THE END OF CHEAP CHINESE LABOR Dror Strum Ariel Lowenstein

BACKGROUND Main causes for Chinese cheap labor: 1. Bad living condition and welfare of the cheap labor - In China workers often earns the minimum wage for full-time work at the factory, even though these wage levels are very difficult to live on. 2.Although Chinese minimum wages were raised in 2008, workers still have problems covering their basic needs and often cannot afford to start a family.

BACKGROUND (2) 3.Energy and pollution problems - In recent years, environmental resources intensive industries with heavy pollution, high energy consumption, and high consumption of resources in China have developed fast.

CHEAP LABOR  In 1978, the average Chinese urban worker was making $1,004 (in 2010 dollars). Now, that same worker is making $5,487.  From 1978 through 1997, the average salary of the urban worker only increased.1% per year - from $1,004 to $1,026 (much slower than GDP growth).  From 1982 through 1997, labor productivity grew almost 3 times faster than real wage growth - This means that Chinese labor was becoming cheaper.

THE RISING WAGES From 1998 through 2010, the average annual growth rate of real wages was 13.8%. Since 1997 unit labor costs were increasing - China’s wages have increased at a much faster rate than productivity. Wages are increasing for all levels of workers. The fact that low skill workers are also seeing this increase suggests an overall rise in wages. Wages are rising in both the more developed coastal regions and the less-developed inland regions. They are rising for both exporting and non–exporting firms.

BUT WHY??? Connection between compensation and productivity. From state workers to private sector.

China started the “One Child Policy” (The Baby Boom).

There was slowing migration of rural workers. Rural citizens cannot enjoy public services in the cities (such as education, medical insurance, housing or pensions). Return to education in urban china.

THE FUTURE If wage growth continues at this pace, the average real wage in urban China would reach $20,000 by By 2050, 40% of China’s labor force can be expected to hold a college degree. Rising productivity and education mean that China’s comparative advantages are shifting If China can improve the quality of education and foster innovation and entrepreneurship, they can become a force in the high value added manufacturing sector.

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