June 3 , 2010

Not Enough Workers in China?

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I’ve discussed labor factors in China in previous newsletters, usually in the context of overall GDP (see QC Newsletter 3, January, 2009). Since then, China’s economy has continued to grow at a very high rate compared with our own and other developed nations. Because China’s population is so large and so many young people are entering the job market, GDP really has to increase rapidly to accommodate them all. Up until recently, there was an endless supply of workers to fill our orders. Or so it seemed…

Fast-forward to today. The May 28 NY Times reported on a strike that occurred at a Chinese plant producing transmissions for Honda cars. Strikes in a “workers’ paradise” are by themselves unusual. But this one caught my attention because it exposed several interesting things about the situation in China:

1. Wage rates are very low, even at large multinationals. The Times says that workers at the plant are earning between $150 and $220 per month. That’s about $0.94 to $1.38 per hour by my calculations. That seems low given the prestige of Honda, their need for skilled workers and quality demands.

2. Strikers demanded an immediate $120 per month across the board increase. In addition, they asked for a seniority-based factor of $15 per month per year of service. And finally, they demanded a 15 percent annual increase on top of it all. This would very quickly double wages at the plant and maintain an above-inflation rate of increase in perpetuity. Although starting from a low base, this looks a lot like the way things went in the U.S. auto industry during its heyday. Ask General Motors’ stockholders how that ended.

3. The strike was well publicized, at least globally, and non-violent. The government is obviously caught in a difficult position because it needs to maintain employment while not damaging competitiveness. The employees are being squeezed by inflation and have a desire to participate in the nation’s economic success. But it seems like there is a lack of institutions to resolve the matter. One would have thought that the government might have enforced labor peace, but they didn’t.

4. The workers have tremendous leverage with Honda. The strike resulted in the shut down of four assembly plants. China is now the world’s largest car market and it can’t be good to lose all Honda’s capacity there due to a strike. There may also be ethnic and nationalistic forces at work based on prior hostilities between China and Japan.

All these things paint a picture of a rapidly evolving and complex labor environment. But the most surprising thing to me is that this is all symptomatic of a labor shortage. How can that be? And if it is true, will Chinese domestic priorities take precedence over export needs?

--Jeff Cosman