It is an exaggeration to say China's labor costs will catch up with the U.S. and European countries in short term.
Certain foreign chambers of commerce and financial institutions recently published reports saying that many foreign companies have felt pressures from increasing labor costs in China, and are considering relocating their production facilities to certain Southeast Asian countries where labor costs are much lower. The French bank Natixis forecast in a recent study that labor costs in China would match those of the United States within four years, catching up with eurozone countries in five years and with Japan in seven years.
Increase in labor costs an inevitable trend
Since the Reform and Opening-up, China has exported a large amount of labor-intensive products thanks to cheap labor. However, the country is gradually losing its labor cost advantage due to steady and rapid economic growth as well as certain unavoidable changes in the structure of the labor force.
Statistics showed that the annual growth rate of average Chinese workers' salaries has been on a steady rise over the past three years. The per capita disposable income of China's urban residents and migrant workers grew 13 percent and nearly 15 percent, respectively, in the first half of 2012 from a year earlier.
Zhang Monan, an associate research fellow with the Economic Forecasting Department of the State Information Center, noted that the large amounts of Chinese exports over the past 30 years since the reform and opening-up have been based on the country's cheap labor, and the value of Chinese workers has long been severely underestimated.
China's labor costs will continue to rise in the next 10 years, and low wages will become increasingly unappealing to workers, bringing an end to the country's demographic dividend, said Zhang.
Population aging is another important reason for China's rising labor costs.
Demographic aging is accelerating in China, Zhang said.
According to the results of the sixth national census, the proportion of the elderly in China's total population stands at nearly 9 percent, and will reach 30 percent by 2050. Population aging has led to a decline in working-age population and in the number of migrant workers. The proportion of China's working-age population dropped in 2011 for the first time in 10 years, and the country is expected to lose its demographic dividend and reach the Lewis turning point in 2015.
Xu Hongcai, deputy director of the Information Department under the China Center for International Economic Exchanges, said that the cost of living in China has increased due to inflation, and the income level of Chinese workers is gradually approaching international standards along with China's integration into the world economy. These factors jointly contribute to rising labor costs in China.
Unlikely to catch up with U.S. or European countries in short term
Will Chinese workers' salaries rise as quickly as foreign institutions forecast? Will China soon lose its cheap labor advantage? Many experts do not think so.
Xu said that the cost advantage of China's low-end labor force will not disappear in the short run because: First, the average salary of U.S. manufacturing workers is much higher than that of Chinese workers and this phenomenon will remain for a long time. Second, there is surplus labor force in rural areas waiting for employment. Third, it is not easy and needs lots of money for transnational corporations to relocate their factories to another country.
The International Monetary Fund estimated that although the supply of China's surplus labor force is dropping, it will completely be consumed away in sometime between 2020 and 2025.
"Chinese workers have certain comparative advantage because they have a wage level higher than the workers of Vietnam and Laos but lower than that in Taiwan, Hong Kong, South Korea, Singapore, Brazil and other countries and regions," Zhang said.
She pointed out that the cost of China's absolute labor force has a low rate of rise and the pace of income distribution system reform is not very fast. Therefore, China's manufacturing workers have a large gap with the workers of developed countries in wage level and the viewpoint that the cost of Chinese labor force will catch up with that of U.S. and European countries within a few years is a little overstated.
Transformation from population quantity dividend to population quality dividend
Zhang said that now it is impossible to realize high economic growth by low labor force cost as before and China must improve labor productivity and the quality of workers and transform from population quantity dividend to population quality dividend.
The rising cost of labor force also urged acceleration of the industrial upgrading and transforming of Chinese enterprises.
China should optimize and adjust both the industrial structure and the cultivating structure of human resource.
Xu said that China should improve the quality of workers and increase educational input in the future. Moreover, the industrial transforming and upgrading also need to improve the quality of workers.
Zhang also believed that a large number of high quality industrial workers should be cultivated before the window of population dividend is closed. The industrial upgrading will be hardly realized if not upgrading the labor force. Therefore, the transformation from population quantity dividend to population quality dividend is necessary.