China’s economy has ben­e­fited from an abun­dance of cheap labor since the 1980s. But the recent sui­cides of 10 employees of elec­tronics man­u­fac­turer Fox­conn Tech­nology and the mas­sive strikes by employees of Honda have caused its gov­ern­ment, and a number of com­pa­nies, to increase wages for an increas­ingly resentful work­force. Ravi Rama­murti, North­eastern Uni­ver­sity dis­tin­guished pro­fessor of inter­na­tional busi­ness and director of the Center for Emerging Mar­kets, ana­lyzes China’s labor strug­gles and their impact on the global economy.

Does the recent labor crisis fore­tell a rising labor move­ment in China?
Not if the gov­ern­ment has its way. Iron­i­cally, workers have had fewer rights in Com­mu­nist China than in many other coun­tries. By law, there is only one national fed­er­a­tion of workers, con­trolled by the Com­mu­nist Party, and, until recently, the gov­ern­ment was more con­cerned with cre­ating jobs and attracting for­eign invest­ment than with max­i­mizing workers’ inter­ests.
The gov­ern­ment kept wages low and ensured indus­trial peace, using the police to break strikes, if nec­es­sary. This worked as long as the supply of migrant workers into the booming coastal provinces exceeded demand. But with growth booming in the inte­rior provinces as well, the supply of migrant workers to coastal cities has declined.
The truly sur­prising thing is not that workers are demanding and get­ting higher pay—something the gov­ern­ment itself has pushed for since 2008—but that this is a spon­ta­neous move­ment led by workers, not one orches­trated by gov­ern­ment. If it spins out of con­trol, the gov­ern­ment could come down hard, and things could turn ugly quickly.

How much did Chi­nese man­u­fac­turing workers make before the recent salary increases and what will those increases mean?
In eastern cities like Shen­zhen and Shanghai, the min­imum wage is about $160 per month, but firms pay almost 50 per­cent more to attract workers. The average wage used to be a lot lower in the inte­rior of the country, but lately that dif­fer­ence has nar­rowed to only 10 to 20 per­cent. According to press reports, Honda increased its wages by 20 per­cent to end the recent strike in its fac­tory, and Fox­conn increased wages by 60 per­cent, to $400 per month.
While Chi­nese wages are still very low com­pared to the United States, the sharp increases will force many Western com­pa­nies to rethink their sourcing strategies.

How will China be affected by the more expen­sive lifestyle of its workers?
The wage increases will help boost internal demand for goods and ser­vices, because Chi­nese workers will have more spending money, and it will reduce China’s reliance on exports for growth. It will also force com­pa­nies in the eastern provinces to raise labor pro­duc­tivity and move up the value curve to more advanced prod­ucts or processes.
The bad news is that it will reduce China’s inter­na­tional com­pet­i­tive­ness, which was based on low wages and docile workers. There­fore, for­eign com­pa­nies will look to shift pro­duc­tion to other low-​​wage coun­tries, such as India and Vietnam. But this will not happen overnight, because China’s sophis­ti­cated net­work of sup­pliers will be hard to repli­cate else­where, and the lower wages of these other coun­tries will be offset by the higher costs of doing busi­ness in those locations.

Will the wage increases affect the prices of cars, com­puters and other prod­ucts man­u­fac­tured in China?
It will cer­tainly increase costs for com­pa­nies making things in China, but they may not pass on the higher costs to U.S. con­sumers imme­di­ately, given the anemic state of the economy. Instead, they will settle for lower profit mar­gins or shift pro­duc­tion to other low-​​cost coun­tries. But once the U.S. economy recovers, Wal-​​Mart and others will be tempted to raise prices to reflect the rising cost of doing busi­ness in China. Almost every product we buy will be affected, either because it is man­u­fac­tured in China or depends on parts made there.

As a result of the salary increases in China, will other coun­tries step in to offer the same amount of man­u­fac­turing capacity at lower wages?
The recent devel­op­ments in China cer­tainly open the door for other coun­tries. Rel­a­tively simple prod­ucts like footwear and tex­tiles would be prime can­di­dates for relo­ca­tion to [man­u­fac­turing facil­i­ties in] Bangladesh, Indonesia or Vietnam.
In the case of more com­plex prod­ucts, such as toys and con­sumer elec­tronics, firms will move less-​​skilled oper­a­tions to the inte­rior provinces of China, while retaining higher-​​skill oper­a­tions in the coastal provinces, whose links to the inte­rior are improving by the day.
India is the only country with a big enough labor force to rival China’s. But India’s infra­struc­ture is so poor that it cannot com­pete in really low-​​cost man­u­fac­turing. It does better in prod­ucts that are skill-​​intensive, such as engi­neered goods, soft­ware, or phar­ma­ceu­ti­cals, where mar­gins are higher.
So, in the mid-​​term, if China ceases to be the world’s low-​​cost work­shop, we may all be in for a dose of inflation.