Fewer, pickier ... smarter?

Xiang Zhihua stood on the side of the factory-lined street one afternoon in late November with his family and all their belongings piled up in roughly a dozen mismatched boxes and bags. Xiang, 27, was moving back to his hometown in Anhui province after spending roughly five years as a factory worker in Shanghais Qingpu district, where factories are interspersed with farm fields.

Xiang, his wife and his four-year-old daughter had no reason to stay in Qingpu, he said, because wages in Anhui have risen rapidly and are only slightly lower than in Shanghai. Eight years ago, he would have earned only RMB400(US$48) a month in his home province, but now he can make RMB3,000(US$480) a month. “In a few years, there wont be people coming here,” he said, referring to the strip of factories along the road in Qingpu. “Every place is becoming developed.”

Xiang is one of the many low-wage Chinese workers who find themselves in increasingly high demand. (As he puts it,“If I wanted a job today, I could find it.”) A decade ago, the stream of labor flowing from Chinas countryside to urban factories seemed limitless. But now that flow of migrants is beginning to ebb. Factories in southern China began experiencing labor shortages at the end of 2003, forcing them to choose between leaving assembly lines unattended or continually raising wages. In one example, a chemical factory in Guangdong province drew only 50 applicants in 2006 for a hiring campaign aimed at recruiting 200-300 workers, according to the China Labour Bulletin.

The shortage will only worsen as the last migrant workers unneeded on farms move into cities, which some economists say could happen as soon as 2017. Workers are gaining the economic clout to command higher wages and better working conditions in addition to working in the location of their choosing. Higher wages undoubtedly benefit workers by raising standards of living, but they also hurt Chinese manufacturers hoping to compete with low-cost exporters in other countries. Manufacturers will need move up the value chain – making more com- plex goods that require a more skilled but leaner workforce – to find new advantages over their competitors.

The army of migrant workers that form the backbone of the Chinese economy have already witnessed cataclysmic changes since the countrys economic opening in the late 1970s spurred rapid development. As Beijing seeks to recast its growth model once more, the next generation of migrant workers and their already urbanized brethren must adapt to make it in the new Chinese economy.

A new model worker

Migrant workers are the foundation of Chinas modern economy, driving lowcost export manufacturing. In the decades following reform and opening, rural residents flooded into cities, beginning with southern Chinese manufacturing centers like Shenzhen. This massive migration caused Chinas urban population to swell by roughly 500 million in the last 30 years.

These first-generation workers were true migrants. Government restrictions prevented them from officially becoming urban residents, making them mostly ineligible for welfare and public education, and many migrants stayed in one place for only a few years before moving to another factory or returning to the countryside. These mostly destitute exfarmers were willing to suffer through poor conditions for low wages in order to feed their families and provide a better future for their children.

But their children, born in the 1980s and 1990s, were raised with drastically different expectations. The second generation mostly grew up in cities as the children of migrants or was otherwise spared from farm labor by being sent to school. This army of 100 million workers born after 1980 accounted for roughly twothirds of all migrant workers in 2009, according to the All-China Federation of Trade Unions.

These second-generation workers identify as urban youth, rather than rural migrants, said Mary Gallagher, a political science professor at University of Michigan who studies migrant labor. Most are tied to rural areas only by their official household registration, or hukou. “I call it the hairstyle test, which is if a migrant worker has a hairstyle, hes not going back to farming,” Gallagher said.

A generation of only children, these migrants inherited the hopes their first generation parents had for them. “They are no longer willing to toil or work in unclean environments,” Liu said. That includes jobs as construction workers and housekeepers, leading wages to rise in those categories.

The new generation is often willing to take lower paying jobs that are cushier or offer more opportunities for career advancement. “While the first generation would only ask how much they could earn, the new generation first asks whether there will be rest days every week and whether they will have to work overtime,” said Lu Ming, a labor economist at Fudan University. “Only after that will they ask about wages.”

