With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?

Tyler Durden's picture

A rather controversial perspective on "reverse labor mobility" has recently seen a revival following the release of BCG's analysis: "Made in the USA, Again: Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring" which claims that "within the next five years,
the United States is expected to experience a manufacturing renaissance
as the wage gap with China shrinks and certain U.S. states become some
of the cheapest locations for manufacturing in the developed world." While this topic, as we will shortly see courtesy of SocGen is far from taken for granted, could be the deus ex machina that could provide the historic jobs boost to Obama's second presidential campaign (should he get that far), it could also explain the eagerness of the Fed to continue exporting US inflation to China. If the latter is indeed the case, it would mean that the Fed will do everything to continue flooding the world with excess liquidity if for no other reason than to see Chinese inflation reach an out of control state, and wages explode, in an outcome that would ultimately undo the great manufacturing job outsourcing phase that marked the 1990s and 2000s. If successful, it would indeed lead to a second US renaissance in manufacturing jobs. However, will China allow its economy to lose the competitive wage advantage it has held for decades over the US, an outcome which would culminate in riots, as unemployment in the billion + nation goes parabolic. Of course, the conspiratorially minded can imagine a scenario in which the inflationary transference plan concocted by the Chairman has one goal and one goal only: to cause labor cost parity between the US and China in the shortest amount of time. The only two question in this case are: how long until China realizes what is going on, and how will it react?

From BCG:

With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.

“All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,” said Harold L. Sirkin, a BCG senior partner. “We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.”

After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said.

So which industries would be the first to see a boost as jobs start to trickle back to the US:

Products that require less labor and are churned out in modest volumes, such as household appliances and construction equipment, are most likely to shift to U.S. production. Goods that are labor-intensive and produced in high volumes, such as textiles, apparel, and TVs, will likely continue to be made overseas.

“Executives who are planning a new factory in China to make exports for sale in the U.S. should take a hard look at the total costs. They’re increasingly likely to get a good wage deal and substantial incentives in the U.S., so the cost advantage of China might not be large enough to bother—and that’s before taking into account the added expense, time, and complexity of logistics,” said Sirkin, whose most recent book, GLOBALITY: Competing with Everyone from Everywhere for Everything, deals with globalization and emerging markets.

Indeed, a number of companies, especially U.S.-based ones, are already rethinking their production locations and supply chains for goods destined to be sold in the U.S. For some, the economics have already reached a tipping point.

Just who are these brave souls who are foresaking Chinese zero wage over US minimum wage?

Caterpillar Inc., for example, announced last year the expansion of its U.S. operations with the construction of a new 600,000-square-foot hydraulic excavator manufacturing facility in Victoria, Texas. Once fully operational, the plant is expected to employ more than 500 people and will triple the company's U.S.-based excavator capacity. “Victoria’s proximity to our supply base, access to ports and other transportation, as well as the positive business climate in Texas made this the ideal site for this project,” said Gary Stampanato, a Caterpillar vice president.

NCR Corp. announced in late 2009 that it was bringing back production of its ATMs to Columbus, Georgia, in order to decrease the time to market, increase internal collaboration, and lower operating costs. And toy manufacturer Wham-O Inc. last year returned 50 percent of its Frisbee production and its Hula Hoop production from China and Mexico to the U.S.

Needless to say, US unions are ecstatic, which is why Obama would obviously be firmly behind such a concoction:

“Workers and unions are more willing to accept concessions to bring jobs back to the U.S.,” noted Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “Support from state and local governments can tip the balance.”

Zinser noted that executives should not make the mistake of comparing the average labor costs for production workers in China and the U.S. when making investment decisions. The costs of Chinese workers are still much cheaper, on average, than comparable U.S. workers, and some managers may assume that China is a better location. But averages can be deceiving.

“If you’re just comparing average wages in China against those in the United States, you’re looking at the problem in the wrong way,” Zinser cautioned. “Average wages don’t reflect the real decisions that companies have to make. Averages are historical and based on the country as a whole, not on where you would go today.”

That said, since this is a consulting report, it is probably wrong from beginning to end. As a logical check we decided to cross refernce with a SocGen report titled "China’s wage rises – the beginning of the beginning" which however reaches a diametrically different conclusion.

