China manufacturers confront labor crunch; Owners lift wages and pass on costs

FINANCE; Pg. 8

Keith Bradsher - The New York Times Media Group

SHENZHEN, China

At the Dahon bicycle factory here, Zhang Jingming's fingers move quickly and methodically - grabbing bicycle seats, wrapping them in cardboard and smoothly attaching them to frames.

Zhang makes the equivalent of $263 a month; as recently as February, he was making just $197. Some of his higher pay comes from working more efficiently. ''When I first started, I wasn't this fast,'' he said. But a good portion reflects that Zhang got a raise: from 1.32 cents for each bicycle seat to 1.45 cents. It is a small difference that signifies major change.

Chinese wages are on the rise. No reliable figures for average wages exist; the government's economic data are notably unreliable.

But reporting across China, as well as analysts who monitor the country's labor market, say factory owners are having a hard time finding able-bodied workers and are having to pay the workers they can find more money. And higher wages in China are likely to lead to higher prices across the globe - at the mall, at the grocery, even at the gas pump.

Chinese companies are already passing on some of their higher costs to overseas customers. Prices for Chinese imports, after years of gradual decline, have leapt 1.2 percent since February, according to the U.S. Labor Department. July's increase was the biggest yet: 0.4 percent from June. Chinese companies and contractors are also passing on the cost of the rise of their currency, up 8.8 percent against the dollar in the past two years.

For decades, many labor economists said that China's vast population would supply a nearly bottomless pool of workers. So many people would be seeking jobs at any given time that wages in this country would be stuck just a half-step above subsistence levels. As recently as four years ago, some experts estimated that the bulk of as many as 150 million workers in the countryside would be heading to cities.

Instead, sporadic labor shortages started to appear at factories here in the Pearl River delta region of southeastern China in 2003.

Now those shortages have spread to factories up and down China's coast, employers say.

This summer, Mary Gallagher, a Chinese labor specialist at the University of Michigan, visited five sportswear factories near Shanghai and Guangzhou. She found them all struggling to hire and retain workers. One factory had even shut down one of its two production lines because it had no one to sew shirts and other garments.
''Basically half the factory was shut down and one dormitory was empty,'' said Gallagher.

In interviews, factory executives across the country complained of being forced to give double-digit raises in order to find and keep young workers. Three or four years ago, said Zhong Yi, vice general manager of a leather-jacket manufacturer in Hangzhou in east-central China, 800 yuan, or $105, to 1,100 yuan a month ''was a good salary.''
''Now,'' he said, ''1,500 is the bottom.'' Chinese officials are quick to say there is no overall shortage of labor - rather, there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s. Factories in cities like Guangzhou advertise heavily for young workers, even while employment offices consider it a success if someone over 40 can find a job in less than a year.

''Now they're taking workers into their early 30s, but anything older than that and they think they can't take the conditions, the 11-hour days,'' as well as work on weekends, and tedious life in factory-owned dormitories, said Jonathan Unger, the director of the Contemporary China Center at Australia National University.

Factory owners' refusal to hire blue-collar workers over 35 or 40 is colliding with the demographic reality of China's one-child policy.

The number of workers in the 20- to 24-year-old range is already shrinking as more of them go to university instead of entering the work force after high school, and the International Labor Organization projects workers in this age range will edge slowly downward through at least 2020.

Visiting villages from tropical Gaoyao in the southeastern corner of the country to dusty Houxinqiu in the northeast, it is striking how few young adults remain after so many have already left for cities. A recent government survey of 2,749 villages in 17 provinces and autonomous regions found that in 74 percent of villages, there were no workers fit to travel to distant cities, according to Xinhua press agency.

A separate report by the Chinese Academy of Social Sciences warned of coming labor shortages even in rural areas as soon as 2009.

The dearth of desirable laborers has not turned China into a worker's paradise. Factory wages remain extremely low by Western standards: roughly $1 an hour for better-paid workers near the coast, compared to early this decade when workers made as little as 50 cents.

The pay looks especially low in dollar terms, partly because China has intervened massively in currency markets to hold down the value of its currency to keep exports competitive. The cost of living is low in dollar terms for the same reason; entrees at an air-conditioned restaurant three blocks from the bicycle factory here start at 50 cents for a large plate of fried rice.

Moreover, labor regulation is weak in China, as shown most vividly this year by the discovery that brick makers in the north of the country had kidnapped and enslaved hundreds of children and mentally disadvantaged adults, working them under brutal conditions with little or no pay.

And wages are stagnating in the middle of the labor market - workers who consider themselves too educated for entry-level jobs in a garment factory, but lacking skills or experience to command a premium salary. ''It's easy to find a job with not a very high salary - it's not easy if you want a higher wage,'' said Chen Zheng, a 24-year-old autoworker and high school graduate in Ningbo, in east-central China.
 
The hardest variable to judge in China's changing labor market is the pace of productivity growth. Since China produces few reliable statistics, the best way to assess them is to look at individual factories like the Dahon operation here, which produces bicycles that collapse for easy storage.

David Hon, chief executive of the privately held Dahon Group, said that while he has been raising wages by up to 15 percent a year, the average labor cost for each bicycle has actually edged downward.

This is possible, he said, because sales are growing by 30 percent a year and increasingly large-scale production has brought savings. The cost of engineering a new bicycle design, or handling the accounting and other back-office operations, is spread over more and more bicycles as production rises.

Price changes in China are unlikely to affect broad measures of inflation immediately in the United States although longer-term effects are likely, the U.S. Federal Reserve chairman, Ben Bernanke, said in a speech March 2, just as prices for imports from China were at their lowest point. Bernanke suggested that the price changes in China would have minimum effect in the United States because the total of Chinese imports is small in relation to the U.S. economy.

The bigger question, even harder to answer, is how much cheap Chinese imports have forced American manufacturers to keep their prices low. And will that price restraint persist if Chinese products become more expensive? American, European and Japanese automakers, for instance, have been putting a lot of pressure on parts suppliers to cut prices by forcing them to compete for contracts with low-cost Chinese producers.

Rising overall incomes in China also affect global inflation indirectly. Higher income in this country contributes to soaring demand by Chinese for cars, air-conditioners and other energy-consuming products.

China is now the world's second-largest oil importer after the United States. More demand will help push up global oil prices and inflation.