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Does China Still Enjoy the “Cheap Labor” Tag?

Wednesday, February 2nd, 2011

The pace at which China is growing easily convinces the world of China’s emergence as an economic super power in very near future.

A population base of 1.3 billion and a growth rate of over 9 percent of the GDP pave the way for China to be the most attractive destination for American entrepreneurs.

It is a common conviction that the cardinal force behind China’s competitiveness and growth is its base of cheap labor; its labor force is not only cheap, but efficiently and systematically trained too. Thus, people believe that whatever the kind of business is, China is there to supply a whole range of cheap labor. However, this picture is gradually waning and China is no longer enjoying the tag of “cheap labor” as it has been for so long. One can witness a drift towards unionization and a subsequent increase of labor price.

China’s cheap labor era is finally coming to an end. Laborers in China are demanding better working conditions and higher wages; their demands are shaking the base of cheap labor. Month-long strikes by workers are taking their toll on the foreign companies that are investing in China. Forgetting their meager wages, workers in China are demanding their share of the profit too. As this situation becomes more serious, big companies are gradually deciding to take their business elsewhere.

Ever since the Labor Contract Law of 2008 made Chinese workers aware of their rights, the cost of labor has witnessed a sharp rise of about 15percent a year. According to the Hong Kong Trade Development Council (HKT DC), production costs in Chinese factories will take a big leap.

Shenzhen, an erstwhile fishing village in Guangdong province on the Hong Kong border, has been the worst sufferer as it rooms thousands of export manufacturers. Following a vast array of suicide cases, Taiwan-based Foxconn Technology in Shenzhen has raised the wages of its workers to more than double, which amounts to $290 per month. Honda, a reputed international auto company has raised the wages of its workers up to 34 percent.

When the prospect of the end of cheap labor in China is realized is one’s mind, one has to understand the crux of the scenario. The main economic problem that China is facing, day in and day out, is that of the uneven distribution of money. A handful of wealthy people are getting more wealth leaving the masses in the depths of poverty. Labor costs in China have always remained low because economic growth has never led to a growth in wages. In reality, the share that labor income has in respect of the total national income has decreased sharply Reliable statistics, within the period between 1992 and 2006, show that the Chinese government revenue rose by 2.02 percent, whereas enterprise income shot up by 5.01 percent and the income of the residents dipped by 7.08 percent. Thus companies like Foxconn, by raising the wages have now actually repaid the wages that they deprived workers of for so many years.

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