To wit:

The discussion on China’s wage growth and its underpinning urbanisation trend has heated up again as the results of China’s sixth population census are released. Urbanisation looks advancing quicker than previously thought. Stories on wage growth and labour shortages have been hitting the newswire more often than ever before. However, we think China is still some time away from reaching the type of urbanisation  rates that characterised Lewis turning points in Japan and South Korea during their most rapid periods of industrialisation and wage growth. We are probably just one decade into this multi-decade dynamic of real wages starting to rise in urban areas.

Digging into the report:

China reached its first Lewis turning point back in 2003. The income gap between rural migrant workers and agricultural labourers has provided a powerful incentive for the latter to try to find better-paid non-farm jobs. The massive labour flows out of rural areas  eventually led to labour shortages in agricultural sectors starting in 2003 and 2004. Since then, rural wages have been growing significantly faster than urban wages. Between 2004 and 2010, the average wage growth was 3.5ppt higher in rural areas than in urban area. As rural areas supply low-skilled labourers, fast-rising rural wages largely determines the wage growth in those industries that relies on  streamline  workers. This is why we have heard so many stories about labour shortages in export-oriented coastal cities, especially in years when food inflation makes rural jobs more appealing.

The ratio of labour demand to supply hit a record high of 1.07 in the first quarter, up from 1.01 in Q4-2010. This quarterly survey of job centres in 100 cities is clear evidence that China’s labour market is very tight and tightening further. In response to the tightening labour market and the healthy gains in rural wages, provinces are forced to raise minimum wages by a significantly faster amount to attract surplus rural workers back into city jobs. Thirteen provinces and cities raised minimum wages by an average of 21% in Q1. Wages growth of this magnitude will continue to feed into higher manufactured goods prices.

China is still some years away from the Lewis turning point in urban areas. One of the most important results of China’s census, released in late April, is that the pace of urbanisation has been significantly quicker than previously thought. As of the end of 2010, 49.7% of the population lived in urban areas. That is 3pp, or 44 million people, higher than the NBS last estimate for 2009. But this is still some distance away from reaching the type of urbanisation rates that characterised Lewis turning points in Japan and South Korea during their most rapid periods of industrialisation and wage growth.

Another significant differentiating factor, in the Chinese case, is that the pace of urbanisation is suppressed by the population registration system. The latest census showed that four in every ten of urban residents did not hold a local registration, known as a hukou, up from three in ten of urban residents in the 2000 census. Hence, the actual urbanisation rate could be lower than 40%, if we exclude those who work in cities but do not settle there.

Another sign that China still has a big surplus of labour is the stagnant income growth for college graduates. Around 6 million students complete their tertiary or higher education every year in China. It seems they are not exactly riding the tide of rising wages as rural migrant workers. The Chinese Academy of Social Sciences, one of the leading think-tanks in China, showed in its report on China’s Population and Labour that salaries of those much better educated graduates are not much higher than the wages of rural migrant. The mismatch between supply and demand of white-collar jobs reflects the underdevelopment of China’s service sector. In 2010, services contributed to 43% of China’s total GDP, which was much lower than the levels Korea and Japan reached during similar phase of development.

All this means that the process of urbanisation and wage dynamics in China still has a long way to go. According to a research published by the US Bureau of Labor Statistics in 2009, Chinese manufacturing workers' hourly wage was only USD0.81 in 2006 - 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of those in Europe. After five years of growth, inflation, and currency appreciation, we estimate that the wages of Chinese workers are still just around 5% of the levels in G3. If assuming an annual wage growth of 15% for another decade and total 20% appreciation of the yuan, China’s wage would be 25% of G3’s current levels.  Indeed, it is still an ocean apart.

To reduce farm labour to 10% of the labour force (the point at which, judging by historical experience elsewhere, China may achieve worker-farmer wage equilibrium), the economy needs to create about 150 million new non-farm jobs. Even if the economy continues to grow at 8% per year, China might need 20-30 years to reallocate agricultural labourers and reach “full employment.” But this requires generating eleven  million new jobs every year, including five million for farmers leaving the countryside and six million for college graduates. And these new jobs need to be the right types. Indeed, we are probably just one decade into this multidecade dynamic of real wages starting to rise in urban areas.

