Op-Ed Contributors

The silver lining of wage increase

By Stephen S. Roach (China Daily)
Updated: 2010-07-27 07:56

At the same time, it is equally important to assess increases in Chinese labor compensation in the context of rapidly rising worker productivity. Based on data from the World Bank, annualized productivity growth in the Chinese manufacturing sector appears to have been running in the 10 percent to 15 percent range since 1990 - not all that dissimilar from gains in real hourly compensation. That would imply only marginal upward pressure on unit labor costs, suggesting little underlying deterioration in Chinese competitiveness.

Moreover, the impact of rising wage pressures also needs to be judged in the context of other dimensions of China's competitive advantage, namely, scale, infrastructure, pan-Asian supply-chain logistics, and the relatively recent installation of state-of-the-art production technologies. China has lost little, or none, of the edge in those critically important areas.

Finally, it is important to note that increasing worker compensation is a key ingredient of China's pro-consumption growth strategy. A serious shortfall in the growth of consumer purchasing power remains a critical problem for an unbalanced Chinese economy. Personal income currently amounts to just 40 percent of Chinese GDP - decidedly sub-par by international standards and down over 10 percentage points from the 51 percent reading in 2000. That needs to change if China is ever going to come to grips with its rebalancing imperatives.

Yet that could well be the real silver lining to this story. To the extent that compensation increases now outstrip the growth in GDP, the labor income share will begin to rise. That sets the stage for increases in household purchasing power, which are critical for pushing China's consumption share of its GDP up from the rock-bottom 36 percent reading in 2009.

Rather than bemoaning the end of low Chinese labor costs, the global debate should focus more on the constructive implications of this important development for the long-awaited pro-consumption rebalancing of the Chinese economy.

The author is non-executive chairman of Morgan Stanley Asia and a member of the faculty of Yale University. He has the book, The Next Asia, to his credit.

(China Daily 07/27/2010 page9)