The Investment Scientist

When China runs out of cheap labor

Posted on: April 22, 2010

China has 1.3 billion people.  In the last two decades, it is the source of seemingly limitless supplies of cheap labor to the world’s manufacturing industries.  Believe it or not, this pool is about to run dry. When that happens, there will be huge implications for the world.

Even before my trip to China, I had read with incredulity that China’s exporting provinces are experiencing severe labor shortages requiring firms to raise wages 20%–30% just to keep the workers they have. My first stop in China was Shenzhen, a city that is home to Walmart’s worldwide procurement center. I stayed in the Evergreen Resort, a facility owned and operated by my friend Mr. Lin.

I took the opportunity to ask him about the labor shortage. He said it is inevitable. He raised his workers wages 30% before the Chinese New Year (in February), and all of his workers reported back to work after the holiday, he said with a proud smile.

There are a number of macro-dynamics that make labor shortages inevitable in China:

  1. Demographic: China’s one child policy was instituted 30 years ago; the effect of the policy on the labor market has become increasingly prominent.
  2. Psychology: These only children are called “the little emperor” in China for a good reason; they are surrounded by three sets of adults: parents and grandparents. They won’t put up with toiling long hours on the factory floor.
  3. Inland development: most of the cheap labor comes from the poorer inland provinces. Those provinces have improved enough in the last 10 years that people can find jobs locally. Though the wages are generally lower, they get to stay with their families.

These dynamics will not change anytime soon. So be prepared to see higher prices at your local Walmart. What about your portfolio? Have you built a strong enough levee to withstand the coming tsunami of inflation?

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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