So there you have it: a consultant report, and a solid research report coming to two almost diametrically opposite conclusions: it won't be the first time. After all BCG was paid to reach a specific conclusion, whereas SocGen is merely trying to generate a market on either side of the issue. That said, even if BCG is 180 degrees off, the underlying proposition is certainly relevant: that the more the Fed exports inflation, paradoxically the faster the US manufacturing job base would see a long overdue renaissance. Which certainly means that the Fed will never stop with its monetary easing stimulus until such time as labor costs in the two countries, on whatever subjective metric is dominant, finally hit parity. The only question, as noted above, is what will China do in the interim as it realizes the Fed has put it in check - will China focus on developing its middle class, with an outcome being the mirror image of the current Nash equilibrium, in which the Chinese middle class would buy from the US, or will China defect before the "export country" to "consumer class" transition is complete and everything falls apart.

Alas, when dealing with two massively centrally planned regimes, we are confident whatever can go wrong, will go wrong...

h/t Jerry

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Ahmeexnal's picture

It's not the Chinese standard of living that's going up.

It's the US wages that will plummet.

old naughty's picture

Or, its the Chinese social welfare that gets the lion's share of the wage growth...centralised pools, centralised-controlled enterprises. End of small businesses in China. Death to capitalism, Chinese style.

Hexus's picture

China: State has a role in economy, growing at 9%.

US: "Free market" "capitalism", fucked.

Yeah the chinese are stoopid.

Sudden Debt's picture

This is total BULLSHIT!!


Average wage in China = 7000$

Average wage in the US = 47.000$









Pondmaster's picture

I agree with first post- Look for wages in the USA to plummet in next 5 yrs ( the parabolic effect started 2 decades ago)  . Figures lie and liars figure , US Middle Class D.O.A. - tagged and bagged . Who gives a rats ass how much Chinese middle class makes . Folk here would just like to buy gas and food , and have a little extra . This whole mess just sucks . Went to fill up my wifes car last night , and to get 5 gal can filled for lawn mower , and fill propane jug for grill . $100!!!!!!!! FRICKING DOLLARS . PRAY TELL , HOW IN  HELL  IS MIDDLE CLASS JOE SUPPOSED TO KEEP UP THIS URSURY PAYMENT TO CORPORATE / GOVT LOOTERS . Till the monies gone and they own us . Kneel ,serf , kneel . I want the first slave tatoo . 

ATM's picture

Or you need to revalue the currencies.......

It's simple really. Renmimbi is allowed to trade freely v USD and China's relative wages rise substantially (or the Us wages drop precipitously, whichever way you choose to view it.) Same result.

Add that tot he Chinese wage growth that is going to occur even under the present fixed exchange rate regime and the rise can easily be achieved.

MachoMan's picture

Right, but how long will increased Chinese wages persist if it causes decreased demand of their products?  [hint: why they didn't depeg long ago].

Max Hunter's picture


Yeah.. No doubt that's the direction, but in 4 years time??... I'm gonna have to call bullshit on that too..

willien1derland's picture

Good call SD - Total BULLSHIT - because everything in economics occurs in a STRAIGHT LINE REGRESSION - Boston Consulting really put their name on this report - Holy Sh*t! - Hey TD - can you arrange an interview with this 'BCG expert' (<--obviously only an expert @ BCG as anywhere else in reality I believe the more appropriate adjective is NIMROD) , please contact Dave Fondiller at 212 446 3257 or fondiller.david@bcg.com & let PLEASE let Marla tear him to shreads - Attention Austan Goolsbee isn't this Dave Fondiller the guy you cheated from in your economics courses @ Carnegie Mellon?!

Mountainview's picture

Can you see yourself on the bicycle and at the noddle shop?

MarketTruth's picture

You MUST be kidding (sarc).

Americans hop the family in their big SUV and head off to McDonalds after papa worked a full day at his McJob.

Suuuu-wee, feeding time kids!


Ok, seriously, China has more 'honor students' than the USA has students! On average, Chinese people have a far better education for their citizens located within cities than their USA counterparts. Add to that, many China factories have new machinery/technology, China has no nasty money-sucking/resource-sucking unions, and Chinese workers work a full day.

Please don't hate the messenger. Go visit China yourself and prepare to realize that the over 25% high school dropout rate in the USA leaves little to be desired... unless they aspire to get a McJob.

Moe Howard's picture

What you say may be true. What is also true is that China is using NO polution controls, they are poisoning the air, land and water of China. This story misses the point that what we really were exporting was the pollution, not jobs. The job export was a side issue.

Tell me about the health care system in China, the retirement system in China, the food distribution system in China. This is the land of poisoned milk, poisoned toys, poisoned sheet rock, you name it. When TPTB are done with China, it will collapse like a house of cards.

