China’s wage problem

Over the last couple of decades China has continued to produce goods with very low costs as hundreds of millions of low wage factory and urban jobs were absorbed by surplus rural farm labour. Another significant advantage has been the fact that China has kept its currency value low giving its domestic exporters a competitive advantage. However over the last year there has been significant pressure from Chinese workers in the form of protests and suicides. To overcome these problems the government has supported higher wages which in turn should boost domestic consumption and reduce the dependency on the export market.

But with greater domestic consumption comes inflation as Chinese workers are buying more with their higher salaries. And as the Chinese economy develops, resources like oil and other commodities will remain high. According to the Wall Street Journal:

Many analysts predict that China’s vast labor force will begin declining in the next year or two, the result of family-planning policies. Others say there’s already a shortage of the most active members of the factory floor, workers aged 15 to 34. That group has been steadily declining since 2007, according to Jun Ma, Deutsche Bank’s chief economist for Greater China. A shrinking work force will need higher salaries to support an expanding population of elderly.

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