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Time for a pay rise, Pearl River Delta

Newspapers recently have been filled with reports of factories in the Pearl River Delta going begging for workers. This has surprised people who imagined that China had a near-infinite supply of rural workers willing to labour for nothing in the booming coastal industries. Most information suggests that the labour shortage now is a short-term phenomenon which should disappear after an adjustment. But there are also some structural factors in play that portend substantial changes in the nature of the Chinese workforce over the next decade.

The main problem in the Pearl River Delta is that factory owners are living in a never-never land created by an unusual confluence of circumstances. Those circumstances are now dissolving, but all that is required in response is a fairly modest upward adjustment in wages.

Factory wages in the delta have not risen appreciably for more than 10 years, even as China's wealth has surged. What made this possible?

First, a prolonged period of stagnant farm incomes, which gave rural families a big incentive to send their children into the cities to seek cash incomes. Second, massive restructuring of the state sector, which put tens of millions of people out of work and temporarily inflated the number of job seekers. Third, the nearly exclusive concentration of export industries in the delta, which made the region the first choice for migrants seeking work.

All these factors have now pretty much disappeared. The relative economic position of farmers has been improving for four years as indicated by the rural-urban terms of trade, which compares the prices of rural goods with those of urban manufactured goods. This ratio rose especially strongly this year, meaning that higher wages are required to pull people off the farm.

State sector reform continues, but the era of massive layoffs is now over. This means that the number of job-seekers will no longer be inflated by people leaving the state labour force. At the same time, new entrants to the labour force are now coming from the one-child-family generation.

Finally, the Pearl River Delta must now compete for labour with a large agglomeration of factories in the Yangtze River Delta region around Shanghai. Improved communication among labourers (thanks to, among other things, the spread of low-priced mobile phones) means that unlike in the past, when migrant workers simply went to the same factories that others from their village went to, they now have more ability to shop around for better pay and working conditions.

This does not add up to a fundamental transformation of China's labour equation: there are still plenty of workers in China looking for factory jobs. A recent survey by the Ministry of Labour and Social Security, as well as research by the China Economic Quarterly in Guangdong, suggests that factories can solve their labour problems by raising monthly wages from 700 to 1,000 yuan.

This seems like a big increase - more than 40 per cent. But a factory that started paying workers 700 yuan a month in 1994 and then raised wages by just 3.6 per cent each year would now be paying 1,000 yuan - only a 10 per cent real increase.

Rather than complaining, Pearl River Delta factory owners should start working a regular annual wage increase into their business plans, because demographics and improved education will soon start cutting into the factory labour force. With the one-child generation reaching adulthood, new entrants to the labour force will decline. Moreover, the more education people have, the less likely they are to work in a factory.

Again, China has more than enough people to fill up factories for years to come. But factory owners must start paying them more realistically.

Research by the China Economic Quarterly

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