Turn, baby, turn

Chinas labor market is headed for a drastic transformation as rural workers with the means and incentive to move to cities dwindle. Economists measure this progression using a concept called the Lewis Turning Point, first promulgated in the 1950s by economist Arthur Lewis. As economies develop, workers are drawn to cities hoping to find jobs in high growth industries.

At some point, however, there are no more rural workers available with both the money and the incentive – a largeenough disparity between rural and urban wages – to move to cities. The Lewis Turning Point occurs when this supply of rural labor is exhausted and wages spike across the economy as employers try to attract remaining workers.

Other major Asian economies saw their Lewis turning points pass decades ago. The point occurred in Japan around 1960, in Taiwan in the late 60s and in South Korea in the early 70s. Chinas turning point has lagged behind these countries because of its enormous population and a 30-year pause in economic development under Mao Zedong.

The Lewis Turning Point affects wages across the Chinese economy, but workers in different sectors and regions will experience the shift in wages and conditions unevenly. For example, a boom in higher education in recent decades has left China with too many graduates of four-year universities, so these educated workers still struggle to find desirable white-collar work.

The impact of the Lewis Turning Point will be most obvious in manufacturing, which the US Bureau of Labor Statistics estimated employed roughly 100 million Chinese as of 2008. But even in that sector, wages will vary widely by region, with coastal areas seeing far more rapid increases than inland provinces.

Economists disagree about when the turning point will fall in China. However, most admit that although the Lewis Turning Point is useful in economic models, the actual shift in the labor market will be more of a “Lewis Turning period” that takes place over many years.

One 2010 study by the International Food Policy Research Institute (IFPRI) which examined wages concluded that the turning point had already passed in 2003. The study found salaries and demand for workers in Chinese villages began increasing rapidly after 2003. Average wages for male workers in eastern Chinese villages only increased from about RMB17 (US$2.05) per day in 1998 to RMB23 (US$2.78) per day in 2003. But from 2003 to 2007, wages doubled to roughly RMB41 (US$5.39).

Models that measure the number of workers, however, predict the turning point remains a few years off. Li Xunlei, chief economist of Haitong International Securities Group, predicts that with an average migration rate of 8 million per year the pool of 40-60 million excess rural workers will be exhausted between 2017 and 2020. Separately, a forthcoming IMF study estimates that China has 150 million excess workers, leading the turning point to fall between 2020 and 2025.

The IMF, Haitong and IFPRI assessments each have their merits, but they all indicate that the “turning period” began in the early 2000s and will continue for several more years. On the ground in China, its also evident that the shift is well underway.

Owners of Chinese factories are already dealing with rapidly rising wages. Top Form International, an underwear manufacturer that supplies Wal-Mart, felt the pressure of rising wages acutely in Shenzhen, where the minimum wage has risen 50% in roughly three years, chief financial officer Michael Austin told China Economic Review last March. While the company will continue to use factories in China, it is choosing to expand in other countries like Cambodia where the minimum wage is US$61 per month compared to roughly US$240 in Shenzhen and US$106 in Longnan, far inland in Gansu, as of 2011.

“Obviously, the availability and cost of labor is incredibly important,” Austin said. “We go not necessarily where you want to go on your holidays.”

Movin on up

But if Chinas low-cost manufacturing economy runs out of steam before the country transitions to a new model for growth, a painful period of economic malaise could set in. To minimize this gap between growth models, China can introduce some reforms to buy time before the clock runs out on low-cost manufacturing.

The Lewis Turning Point is not set in stone; rather, China can push it back by freeing up more rural laborers. “Policies can play a significant role in making sure that the turning point is happening in the most efficient way economically and also, from a social point of view, the most balanced way,” said Roberto Torres, an economist and the director of the International Labour Organizations research arm.

Thats a daunting task, considering“the labor question in China is related to every other hard problem that the government faces,” said Gallagher of University of Michigan. “Its related to the onechild policy, its related to hukou reform, its related to land.” Beijing must hope to gradually reform all of these policies to keep factories full in the face of labor shortages.

