China: 1.3 Billion People, But A Labor Shortage?

It sounds surprising, but China is facing a shortage of workers. From Thomas Fuller's April 20th article in the International Herald Tribune comes the news that China currently has a labor shortfall. In a modernizing country with a population of 1.3 billion, how can there be too few workers? Here's how:

"Population experts say factories are seeking a very specific type of worker: young, very mobile, willing to work very long hours and be far away from their families. There are plenty of underemployed people in the Chinese countryside, but most of them do not fit this profile."

This is a long-term structural problem that China faces:

"Dali Yang, a professor of political science at the University of Chicago, predicted in a recent article that the supply of entry-level, low-skilled industrial workers had started to shrink. Because of the effects of the one-child policy, which was implemented in 1979, the number of people between the ages of 15 to 19 will decline by 17 percent in five years to about 103 million from 124 million today. This decline of about 21 million people is the equivalent to about four times the entire population of Denmark."

The labor shortage is already contributing to rising labor costs:

"Chinese wages are still low by European or American standards, but a worker in a sneaker factory in southern China today is paid about 30 percent more than his counterpart in Vietnam and 15 percent more than a worker in Indonesia."

One might expect this wage-scale differential to bring about a shift of factories from China to countries with cheaper labor costs. To some extent, this is happening:

"Some big countries are moving production to Vietnam . . . . Kingmaker Footwear Holdings . . . makes Timberland and Caterpillar shoes and plans to hire about 2,000 workers in Vietnam to make up for a shortage of the same number of people in its factories in China."

Yet, companies are continuing to invest in China. Why?

"Companies these days are investing in China to be present in such a large market more than relocating because costs are cheaper than in other countries."

Thus, the large Chinese market continues to draw companies. But which market? As a non-economist, I usually understand "market" to mean "consumer market," but it can also mean "labor market," among other things. Since Fuller's frontpage article is written for the general public, I'd normally assume that "market" is short for "consumer market" and that companies are investing in factories within China in order to be positioned to make big profits when a sufficient number of Chinese become wealthy enough to generate a consumer-driven economy.

However, "market" might actually be short for "labor market" because the article emphasizes that China's total pool of labor continues to be attractive. According to Bob Charles, senior consultant at Watson Wyatt:

"[R]ising costs in China . . . [are] unlikely to lead to large-scale moves by the manufacturers to Southeast Asian countries, where total labor pools are considerably smaller."

This all suggests that large, global manufacturers will continue to locate factories in China even though Chinese labor costs are rising and are expected to keep on rising.

What does this mean for South Korea, "the economic 'hub' of Northeast Asia"? On the positive side, it might mean that rising labor costs in China could make local Korean labor appear more competitive. On the negative side, it suggests that China will remain more competitive long-term than Korea because of China's huge markets for labor, goods, money -- you name it. Overall, however, the enormous Chinese market can be a positive thing for Korea if it maintains good relations with China.

This, of course, is a really big issue in our time of rising nationalism in Northeast Asian countries. But that -- as Andrei Lankov likes to say -- is another story.