Cheap Labour is a Relative Term

There has been some controversy lately in the UK after supermarket Sainsburys launched a designer bag to carry your shopping home in, which being manufactured from cotton and rope would hopefully reduce the vast numbers of non degradable plastic bags thrown away each year. However, apparently these aims are not noble enough, and it has been seized upon as an opportunity for campaign groups to criticise Sainsburys for various reason. One aspect of this is complaints about the wages paid to workers in Chinese factories.

This is not a new cause of concern in some areas, particularly with trade deficits between developed and developing countries rising to all time highs. Manufacturers in the West are facing greater and greater pressure on their jobs due to the fact production costs are much lower in countries like China. It is not unusual to see incredibly low wages being quoted and raised as a cause for concern, the implication being that such low wages are unethical, and that companies should be much more reluctant to move production to developing countries. In the case of the Sainsburys bag mentioned above, there is a quote that "workers in the garment industry in China typically are paid 20p to 30p an hour" [1].

On the face of it, to someone in a developed country, this seems quite shocking, but we should investigate what this really means in terms of cost of living, and how this compares to wages for other workers in China, and in other countries. To make this comparison, I have decided to look at the salaries of teachers in China and the UK as a reference point, to try and decide what this sort of wage really amounts to in relative terms. I have chose teachers salaries here for no scientific reason, expect that in both countries, teachers salaries are managed by the government, and as such should be attuned to provide a decent, but probably not luxurious standard of living. You should treat this as an interesting benchmark, not a very precise comparison.

The first question is, what does 20 or 30p per hour equate to as a salary in Chinese Yuan (CNY). Using this website: Currency Conversion, and assuming an 8 hour working day, we can calculate that 25p (the mean wage estimate) per hour works out at 650 CNY per month. Next we need to know the monthly salary of a Chinese teacher. An approximate answer is 1000 CNY per month [2, 3]. This shows us that a Chinese manufacturing worker earns approximately 65% of the salary of a Chinese middle school teacher. This definitely doesn't sound so exploitative any more. Comparing now with English teacher salaries, which can be estimated at 23,000 GBP per year [4], we find that 65% of that is approximately 15,000 GBP per year, which while not a great salary, is certainly not exploitative or particularly unfair, bearing in mind that this is either unskilled or low skilled labour.

So in light of this, we should take it with a pinch of salt when we hear about Chinese manufacturing being unfairly cheap; in fact, considering cost of living adjustments and the relative position of the Chinese economy, the salary of an average manufacturing worker is actually quite reasonable, and not particularly out of line with what a similar unskilled worker might earn in the UK.

The Value of the Yuan - Redux

Someone pointed me at this article on a report by the Chinese government stating that a 5-10% increase of the value of the Yuan would cost their economy 3.5 Million export jobs hurt 10 Million farmers:

Costs of Revaluation

Numbers like this should always be taken with a grain of salt, but supposing even that they are double the actual impact, it is clear that the Chinese have a lot to lose by acquiescing to US demands. When analysing the expected movement of the Yuan / Dollar exchange rate therefore we should bear in mind facts such as this and accept that if the Yuan does move, it will be as slowly as Beijing can manage.

Thanks to immobilienblasen for bringing this to my attention.

Why the Chinese Will Not Revalue the Yuan

In China, much like in many Asian countries, the local currency, the Yuan, has had a fixed exchange rate to the dollar for many years. Historically, the value of this exchange rate was entirely under the control of the government, a fact which gave them great control over the way in which money flowed in and, more importantly, goods flowed out of the People's Republic. There has been growing pressure for more than a few years for the Chinese government to release their control of this exchange rate and to allow it to move, in the natural course of market trading, to a more freely determined level. The Chinese government, one must assume reluctantly, in 2005 allowed this to begin to take place, by fixing the rate of the Yuan to a secretive "Basket" of currencies that would be designed to allow the overall exchange rate of the Yuan to move more freely. However in the almost 2 years since this took place, relatively little movement has been seen in the value of the Yuan, and the Chinese are facing calls to devalue their currency further. The interesting question here is what do we expect the future to hold for the Yuan? To understand this we need to understand why the Yuan is valued the way it is at the moment, what the impact of a revaluation might be on Chinese economics, and what are the consequences of doing nothing.

For many years the growth of the Chinese economy has been one of the most impressive stories of global economics, averaging 9% GDP growth per year for the decade to 2004. This growth shows no sign of stopping, and is a major driving force behind the urbanisation and modernisation of Chinese life. It is a testament to how far the Chinese economy has progressed in the recent past, that a country which suffered food shortages and starvation in the previous generation is now in the unprecedented position of being talked about as overtaking America as a global economic superpower in the next generation. The smartest and hardest working Chinese students can afford jet half way around the world to study at the best universities, paid for by their now wealthy parents - the same ones that may have suffered hunger themselves not so long ago - and who know very well that China's new found wealth should be held on to and respected for the better life it can bring their children.

The engine of China's economic growth has been manufacturing, and, more specifically, the revenue generated by exporting those manufactured goods to wealthier countries. First of all, it is interesting to note that around 20% of exports from China to go the US, and are predominantly in manufactured goods; items such as electronics, office equipment as well as clothing and textiles make up just over half of all Chinese exports. Clearly there is a large vested interest in manufacturing and exports; the manufacturing side is driven by a large availability of cheap labour (China is the worlds most populous country, and around half those people work in agriculture), and exports create revenue by virtue of their affordability to a large number of people around the world. It is this affordability which the Chinese government are looking to control when they manage the exchange rate of the Yuan; and if managed correctly, their exports and associated revenues will continue to grow, and be a boon to the lives and well being of the Chinese people, leading them to the greater prosperity and comfort which all people strive for. Clearly therefore it is in the interests of policy makers in Beijing to attune the exchange rate of the Yuan to suit the needs of the Chinese people - although they may not be democratically elected, the government must keep the needs and wishes of the Chinese people foremost in mind when making strategic decisions - and this will always therefore lead them to keep the Yuan low enough to stimulate growth, particularly in the form of those exports to richer countries that bring in valuable foreign money, which is the main reason for the growing prosperity of modern China.

Therefore, we can expect that the future will not bring any major revaluations of the Yuan - the Chinese government has been under pressure for some time now to devalue the currency, but has not done so in any significant fashion, and we should expect this trend to continue as long as no extraordinary external pressures force it to do otherwise. That the Chinese have allowed the Yuan to float freely at all has been in response to strong criticism, particularly from the US, that the currency is too weak. The fact that the Yuan has only moved around 5% in the last year, when some in America are calling for a 40% revaluation, shows how reluctant the Chinese are to concede to these demands - it is from this that we can infer that the decision was taken reluctantly, and that the Chinese will resist as much as possible any further requests to devalue the Yuan further.