Rising wages should propel the next wave in productivity gains

Here's yet another reason why we don't need to worry about factories on the mainland losing their competitive edge.

As we know, wages on the mainland are rising. Governments in the rich coastal provinces have increased their statutory minimum wages by between 10 and 20 per cent this year. And with the media full of stories about a deepening labour shortage, many foreign-invested factories have been forced to jack up workers' pay by 20 per cent or more.

The size of these rises has spooked many observers. Businesspeople and investors both fret that such big increases in factory wage bills at a time when the mainland's currency is appreciating, when commodity prices are going up, and when developed market demand is soft, will compress profit margins and erode the country's manufacturing competitiveness.

They can relax. It will be a long time before rising wages threaten China's competitiveness at either the country or company level.

As this column has pointed out before, this year's wage rises might sound generous, but few workers got any increase in 2009. A 25 per cent pay rise now in an economy growing at 10 per cent a year with inflation running at 3 per cent means factory workers' pay doesn't even keep pace with the overall increase in national income.

In fact, with workers' productivity climbing faster than their pay over recent years, manufacturers' unit labour costs have actually declined rather than increased. As a result, as the first chart below shows, the mainland's wage bill has fallen relative to overall economic output. And even following the recent increases, as the second chart shows, Chinese workers remain extremely cheap by international standards.