Saturday, November 12, 2011

Wage Gap With China Continues to Shrink, Which Will Mean More Manufacturing Production in U.S.

Chart has been updated to end in 2015.

1. CNBC --"Slowing wage growth in the United States, coupled with rising wages in China and other emerging markets, could soon make the U.S. more competitive. While wage levels in China are still far below the average wage in the U.S,, better technology, transportation and services in the U.S. could help make the difference for companies, according to Bart van Ark, Chief Economist at The Conference Board.

"There are other factors at play here, from access to services, high technology and innovation, to transportation," he told CNBC Friday. As wages increase in the major cities in China, companies are having to move lower-paid jobs further inside the country, where infrastructure has not yet caught up, to get the same benefits."


2. BEIJING, China — "Factories in China’s manufacturing heartland are feeling the squeeze again, with minimum wages in Guangdong province set to rise by as much as 20 percent on Jan. 1 for the second time in less than a year. And while one Chinese province’s minimum wage might seem like a local issue, the salary question underlines a continuing momentum in China toward building higher-end business and better jobs. In other words, the days of endless, cheap Chinese labor are limited."


MP: The chart above illustrates the shrinking manufacturing wage gap between the U.S. and China, as wages increase in the U.S. at about 2% compared to 15-20% wage increases in China (Note: Those wage increases in China may obviously not continue in the long run, but are shown here to illustrate the shrinking wage gap).  As recently as 2005, average manufacturing wages in the U.S. were more than 20 times higher than in China, but the U.S./China wage ratio had shrunk to only 10 times by 2010, and will likely be only 5-to-1 by 2015 at the current rate of wage increases.  

Along with the shrinking wage gap, there are other factors that are starting to favor increased manufacturing production in the U.S. including greater productivity of American workers, the cost of shipping goods 8,000 miles from China with a 3-week delivery time, the logistical advantages of domestic production to avoid the challenges of coordinating design changes or addressing quality issues when production is taking place 13 times zone away, cheap industrial and commercial land in the U.S. and weak enforcement of intellectual property rights in China, among others. 

As the Boston Consulting Group reported in May, "Within the next five years, the United States is expected to experience a manufacturing renaissance as the wage gap with China shrinks and certain U.S. states become some of the cheapest locations for manufacturing in the developed world.  We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years."

HT to Gary Lyle for the CNBC link

19 Comments:

At 11/12/2011 11:01 AM, OpenID Sprewell said...

You're joking, right? The notion that Chinese wages will increase 17% for decades is ridiculous. Something like 70% of their population still lives in rural areas, that's equivalent to two USAs, not to mention a similar number in India. As soon as wages rise, some budding Chinese or Indian entrepreneur will build another factory and hire those rural workers, keeping wages in line with additional labor supply. The notion that manufacturing will ever come back to the US is a fantasy: the sooner the US realizes that and moves on, the better.

 
At 11/12/2011 11:02 AM, OpenID moneyjihad said...

Does this mean that California will use American instead of Chinese labor on its next public works project?

 
At 11/12/2011 11:05 AM, Blogger Zachriel said...

A typical mistake is for people to extrapolate a current trend forever into the future. If current trends in population growth continue (1.2% per year), the mass of humanity will exceed that of the Sun in just 2500 years.

When nations industrialize, workers move from low-GDP jobs in agriculture into high-GDP jobs in industry. Once this process is more-or-less complete, then the growth rate will tend to stabilize, and without the influx of new workers, wages will increase.

 
At 11/12/2011 11:41 AM, Blogger Mark J. Perry said...

Note: The U.S. has added 303,000 manufacturing jobs since January 2010.

 
At 11/12/2011 11:57 AM, Blogger Mark J. Perry said...

Chart has been updated to end in 2015, with the assumption that the 15-20% wage increases in China will continue through 2015.

 
At 11/12/2011 12:01 PM, Blogger Buddy R Pacifico said...

"The notion that Chinese wages will increase 17% for decades is ridiculous. Something like 70% of their population still lives in rural areas,..."

