On China’s Increasing Labor Cost

by Guinandra Jatikusumo

As a developing country, China has run an export-led economy over the past few years by maintaining a weak currency and implementing protectionist policies in an effort to support its infant industries. Indeed, it has reaped a plethora of benefits on account of this: improvements in domestic firms’ welfare, soaring growth, increase in aggregate expenditure, and global competitiveness in both its labor and goods market. There are unfortunately unintended consequences deriving from this strategy, which includes the rise of labor cost (wage) as productivity and price level increases. Yesterday’s article on Jakarta Globe corroborates what Professor Rajan of the Booth School of Business surmises (I recently read his book, Fault Lines, which makes this event very coincidental):

“China also faces a more traditional problem related to export-led growth strategies…can they step away from the seductions of export-led growth and fixed-asset investment before it is too late?”

The author in the Jakarta Globe post also argues that in four years, Chinese labors will be as costly as American labors.

This situation reminds me of Japan, once a developing country with export-led policies I believe China is espousing now. Back then, it gained surpluses from its exports of durable goods. When price levels started to rise, Japanese domestic labors, primarily labors whose products were not tangible (services) demanded an increase of wage as a compensation for increasing price levels. Things were not too good; people even considered a decent haircut to be overpriced.

Perhaps the Chinese authority should start heeding Professor Rajan’s suggestion and detour from its current economic policy track, before the country turns into an economy that resembles a hard-bodied bodybuilder who dislikes calf raises and squats to strengthen its legs.

Update: similar story from the Time Magazine.