Economics, Politics, Social Commentary and occasionally Superstring Theory.

Thursday, December 02, 2004

Comparative Advantage and China

Business Week has an excellent article on the costs of Chinese manufacturing labor. The Bureau of Labor Statistics hired Judith Bannister, a Beijing-based American consultant, to ferret out these costs. Why hire a consultant? Because China does a poor job of publishing these statistics, of course. Remember, these numbers aren't bulletproof, but probably represent the best information available. Among the most interesting findings for 2002:

1. The average cost of an hour of manufacturing labor in China is 64 cents an hour. This, of course, means nothing. Translated into purchasing power, it becomes $2.96 per hour. As a basis for comparison, Mexico averages $2.48 per hour. But, lest you think China is lowest, Sri Lanka is at 49 cents (courtesy of the Bureau of Labor Statistics.) This is about what you expect. China has an enormous pool of cheap labor that it can use, and its costs are consistent with that supply.

2. Inflation-adjusted compensation in cities doubled from 1990 to 2002. This is also what you would expect. As the cities experienced hyper-growth, competition and accompanying tightening in the labor market drove wages up.

3. Between 1995 and 2002, cities shed 11 million factory jobs while the countryside gained 5 million factory jobs. And, the trifecta. As a result of the accompanying tightening of the labor market in the cities, operations with low fixed-costs moved to where the labor was cheaper.

Bottom line: Chinese manufacturing labor costs are going to be low for at least a generation. China's trying to balance modernizing with not upsetting the countryside too much. The spread of the factories away from the coasts is a good thing. It will help lift subsistence farmers out of poverty and bring needed infrastructure. Every Chinese revolution has originated in the countryside, so the government has good reason to foster such an outcome.

An interesting thought occurred to me as I was writing this post. Does purchasing price parity (PPP) really matter for labor costs? The Chinese analysis focused on what employers had to pay workers, including government benefits, etc. The real cost imposed is the opportunity cost, i.e. what the employer could have done with that money if it didn't have to pay its employee. But, what an employer could have done with its money is different from what the employee could have done with the money. For instance, if the employer could have invested the money and earned interest on it, this would be different from the employee buying a boat. Especially if the employer invested the money abroad. Because PPP is usually used to compare currencies based on the consumer transaction, is it really that relevant when translated into what labor costs the employer? If anyone knows about literature addressing this topic, please drop me a line.

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