Labour pains: are higher wages and benefits for China’s workers harming its economy?

It is rare for top officials in China to openly question or criticise government policy, but that is what Finance Minister Lou Jiwei did very publicly earlier this week. Lou was commenting on the country’s labour laws, designed to protect workers’ pay and conditions. The finance minister told a press conference on the sidelines of the National People’s Congress in Beijing that the legislation was drafted with the best of intentions, but it had caused damage to the world’s second-largest economy. “The original purpose was to protect workers, but in the end it harms the interests of some workers as it increase wages and firms’ costs and leads them to move operations overseas,” Lou said during Monday’s televised press briefing. “Ultimately, who’s harmed? It’s workers who’re harmed. Job opportunities are reduced.” READ MORE: Manufacturers step up search for low cost alternative to China Lou’s comments echoed complaints made by some regional officials who have said the legislation has forced many foreign companies to move production out of China and thus kicked workers out of jobs. He also appeared to touch a nerve with some business delegates attending the annual meeting of the legislature in Beijing. “The profits for manufacturers are thinner than a blade,” said Li Shufu, the chairman of the car manufacturer Geely, who was addressing a session of China’s main political advisory body. Li said labour costs in China had nearly trebled over the past decade as employers need to cover most of their staff’s social security payments, including pensions and medical care. Ke Xiping, a delegate and businessman from Fujian province, said during a panel discussion that the labour law passed 11 years ago was necessary, but needed to be updated after years of economic development. “The government should cover part of social security because companies pay tax,” he said. Analysts said Lou’s remarks highlighted one of the key dilemmas facing the government as it tries to modernise and overhaul the nation’s economy. Rising wages are essential to attempts to rebalance the economy Tom Orlik, chief Asia economist at Bloomberg China has in recent decades partly relied on low-end manufacturing produced by cheap labour to drive economic growth. But as workers wages rise and their conditions improve in the midst of efforts to shift the economy away from cheap manufacturing, that competitive advantage has been eroded. Tim Condon, chief economist and head of research at ING Asia, said: “An unintended consequence of the 2007 labour law was to dramatically reduce the flexibility of the labour market.” Condon said it was right that Lou questioned whether a French-style labour market geared heavily towards the rights of workers was right for a developing country like China. Alicia Garcia Herrero, chief economist covering the Asia-Pacific region with the financial services firm Natixis, said she could understand Lou’s frustration. Wages and benefits were increasing in China, but productivity was not rising to cover the extra costs, she said. “The reality is that labour productivity keeps on coming down in China while wages continue to be above productivity, making it totally unsustainable,” she said. Hao Hong, managing director of research at BOCOM International in Hong Kong, said labour laws should be more flexible to aid the restructuring of China’s economy. “The shortage of skilled labour suggests a failure in labour price signals, which could be the result of some unreasonable labour laws,” said Hong. But some economists argue the government is right to introduce higher pay and conditions for workers as it attempts to promote high-tech manufacturing, the development of the service sector and the creation of an economy based on domestic consumption rather than overly relying on cheap exports. Tom Orlik, chief Asia economist at Bloomberg, said China has made strong wage growth and steady employment a policy priority. “That makes sense as rising wages are essential to attempts to rebalance the economy with a larger role for consumption,” he said. Louis Kuijs, chief Asia economist at Oxford Economics, also rejected the idea that labour laws were to blame for wage increases surpassing productivity in China. READ MORE: Why China’s factory workers are slowly winning their battle for stronger labour rights “The catch up of wages follows a long period in which wage growth lagged productivity growth and the rapid expansion of wages in recent years reflects both market forces and government policies such as generous minimum wage increases,” he said. Kuijs added that while China had lost jobs in some low productivity manufacturing sectors to countries such as Cambodia, Vietnam and Bangladesh, it was succeeding in developing employment in more lucrative areas of the economy. “In fact, in a sign that is actually happening, China is gaining market share in the international supply chains from countries such as Japan, South Korea, Malaysia and Thailand and, overall China is not losing global market share,” he said. Additional reporting by Laura Zhou

Labour pains: are higher wages and benefits for China’s workers harming its economy?

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.css-jfmysa{display:inline;word-break:break-word;}.css-1ankfgb{cursor:pointer;display:inline;word-break:break-word;}READ MORE: Manufacturers step up search for low cost alternative to China

Minister makes rare criticism of government policy, saying laws to protect workers may have backfired

READ MORE: Manufacturers step up search for low cost alternative to China