Labor Unrest Leads to Pay Rise

China, which used to be famous for its cheap labor force, is facing a great change in its labor force landscape. Is the end of cheap Chinese labor force getting closer?

The global manufacturers who commit themselves to controlling cost have found that the infinite labor force in China seems to have run out.

Matters, such as the strike haunting Honda and the workers’ suicide scandals surrounding Foxconn reflect the advent upheaval of Chinese labor force landscape.

According to the report from Xinhua News Agency, Guangdong’s Party chief Wang Yang visited a Foxconn’s plant in Shenzhen and asked the Taiwan-based company to provide the workers with “better and more humanized working environment”.

“The workers born in the 1980s and 1990s need more encouragement,” said Wang Yang, who is trying his best to push the industrial upgrade in Guangdong to help this province abstain from the exportation of cheap products in economic development.

This shift is spreading across the whole country. The manufacturers are trying to recruit and retain the young workers. The new-generation workers are shattering the labor force structure in China. These young men and women born in the 1980s and 1990s gradually climbed to the main roles of society as well as the labor force market. With better education than their parents and having grown up in a better living condition, they are unwilling to bear bad working condition and low salaries; in addition, they know how to fight for their rights.

“Our economic development should never depend on exploiting workforce’s interests because the workers can no longer bear it. This is very cruel,” said Chang Kai, head of the Labor Relationship Research Institute, People’s University of China.

Honda's employees strike for higher salaries

Strike for Higher Salary

The foreigners’ concerns about the labor force in China started from the strikes at Honda’s factory in China. On May 17, hundreds of workers in a Honda auto component manufacturing plant in Nanhai, Guandgong went on strike due to the dissatisfactory salary and welfare. The workers demanded that Honda “increase their pay to 2,000 yuan (USD 292. 9) or 2,500 yuan (USD 366.2) per month and to reform the salary mechanism”.

It was reported that the huge salary gap between the Chinese workers and Japanese workers caused the most complaints. An ordinary Chinese worker’s monthly salary is only 1,000 yuan (USD 146.5) while a Japanese worker can earn 50,000 yuan (USD 7.3 thousand) each month. In addition, nearly all the medium-end and above management positions are taken by the Japanese.

Actually, such a phenomenon is common in the Chinese auto industry. In all the joint venture companies in automobile and components production, the foreign workers usually enjoy higher salaries. Commonly, the foreign workers are paid according to the salary standard of the country from where they come while the Chinese workers are paid based on the Chinese standard.

Another problem fretting over Chinese auto industry is that the blue-collar workers have even lower salaries than the average level of where they live. In addition, the rapid development of China’s auto industry in these years has not brought any benefits to these blue-collar workers. According to the data, the pay rise of the auto industry in 2009 was only 9.10% while the sales increase reached 40%.

The unfair treatment caused the strike, which significantly impacted Honda’s manufacturing in China. On June 4, Honda finally agreed to add 500 yuan (USD 73.2) to the workers’ pay each month. The strike ended with the victory of the workers.

End of Low-salary Era

Aside from Honda, the Taiwan-based Foxconn, which is haunted by the workers’ suicide scandal, increased the employees’ salaries from 900 yuan (USD 131.8) to 2,000 yuan (USD 292.9).

Some experts said that Foxconn’s suicide scandal and Honda’s strike brought forth the end to an era of cheap labor force in China. Before the reform , China has benefited a lot from the cheap labor force, earning “made in China” a share in the global market. Meanwhile, the cheap labor force brought about the advantages in price, which then turned into integrated competitive advantages. Foxconn’s subcontracting pattern is quite suitable for Chinese national conditions and is considered another sample for China’s rise.

However, this development pattern, which overwhelms the workers, will finally meet its end. Terry Guo, board chairman of Foxconn, attributed his company’s fast growth to “the first-class customers, second-class equipment, third-class management and fourth-class talents”, of which the first-class customers are Apple, Nokia, HP and Dell and the fourth-class talents are the Chinese workers.

In truth, Foxconn’s benefits arising from this pattern is much smaller than its customers. For example, Apple subcontracted the production of its iPad and iPhone to Foxconn and can enjoy a 50% profit margin.

According to a review from the Wall Street Journal, Foxconn’s tragedy comes from its sole dependence on the cheap labor force and subcontracting. It is finally related to the Chinese economic pattern, which relies on foreign capital, cheap labor force and export. The review said: “If the Chinese government doesn’t give up the economic pattern dominated by the processing trade and export, there will be more similar cases as Foxconn’s.”

