Thursday, January 27, 2011

China Hikes Minimum Wage Again

We continue to see a lot of items that strike a very similar tone to late 2007 to mid 2008; the latest is an increase in minimum wages in China.  Go back 3 years and ... [Feb 27, 2008: China Raising Minimum Wage]  As I wrote back then when I asked "why do you care?" - it's about importing inflation.  The U.S. has been a huge beneficiary of lower prices for decades as jobs are moved to lower cost locales - but at some point those other countries workers will want a higher standard of living.  Hence over the long term we need to (a) continue a race to the bottom of global wages and the work needs to move to Vietnam, Indonesia, Africa, et al or (b) we need to expect to pay higher prices for imports. 

Ironically, as The Bernank prints on a daily basis it is not really causing much inflation inside our country because there simply is not that much demand for loans, hence our traditional transfer mechanism for inflation is weak.   We can put as many apples on the shelf as we want, but someone needs to want those apples. Instead that liquidity tsunami is leaking into capital markets, and overseas.  Therefore, we are in a way exporting inflation via our central bank... and eventually (via things such as wage increases abroad) we'll eventually import that inflation back via goods.   Unless Walmart decides to eat the costs.

Certainly this is not the traditional model of inflation creation, as the global transfer of capital changes so many dynamics.  To The Bernank there can not be any inflation because without wages of Americans going up significantly, people can't pay higher prices - which would be very true if the U.S. was the only country on Earth.  However we have a much more complicated picture with the global interconnections.

Going back to China itself, this is indeed the traditional wage push inflation from the textbooks - prices going up, so wages go up to compensate, which feeds on itself - sorta of 1970s U.S. style, when workers still had some level of bargaining power on wages. Now the question begins how high wages can go before the Chinese corporations threaten to move the work offshore to cheaper countries. ;)

Via AP:
  • Many Chinese cities are raising minimum wages for workers, fanning inflationary pressures while also seeking to soothe frustrations over price hikes. The double-digit increases in major manufacturing centers like Guangdong, and the cities of Shanghai, Tianjin and Beijing follow wage hikes last year that have further raised labor costs, accelerating a shift by makers of inexpensive goods to lower cost places like Vietnam and Indonesia.
  • Shortages of workers in some areas and strikes and other protests by disgruntled young workers have also prompted authorities to push minimum wages higher, with most localities expected to follow suit.
  • China retains massive advantages such as the standard of its infrastructure and its own huge market, which increasingly is the focus of foreign companies manufacturing there. But surging costs for labor, land, energy and materials have prompted many making low-cost items such as toys, shoes and clothing to move some production to other parts of the developing world.
  • Tianjin's labor bureau, in a statement seen Wednesday on its website, said it is preparing to raise the city's minimum monthly wage to 1,070 yuan ($160) from the current 920 yuan ($140). Shanghai's mayor, Han Zheng, confirmed last week that the city was preparing for an April 1 increase in the city's minimum wage, by more than 10 percent over the current monthly 1,120 yuan ($170). Han described this as an effective way to ensure a "rational income distribution."
  • "It is our responsibility to raise wages in Shanghai because people living on those wages are having a really hard time," he told reporters during an annual news conference. "It is important for every worker to share the fruits of progress and harmonious labor relations are conducive to healthy businesses," he said.
  • Beijing has announced its minimum wage will rise by 20.8 percent this year. Jiangsu, an affluent region adjacent to Shanghai, is hiking its minimum monthly pay by 15 percent and Guangdong, by about 19 percent in March to 1,300 yuan (about $200) -- the country's highest.
  • Mindful of past links between surging inflation and political unrest, the authorities have sought to reassure consumers that they have prices under control.

[Rising Factory Costs Erode China's Edge]
[China's Inflation Hits American Price Tags]

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