The East-West Wage Gap Is Closing

China is a lot less low cost than it once was and that changes a lot

A Chinese worker fixes compressors along an air conditioners production line at the Japanese Hitachi Household Electrical Appliances Company in Shanghai, in March 2003. Liu Jin/AFP via Getty Images

Commentary

One of China’s great economic advantages is going away. Relatively low-cost, reliable labor has been a mainstay of China’s economic engine for decades.

Manufacturers from Europe and North America for years rushed investments into China to produce their products at a lower cost than they could domestically, first simple, cheaper items and later more sophisticated, high-value items. This investment and the income it generated helped propel China’s fantastic pace of economic growth. But for some time, wages in China and Asia generally have been rising faster than wages in the West, so today, the allure of that low-cost advantage has all but disappeared.

Early on in China’s development, the wage gap was compelling. In 2000, for example, when China entered the World Trade Organization (WTO), the average annual wage in China, according to Beijing’s National Bureau of Statistics, was about 9,333 yuan a year. At the then-prevailing dollar-yuan exchange rate, that annual pay amounted to some $1,127. The average American worker at the time took home some $30,846 a year, almost 30 times his or her Chinese counterpart.

A study done back then by the United Auto Workers of America (UAW) quoted an average wage for a Chinese auto worker at the equivalent of 59 cents an hour, a touch less than 3 percent of his or her American counterpart. Though offshore production carried complications and costs, and American workers could boast better training and higher productivity rates than Chinese workers, the wage gap was so huge that producers could not resist the China location.

But as more and more Western facilities located in China and that economy otherwise developed, wages began to rise much faster than in Europe or America. By 2011, the average Chinese worker commanded an annual wage of 41,799 yuan, the equivalent at the exchange rate of the day of $6,120. That year the average American worker still brought home considerably more, some $40,000, but the gap had shrunk. American wages were 6.5 times their Chinese equivalent.

By the time of COVID-19 and all the additional complexities it imposed on Western sourcing in China, the wage gap had shrunk almost to insignificance. In 2021, the last full year for which Beijing’s National Bureau of Statistics offers data, the average Chinese worker earned 105,000 yuan yearly, the equivalent of $16,153. The average American worker earned some $58,120 a year, only 3.5 times his or her Chinese counterpart.

And according to the independent consulting firm ECA International, preliminary data show that the wage gap continued to close in 2022 and will likely close further in 2023. The firm’s respected Salary Trends Report indicates that wages in China and Asia generally will outpace inflation in this new year, while workers in Europe and the Americas will suffer wage growth of less than their inflation rates. For China, the report expects a 3.8 percent jump in real wages in 2023 and even more impressive increases in India and elsewhere in Asia. Expectations for Europe center on a 1.5 percent decline in real wages, while for the Americas, they look for a 0.5 percent real decline. That could bring the U.S.-China wage gap down close to 3.3 times.

To be sure, a gap remains, but it is no longer sufficient to extend the production location trends of the past. Consider that American workers still boast higher productivity rates than their Chinese counterparts, enough perhaps to erase the effects of the shrunken labor cost gap completely. And in recent years, another compelling matter has become clear. China is no longer as reliable for sourcing as was once thought. During COVID-19, Beijing halted the export of several important items, such as face masks. The reasons were easy to understand. China had an acute domestic need. But the move hardly encouraged foreign buyers or producers. Then, when Beijing’s zero-COVID policy blocked production for long periods, Western producers still found another reason to reconsider Chinese sourcing.

China’s economy has less need for this Western sourcing than it once did. It can continue to grow even as Western producers seek other venues for their production. But the shift ushered in by the shrinking wage gap, as well as these other considerations just alluded to, will slow the pace of China’s economic growth to rates well below those to which China and the world have once grown accustomed.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.