The two companies’ increasing the employees’ salaries are thought to be a significant turning point for China’s economy – the low cheap force era of China may come to an end and industrial upgrade can be promoted in China.

Here Comes the Lewis Turning-point?

The salary level has been at the low point for a long time. According to the data, the staff salaries usually take 50% of the enterprises’ operating cost in developed countries, but the proportion is only 10% in China. The labor force cost usually takes more than 55% of the GDP in the developed countries. In China it is only 42% and kept decreasing in these years.

But things may be different from now on. According to the news from the Ministry of Finance (MOF), one of its major jobs this year is to adjust the national income distribution pattern to increase the ordinary people’s salaries. Meanwhile, the shortage in migrant workers in the coastal areas at the beginning of this year initiated the study into the advent Lewis Turning-point and the increase of national income.

According to the expert, the Lewis Turning-point is quite common in developing countries. When the residents in rural areas move to the cities and become engaged in non-agricultural businesses, the labor force cost is lowered because of the bigger supply. The trend will be continued till the industrialization and urbanization absorbs all the surplus labor force and the pay will be raised if more labor forces are needed. This is when the Lewis Turning-point happens.

After the Chinese Spring Festival this year, the coastal areas of China experienced a shortage in migrant workers. It was once reported 2 million workers were needed in the Pearl River Delta and this was not the first time that the migrant worker shortage happens to this area. This forecasts the approach of Lewis Turning-point. According to the report, the proportion between job vacancies and job hunters in the 103 cities of China has been increased from 0.85 before the financial crisis to 0.97 in the fourth quarter of 2009. Such a proportion reached 1.26 in the Pearl River Delta, showing that it is hard to recruit new workforce if not increasing the salaries.

But according to another report, the advent of Lewis Turning-point can be seen by the shortage in migrant workers. Firstly, the 47% urbanization in China is far behind the 70% proportion in Japan and Korea when the Lewis Turning-point happened to them; secondly, China didn’t see big increase of the salaries after the shortage in migrant workers in 2004.

In addition, the “Global Urbanization Outlook 2009 (amended edition)” said that the urban population in China will increase from 610 million at present to 767 million in 2015, which means that more than 10 million rural residents move to the cities every year. Therefore, the labor force supply can still meet the demand.

Therefore, some scholars said that some parts of China have seen the Lewis Turning-point but the whole country has still surplus labor forces in rural areas. The Lewis Turning-point doesn’t really come. 

Foxconn's chief Terry Guo was haunted by the workers' suicide scandal

Government Role in Salary Increase

What made Chinese people see the hope that their pay could rise were the government’s declarations and actions. At the end of last year, the central government confirmed that one of the major tasks this year is to increase the consumption demand for the people and adjust the national income distribution.

In the parliamentary sessions in March, Chinese premier Wen Jiabao said that the commitment to economic development aims at increasing social assets as well as improving the distribution system of these assets. In April Wen Jiabao held the conference of the standing members of the State Council, in which he confirmed that adjusting national income distribution system and bettering social security system were the two most important tasks in 2010.

Su Nanhai, an expert from China’s Ministry of Human Resources and Social Security, said in June that ageneral plan of adjusting the income distribution will come out at the end of this year. He put forward the plan of “doubling the laborers’ salaries in five years”. “If the salary can see a 15% increase averagely each year, the doubling can be realized in five years,” said Su.

Su said that many problems in the income distribution had already caused complaints from the ordinary people. Presently, the urban residents’ average income is 3.3 times of the one of rural residents. Some workers in an industry can earn 15 times as much as the ones in another industry. The annual salaries of senior executives of some state-owned financial companies are 2,000 times higher than the average level of the society.

Previously, unapproved strike is not allowed in China and it is usually very hard to get an approval from the government for a strike. But in recent years, more and more strikes have been held in China, especially in the Yangtze River Delta and Pearl River Delta.

The Chinese government previously showed partiality for the foreign companies when disputes between foreign employers and Chinese employees occurred in order to attract more foreign investments. But the strike of Honda’s employees can be seen as a change of the government’s attitude. Though the government didn’t completely stand alongside the employees, it took a neutral position and even made a lot of reports on the media, which is quite different from the past.

“The financial crisis has made the Chinese government aware of the importance of the domestic demand,” said the Financial Times. “To increase the income of citizens and to give them better consumption ability are of great importance for China to continue its fast economic growth.”

Actually, it is not only an issue about the economic development, but also a matter related with national stability. The complaints about the increasing gap between the rich and the poor are more and more frequently heard in these years. Solutions are needed! The incident of Honda employees’ strike may leave a mark on the way of China’s income distribution reform.