Leaders could start by reforming the hukou system, which requires all Chinese to register to a single city or county, which is then responsible for providing social services. To avoid an influx of migrants, many cities make it difficult for rural residents to obtain urban hukous, though Shanghai, Chongqing, Chengdu and Shenzhen have launched pilot programs to give residency to migrants that could eventually be expanded nationwide.

But many migrants dont want to surrender their rural hukous, which give them rights to collectively owned rural land that they view as a kind of insurance policy to fall back on in tough times. If the government introduces reforms to give rural hukou holders full ownership of their land so they can sell it and reap the profits (see “This land is my land,” page 26) or allows them to retain rental and farming rights with an urban hukou, then migrants would be more likely to make the switch.

In the longer term, many China watchers argue the primary solution for labor shortages would be easing the onechild policy. But even if the policy were eliminated today, the babies born would not enter the work force for 15 to 18 years, by which time the Lewis Turning Point will likely have passed.

Implementing reforms to the hukou system, land ownership or the one-child policy will require great political will and coordination. Many local governments oppose hukou reform because they would be required to foot the bill for more social services. But the central leadership nevertheless understands that something must be done to free up more workers. If wages rise too fast and unskilled jobs leave China, unemployed workers may blame the government.

Left behind

By many appearances, China is entering a golden age of manufacturing. Unskilled workers can easily find factory jobs that provide for a somewhat comfortable life. But this period will not be sustainable: As wages rise over the course of years or decades, China will shed factory jobs to lower-cost countries such as Vietnam and Indonesia.

Economists say Chinese companies must look for advantages other than costs to compete – namely, moving up the value chain to make more sophisticated goods that require fewer workers and more advanced production techniques. For example, instead of merely assembling iPads with imported parts, Chinese factories would seek to make more of the iPads high-tech components such as cameras, screens and processors. South Korean, Japanese and Taiwanese companies have already done this in a variety of industries, including semiconductors and televisions.

Chinese workers must prepare for the new, higher-tech economy that Beijing seeks to create. At the least, they must know how to use computers and read English to operate machines. They will also need the critical thinking skills to adjust sophisticated manufacturing equipment, rather than simply doing repetitive actions. For example, a worker will need to know how to alter a computer model that in turn tells a metal cutter to move by a fraction of a millimeter, rather than just being able to stitch clothing straight.

But with plenty of well-paying unskilled jobs available now, most workers have little incentive to get the vocational training necessary for higher-tech jobs. For example, a 26-year-old factory worker in Shanghai, who asked simply to be identified as Mr. Zhang, studied chemistry at a technical school for three years before finding a job at a stateowned rubber manufacturer that pays RMB3,000 (US$481.49) per month.

Meanwhile, his unskilled 38-year-old coworker, who has been at the company a similar amount of time, said he earned RMB4,000 (US$641.98) a month – the pay difference being based on age and not a workers market value.

The first step in making this shift is convincing young Chinese to go to high school, generally a requirement to later attend vocational school. But most Chinese only think of high school as a stepping stone to four-year universities. With too many Chinese college graduates and too few coveted white-collar jobs, many youth simply choose to go directly into the workforce after completing the nine years of compulsory education.

The challenge of creating an army of highly skilled workers adds one more difficulty to Chinas already painful economic shift. Some workers in the highertech economy will welcome better pay and jobs that require more thought and less toil. But some workers without the money or time for vocational training will undoubtedly have difficulty finding jobs.

For now, the future looks bright for workers like Xiang. He will return to Anhui province to a modestly paying job that can support his family, and he may easily find a string of other factory jobs for years to come. But Xiang could find himself unprepared to work in the highly mechanized factories of the new economy China hopes to create. China must aim for a transition that provides unskilled jobs for those like Xiang as long as possible, while gradually shifting the workforce over to more demanding and higher paid employment.

China can take cues from other economies that have turned away from low-cost manufacturing. Japan, Korea and Taiwan climbed up the value chain gradually and effectively. By contrast, the US had abrupt structural shifts that created the rust belt of dead factory towns and left swaths of workers unemployed. If China fails to manage a smooth economic transition, Xiang and workers like him could find themselves similarly left behind.