We heard all the same stories about Japan back in the day, they started exactly the same way as China in manufacturing.

If the story had used a timeline like fifty years, possible. 5? Right.

Although Mao's 5 year plans could destroy China's industry in that time, I don't think they can make it uncompetitive based on wages.

MarketTruth's picture

The health care system in China is not a PONZI scheme that will take down the USA (or at least be outright theft of earnings/money from their citizens).

Retirement... it is called gold, silver, copper etc holdings. Only a fool would trust ANY central bank as they all suffer from purposeful devaluation of FIAT currency. China promotes to their citizens to buy gold and silver, which is available at many banks throughout the country. What does the USA central bank tout and can Americans buy gold and silver countrywide at said banking institutions? Are Americans by and large educated properly about currency and savings, or do they blindly trust what the Federal Reserve central bankers tell them?

Food distribution system in China is generally fine. Plenty of land, too, and they are building high-tech rail systems to transport goods. The pollution you speak of is indeed a problem for now, yet over time that will diminish. America and other countries had the same problems during their growth. As you said, Japan back in the day started exactly the same way as China in manufacturing.

Am not saying China is perfect, yet the USA is a troublesome PONZI scheme amongst even more PONZI schemes, blighted by unions that waste resources, etc. But the worst killer of America long term, besides the collapse of these PONZI schemes (plural), is the sheer lack of education and mind-bogglingly high dropout rate of those in high school. Worse still is that it takes very little knowledge or critical thinking/processing skills in America to graduate high school.

SoNH80's picture

China has made much progress since 1949-- infrastructure, education, industrial base.  However, if the Chinese leadership were wise, it would be less dependent on the United States.  China and the U.S. are in a bear hug with each other, and it isn't healthy for either country.  Ideally, China would focus its energies on supplying itself with goods, and increasing its own people's standard of living, instead of shipping it all to the West in some vain hope of gaining a monopolistic position in Western markets.  Think of how Chinese could enjoy all of these products sent to the West, especially the U.S., in return for pieces of worthless paper!

SoNH80's picture

One more thing.  The quality of products sent to the U.S. from China these days is pretty bad.  My nearly-new coffee maker leaks, a sweatshirt that someone bought me stinks of cheap dye that wasn't fixed, and the bicycles are known to have their frames break.  Is the good stuff being kept within China, after all?

Kopfjager's picture

Yet all centrally planned economies suffer the same fate.  

But here's some pics from my last trip there.  Pretty cool place to check out nonetheless.  http://gallery.me.com/tribebreaker#100003&bgcolor=black&view=grid

Notice that there's hardly a single soul in any of my pics though.  Hard to believe when there's 1.2 billion people in that country.  Makes one wonder if all the stimulus plans to boost tourism was dumped into money loosing projects.  All that money on a freeway and I'm the only car on it!

Goldenballs's picture

No,no Western Country is allowed to compete on anything,this would obviously be a threat to the lifestyle of the 5% whoose business is the failed concept of Globalisation which translates as " the highest profit at any price ".

astartes09's picture

Quick!  Everyone run to the Iphone factory for those awesome new jobs!  Its not slavery if you volunteer!

Scribbles's picture


I can't wait until I have the chance to work 4 jobs so I can pay my bills!

Weisbrot's picture

why not just generate them and ask for a bailout or stimulus package instead? if you dont get one you could allways tell them if they dont hand over more money you will leave... just like greece...

Sudden Debt's picture

Bummer part for you will be that you'll only be able to work 4 times 6 hour shifts so that will account as PART TIME JOBS! So we'll pay you minimum -50%.


PS: when you come to work, don't wear any sweaters. Our whips sometimes get stuck in them and that may demotivate are Whipping managers as their whipping quota's may go down if they have to unstrung their whips.



Drag Racer's picture

a major shift in policy and laws will have to change for any large shift to happen

jkruffin's picture

I guess we better get that Hi Speed Rail system into the battle plan huh?

silvertrain's picture

These sorry mother fuckers here wont work..Unless its from home and very easy with great pay and benefits and retire at 50 and 5 weeks vacation off the bat bla bla bla..

Scribbles's picture

Not to mention everyone between the ages of 18 and 30 are "filmmakers."

Hacksaw's picture

That's why nearly a million of the sorry mfers applied at McDs.

bobafett164's picture

Ssshhhh... "these are not the droids you're looking for".

Bob's picture

This isn't satire?  Who da thunk that the Pigmen are doing it all for the little guy.  Now I've heard it all. 