In the current Five Plan for China, the PRC hopes to increase disposable income by 7% per year in the urban areas. In the rural areas, the aim is to increase net income 7% per year by the end of 2015.

Today, China's urban populace is 47.5%, with a drive to increase that to the majority (51.5%) at the end of the current 5YP.

 
At 11/12/2011 1:13 PM, Blogger Benjamin said...

You see some garment and furniture making jobs coming back from China to Los Angeles. The minimum order the Chinese will accept keeps getting larger.

In 10 years, the last cheap and good manufacturing platform--China--will not be so cheap. India is huge, but corrupt and hidebound.

Manufacturing has a great future in the USA.

 
At 11/12/2011 4:22 PM, Blogger PeakTrader said...

The Max chart shows U.S. manufacturing jobs began a sharp decline 10 years ago:

http://metricmash.com/jobs.aspx?code=30000000

 
At 11/12/2011 6:50 PM, Blogger Craig said...

The notion that Chinese wages will increase 17% for decades is ridiculous.

Well, of course, it is. But it is happening now.

China is reaping the final "benefits" of its inflationary monetary policies. Wages are rising faster than productivity because of the inflation and, for the first time in decades, US wage inflation is nonexistent.

Neither situation will last long, but it will make a difference for a while. Trade between nations takes place only because of prices. When US wages (capital taken into account) begin to equal Chinese wages, business decisions on where to produce will change.

 
At 11/12/2011 7:00 PM, Blogger kmg said...

Actually, automation will destroy both Chinese and US manufacturing jobs.

Goods will become cheaper and cheaper, however.

Foxconn is already talking of replacing 50,000 workers with robots. Those are not jobs returning to the US or China (but at least US and China costs converge on account of automation).

 
At 11/12/2011 8:57 PM, Blogger PeakTrader said...

KMG is correct.

Manufacturing jobs as a proportion of total jobs will continue to decline, e.g. through productivity.

Similarly, prices of manufactured goods as a proportion of income will continue to decline, e.g. through deflation.

 
At 11/12/2011 9:09 PM, Blogger PeakTrader said...

Offshoring gave us increasing returns to scale, particularly, from 2000-07, and reshoring will give us decreasing returns to scale.

Definition:

Increasing Returns to Scale

When our inputs are increased by m, our output increases by more than m.

Decreasing Returns to Scale

When our inputs are increased by m, our output increases by less than m.

 
At 11/12/2011 10:20 PM, Blogger VangelV said...

Great news. The Chinese will become wealthier and will buy toys and rakes from American workers who earn less. Get out the party hats.

 
At 11/13/2011 12:54 AM, Blogger PeakTrader said...

VangelV, that's not necessarily true. If it cost $100 to produce $120 of output, and the cost of production rises to $120, to produce the same output, then prices rise or profit falls, or both.

 
At 11/13/2011 8:35 AM, Blogger Aiken_Bob said...

What is interesting -- if a large number of manufacturing jobs come back you can be sure that the unions are going to pushing for more. It is always a give and take. If the unions and liberals win the jobs will go somewhere else. Only time will tell.

 
At 11/13/2011 6:45 PM, Blogger Don Culo said...

Note: The U.S. has added 303,000 manufacturing jobs since January 2010.

***************

Thank you president Obama for adding those 303,000 manufacturing jobs !!!

 
At 11/13/2011 7:43 PM, Blogger sethstorm said...


Manufacturing jobs as a proportion of total jobs will continue to decline, e.g. through productivity.

Similarly, prices of manufactured goods as a proportion of income will continue to decline, e.g. through deflation.


As a logical extension, the quality of said products will decline as they are made cheaper.

 
At 11/13/2011 9:50 PM, Blogger VangelV said...

Thank you president Obama for adding those 303,000 manufacturing jobs !!!

Americans should really think about reelecting him. That way they will get George Bush's fourth term and those of who have bet on the stupidity of the American voter will get much richer. All will get what they deserve.

 
At 11/15/2011 6:24 AM, Blogger shehzil said...

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