Monday, May 9, 2011

Chinese and US Wages Converging

From a BCG (The Boston Consulting Group) press release:

"With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.

“'All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,' said Harold L. Sirkin, a BCG senior partner. 'We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.'

"After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said."

Read the full post, Press Release May 5, 2011

(h/t Zero Hedge)

The great leveling is proceeding apace as the emerging world rises and the developed world sinks to meet it.


Mike Norman said...

Wonderful. Their wages are going up while ours are flat to down. This is the "brilliant" solution our policymakers have come up with to deal with "unsustainable imbalances." Make us poor, make them rich. Absolutely crazy!

traderscrucible said...

I also saw this as a very important article. Nice catch Tom. It has huge implications

Tom Hickey said...

That's the inevitable result of "free markets, free trade, and free capital flow." What this does in effect is to export cheap labor from the ROW to the developed nations, as Marhall Auerback has observed. Its' "the great leveling," with a giant buffer stock of unemployed, underemployed and virtual immigrants keeping wages low and suppressing demand in the developed countries.

Meanwhile, the conversion of commodities to an asset class and rising global demand is driving up food and energy costs, squeezing discretionary spending. Rising material costs are also leading to margin compression, even with cheaper labor.

The result will be stagflation.

Anonymous said...

All that will happen is like what is happening in Mexico since there wages and envirment issues are leveling. Move your factory to a cheaper country like China. This is a never ending cycle. One day thay will be moving factorys to Afganistane for cheap labour