The best news about the American economy isn’t coming from America. It’s coming from China.
The inexhaustible labor pool that has fueled China’s rise as the world’s dominant low-cost manufacturer is beginning to get exhausted. The nation’s decades-old one-child policy has collided with its decades-old industrial development policy to produce something hitherto unimaginable: a labor shortage. China’s labor force will begin to shrink in the next year or two, the Wall Street Journal reported on Monday.
The result, as the Journal documents, is steeply rising wages — during the past year, up 14 percent in Shanghai; 18 percent in Guandong (China’s industrial belt); and 28 percent in the inland province of Chongqing, a lower-wage region to which manufacturing has only begun to relocate.
The implications for the U.S. economy are potentially major. With labor costs soaring in China and the yuan slowly rising, while in the United States productivity soars and the dollar slowly declines, the economic advantages that American companies reap by offshoring production begin to dwindle. A Boston Consulting Group study released this month on the return of U.S. manufacturing concludes that “re-investment in the U.S. will accelerate” as a result of these trends.
Great news, no? Well, hold the applause for now.
The study looks at the change in U.S. and Chinese labor costs and productivity levels over the past decade, and then projects them for 2015. China’s labor costs were 34 percent of U.S. labor expenses in 2005, the study notes, in the two regions the group chose to measure. By 2015, the study reports, the gap between American and Chinese labor costs adjusted for productivity differentials will have so narrowed that China’s labor costs will come to fully 69 percent of U.S. labor costs.
So what’s the catch? Just this: The two regions that the group compared are the Yangtze River Delta (which includes Shanghai) and Mississippi.
Mississippi? The state that ranks 49th or 50th in virtually every measure of U.S. living standards? Is Mississippi the new normal for an America that’s competitive in the global marketplace?
“We made a mistake by picking Mississippi,” conceded Harold Sirkin, a senior partner and managing director at the Boston Consulting Group who authored the study. But the America that the group was measuring, he told me last week, was one defined by Southern labor standards: “fewer work rules, less unionization and lower costs” than other advanced economies. Our economy, he said, is more flexible than, say, the northern Europeans’. “With unemployment at 9 percent, the economy can flex in ways that people wouldn’t have believed. Michigan’s population is declining, while the South is growing.”
Mississippi, here we come.
So is the rebirth of U.S. manufacturing inescapably linked to paying the next generation of American workers less than their parents made? A quick look around America’s industrial landscape — where new hires in unionized auto plants are paid roughly half the $28 hourly wage that longtime employees make — suggests that inter-generational downward mobility may be the price of bringing manufacturing home.
But perhaps not entirely. John Surma, the chief executive of U.S. Steel, told me this spring that labor costs aren’t that major an issue for his company. “Wages and benefits account for 15 to 20 percent of our costs,” he said. “Materials and energy add up to 75 percent.” And with the productivity gains that the company has experienced — “30 years ago, it took 10 hours per worker to produce one ton of steel; today, it takes two” — Chinese steelmakers no longer have a price advantage (though their government covers their losses).
U.S. Steel is a unionized company that has good relations with its union (the United Steelworkers), and while the union has adapted to the harsher economic climate, conditions for workers there haven’t descended to Mississippi norms. But for many manufacturers — including some based in Europe and Japan — Mississippi beckons. Volkswagen, BMW, Honda and the like have moved into the South, where unions are absent and labor is cheap.
Germany still profitably produces its high-end products at home, with labor costs that are some 50 percent higher than those in the United States. The South is where Germany goes when it wants to build its products on the cheap — a halfway house, as it were, between China and the high-value-added economy of Northern Europe.
As the Boston Group’s Sirkin effuses, “We’re on pace to become the low-cost manufacturing platform” for consumers in the developing world.
And so it goes in the 21st-century American economy, where even the good news is bad.