Double down on outsourcing to bring the jobs back home.  Riiiiight. 

Oh regional Indian's picture

Kind of like the Broken Window Fallacy eh, bob?

I think the part many have trouble imagining is that the US will cease to exist as the world's primary glutton before too long. And Wage parity with China would come with Chinese working conditions.... else, with OSHA like statutes and unions, net wages will stay up in the developed world.



Cthonic's picture

According to the iron law of wages, wage parity won't be a good thing for the Occidental earners.

pitz's picture

I doubt Americans will be willing to go back to manufacturing jobs as long as financial industry motherfuckers are still 'earning' outsized salaries for doing nothing but ruining the economy. 

sun tzu's picture

Making $100K a year isn't bad for a 2 year college degree where the hardest math is basic algebra and some geometry. You get to work in an air conditioned facility. It beats the hell out of McDonalds and WalMart.

buzzsaw99's picture

That goes for me anyway. Why work for clownbux?

Ahmeexnal's picture

If they over ate, they are going to take a massive dump.  Guess who's getting the pile of shit?

Hexus's picture

Sounds like anti-China propaganda to me. In my opinion China has a valid economic program similar to what America was doing in the boom years after the second world war, while the US has become a creature of finance capital trying to leach as much money from the real economy as possible through speculation and multi-national corporations reliant on slave labour. These Parasites don't care about American workers or chinese workers they care about money and keeping the empire alive so they can keep their money and power.

This is where China comes in, they are a threat to the Anglo-American financiers' empire and they must be stopped. Vassal countries of the IMF/World Bank/WTO are looking for alternatives, they see America collapsing on one side and China booming on another, they see America blowing up wedding parties with predator drones on one side and they see see China sending in workers to help build infrastructure on another.

This is the purpose of the "Arab spring" happening as we speak, bring the naughty puppets back under US control. 

tmosley's picture

Exactly.  It has not one thing to do with how "bad" American workers are.  It is the government, and the government alone, that drove our manufacturing base overseas.

Hansel's picture

Agreed, and a banker probably made in 1 year what he made in 18.  Other factors need to be figured into the American workers dilemma, for instance the government intentionally pursuing policies to increase housing costs (and not wages), what kind of work is most rewarded monetarily compared with what is produced by that work, how easily the central bank can debase worker salaries, and how many people don't work but enjoy great benefits on behalf of the government.  Nominal wages are only one part of America's compensation problem.

buzzsaw99's picture

...a banker probably made in 1 year what he made in 18.


That. Fraud pays better than work.

Oh regional Indian's picture

Really tmos? Who was forcing GM/Detroit to turn out poorly manufactured automobiles long before the government was driving anything everywhere? Or those god awful GE appliances?
America does well in small, entrepreneurial businesses, craftsmanship.

Not in big companies, robot manufacturing.


NidStyles's picture

UAW. Yes, they have Government paid lackey's on their roll's as well.

Eally Ucked's picture

It seems to me that you talking about management and not about workers.

Cheap and faulty designs, substandard parts and materials were accepted by them with full knowledge. First you sell your product and then worry what to do next. Permanent, year after year recalls were their invention. That practice is still in use just look at Microsoft or Apple or anything else.

Oh regional Indian's picture

Both eally. GM cars with coke cans rattling in doors and steering wheels falling off were not uncommon.

Both were responsible. I think at that booming stage of an economy, everyone has a huge entitlement complex.


Creed's picture

Oh and for those that say that American workers won't do the job because they are too spoiled....I worked in manufacturing for 18 years. I saw committement and pride and good team spirit.

So fuck you.

a big +1

those kind of comments come from the same negative nelly crowd that foolishly states that America doesn't manufacture anything anymore

a cursory look at Google shows America manufactures quite a bit :)

tmosley's picture

We used to manufacture EVERYTHING used in the entire world.  Now we don't--China does.  Not a good trend.

Not sure why you seem to think it is going to reverse itself any time soon.

sun tzu's picture

rising chinese labor costs + high transport prices

forexskin's picture

i'm in manufacturing, and i'm seeing it now. we have cost structure analysis that now justifies starting a new product, with manufacturing done here. HERE, dammit.

buzzsaw99's picture

Go ahead, slave your whole life away for peanuts. The bankstas laugh.

forexskin's picture

i'm making an honest living. you?

Pepe's picture

so...were you a well trained obedient slave..is that what you mean?