A Substantial Increase in China's Minimum Wage
January 11 (Thursday) 2007
Yan Zhu
Senior Fellow
Summary
- The Chinese economy continues to experience robust growth. The economic growth rate in 2005 was 10.2%, while the rate reached 10.7% from January to September in 2006. Low wages have been a driving force in giving China an edge in its economic development, supporting the “world’s factory”. Sustained economic growth, however, continues to raise the level of wages.
Rapid Rise in Laborer’s Wages in High Economic Growth
In the past, the salaries of the staff, engineers, and executives of a company – the so-called white-collar workers – have been raised at around 10% a year, while the level of wages for laborers has remained relatively fixed. Since the beginning of 2006, however, the rise in wages for these laborers has been remarkable, and in July the minimum wage level was raised almost uniformly across cities.
In the export-heavy Guangdong province, major cities were set in a five-level system and the minimum wage was increased across the board in varying degrees, with the average increase at 17.8% and the highest increase reaching 46%. In the city of Guangzhou, where there is heavy Japanese automobile industry presence, the minimum wage was raised from 684 yuan (about 9,900 yen, calculated at 1 yuan = 14.5 yen) to 780 yuan (about 11,300 yen) per month, representing a 14% increase. The special economic zone city of Shenzhen boasts the highest minimum wage in the country, with an additional 17.4% raise from 690 yuan (about 10,000 yen) to 810 yuan (about 12,000 yen).
In the Dalian development zone, which has become a production center for Japanese companies, a labor and management dispute last year led to a monthly wage increase of 100 yuan across the board for employees. In July, the minimum wage was raised from 500 yuan (about 7,250 yen) to 650 yuan (about 9,400 yen), marking a 30% increase.
In Beijing, starting in July the previous minimum wage of 580 yuan (8,400 yen) was pushed up 10.3% to 640 yuan (about 9,300 yen). Labor management authorities of Beijing City announced a 2006 company wage guideline at the same time, setting the standard for wage increases at 10.5% and the upper limit at 15.5%. Statistics show that annual wages in 2005 for workers in Beijing increased 15.7% from the previous year. Shanghai reported an 8.7% increase in August, with the minimum wage moving from 690 yuan to 750 yuan (about 11,000 yen).
In this way, minimum wage standards were significantly raised in the various regions. This creates the possibility for substantial increases in wages for laborers as well.
The Influence and Background of the Minimum Wage Increase
China introduced its minimum wage system in 1996, and its primary goal was to protect laborers. Labor officials from various cities consider the situations of their respective regions, decide upon minimum wage level for their cities, and then review the system once every one or two years. The minimum wage level represents nothing more than a fraction of average normal wages, and generally applies to low-income laborers working at factories, particularly migrant workers who have left rural farming areas for the city.
The following factors have contributed in bringing about the recent and significant increase in the minimum wage. First, economies have developed and living standards have improved across the regions. Secondly, the unemployment rate in cities is high, and while the difficulty persists for university graduates to secure jobs, labor shortages have also become grave. In particular, supply shortages of migrant laborers leaving inland areas for coastal cities are having a large impact. Thirdly, in order to maintain social stability the government placed even more importance on worker protection.
The raising of the minimum wage is not limited to the low-income class. It has an effect on wage standards for other professions, and wage standards for companies in general. In addition to basic wages, it also increases the burden on companies by putting pressure on management costs concerning social security, overtime benefits and etc. In addition, officials have taken the significant increases in the minimum wage as an opportunity to supervise companies and stiffen penalties for violations.
The Effect on the Management of Japanese Companies
A rise in wages is a long-term trend of the Chinese economy. There is a strong possibility that there will be an aggressive long-term increase in wage standards in the future because of continued economic growth. This would lead to a decline in the attractiveness of the “world’s factory”. Countermeasures must be implemented immediately.
An increase of the burden on Japanese companies, especially those in labor-intensive industries located coastally and employing large numbers of migrant laborers, is unavoidable.
It is in the interest of these Japanese companies to take the following measures. First, change the business style so technological and brand strengths are emphasized over low costs. Second, promote the automation of labor-intensive production processes. Third, transfer production to regions with cheap labor, and even if existing factories are not relocated conduct expansion investment in neighboring regions or interior areas.
