Impact of increased wages on China's Growth

Question

Will China's growth be harmed by pressure for increased wages?

Answer

Over much of the past decade, Chinese wages grew faster than the economy, lifting workers’ living standards but also diminishing China’s competitive edge (Wong 2016). Many studies have concluded that high inflation can have a temporary negative impact on growth, as a result of reduced purchasing power and exchange rate fluctuations. On the other hand, moderate inflation is good for an economy in the sense that it suggests increased economic activity. Furthermore, it is also possible for nominal wages to rise without causing inflation if the increased wages are offset by the rise in productivity. Therefore, there is no cost push inflation. However, it should be noted that for now, China's inflation figures seem to fall in line with China’s spending and income support consumption-led growth path (Jain 2016). So, maybe the panic surrounding China's growth as a result of pressure for increased wages is justified. Higher wages hurt businesses. Congressional Budget Office (2014) issued a report exploring a scenario which would see minimum-wage increase: there would likely be a reduction of workers across the labour market as business shed jobs. However, despite fast-rising wages, China’s factories are still far cheaper than their rich-world rivals. Many pay their employees just above the minimum wage, which at about $270 a month in China is less than a quarter that in America. And they are more efficient than many rivals in the developing world. McKinsey, a consultancy, found that labour productivity increased by 11% a year in China from 2007 to 2012, compared with 8% in Thailand and 7% in Indonesia. With Chinese factories just starting to pour money into automation, there is scope to improve productivity further (Jiaxing and Yangon 2015).

References

Congressional Budget Office (2014) The effects of a minimum wage increase on employment and family income. Available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf Jain, S. (2016) China’s Consumer Prices and Inflation Support Consumer-Led Growth. Available at: http://marketrealist.com/2016/03/consumer-prices-inflation-figures-support-consumer-led-growth-china/ Jiaxing and Yangon (2015) Rising Chinese wages will only strengthen Asia’s hold on manufacturing: A tightening grip. Available at: http://www.economist.com/news/briefing/21646180-rising-chinese-wages-will-only-strengthen-asias-hold-manufacturing-tightening-grip Wong, C. H. (2016) China may rein in wage increases to boost economy. Available at: http://www.wsj.com/articles/china-may-rein-in-wage-rises-to-boost-economy-1457616686