Labor unrest is rising in various forms in China, with industrial workers using their power of numbers to try to secure higher wages and better working conditions. The protests have been peaceful for the most part, though some have involved clashes with police.
The workers are having some success – examples include tech company Foxconn, which recently gave employees a 60 percent raise, and car maker Honda, which boosted pay by 20 percent.
Labor costs are, of course, one of the key inputs in the cost of production, so economically it stands to reason that significantly higher wages may result in significantly higher prices for finished products. In the U.S., for example, labor can account for up to 70 percent of a company’s overall cost structure.
But this week’s chart from Goldman Sachs shows that labor costs in China and neighboring Taiwan comprise a relatively low percentage of operating costs – typically less than 15 percent, and in some cases much less than that, with telecom in Taiwan being a notable exception at more than 20 percent.
Higher wages and an appreciating yuan together stand to create a double benefit for Chinese workers in terms of purchasing power. This is consistent with Beijing’s focus on promoting domestic consumption.
Some coastal Chinese companies may opt to relocate their production inland, where wages are lower, and some may be able to pass along at least some of the costs to their customers. It’s also possible that China’s tight labor market could loosen next year because the 2008 stimulus is scheduled to end. A rise in unemployment could put a damper on wage hikes and take some momentum away from labor activism.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 3-31-10.
