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How US Job Losses Will End.
I am not in the habit of regularly lifting data out of the Wall Street Journal, but even a blind squirrel occasionally finds an acorn.
I was tempted by the comparative Asian wage data they published yesterday, which I just have to get into my data base. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18 fold increase in labor costs from ten cents an hour since Chinese industrialization launched in 1978.
This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What’s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub continent’s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.
This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods.
Chinese wage growth at this rate takes them up to half our minimum wage in only five years. Recent indications that the Chinese will allow the Yuan to float, and therefore go up, will only accelerate this trend. This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea’s GDP growth is half that seen in China.
These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring. This is why I have pushed the Vietnam ETF (VNM) on many occasions, with great success (click here for the call at http://www.madhedgefundtrader.com/june_8__2009.html ). I know every time I do this I get torrents of emails from that country bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn’t buy a 50 acre industrial park there.
But the numbers don’t lie.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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This is just wrong.
See Marc Chandler's excellent treatment and refutation of these arguments in China: It's All About Hu, Not Yuan which I've excerpted here.
http://seekingalpha.com/article/209634-china-it-s-all-about-hu-not-yuan
Value-Added
Many pundits talk about China being the factory of the world. This is misleading. China might be more accurately thought of as the assembler of the world. While last year it was the world’s biggest exporter, it was also one of the world's biggest importers.
China does not simply import raw materials and commodities, it also imports parts and semi-finished goods which it then assembles. The imported raw materials and commodities are largely invoiced in US dollars. So are the parts and semi-finished goods. The cost of these inputs is estimated to be about 25% of the price of the finished good. The value-added in the assembly work can also be worth another quarter of the price of the finished good. This assembly work is the only part that is sensitive to the value of the yuan.
The other 50% of the price of the Chinese good is incurred locally in the US for storage, shipping and marketing, and of course, each of those middlemen also earns a profit.
The fact that only a small part of the price of the Chinese made goods is impacted by the value of the yuan means that nearly any reasonable currency appreciation will simply be insufficient to balance the accounts.
Some US Congressmen like to cite extreme estimates that the yuan is as much as 40% under-valued against the dollar. But there is an even more profound gap, and that is the discrepancy between US and Chinese manufacturing wages. Chinese manufacturing wages are about 3% of the US.
The impact of a 40% appreciation of the yuan on the price of a Chinese good would be limited to the increased cost of the value-added component of that good, I.e. the wages of the Chinese manufacturing worker. Assuming all else being equal, it would raise the price of a Chinese made good by 10%. However Chinese manufacturing wages would still be only 4.2% of US levels, and the imbalance would remain. A sharp appreciation of the yuan would also reduce import prices, and therefore likely offset the impact on wages.
Significance Explained
Higher Chinese wages can only be inflationary if they are a significant part of the price of the good,and they are passed on to the consumer. This does not seem to be very likely. For assembly work and most manufacturing, wages pale in comparison to the cost of the raw materials or parts and semi-finished goods.
The most significant impact will not be on the price of Chinese goods for foreign or domestic consumption. It will be on how the rewards of the economy are distributed between employers and workers. The share of the surplus that goes to workers may rise and the share of profits may fall, but it does not mean that overall profits will necessarily decline.
It is possible that some businesses may move from the eastern part of China into the interior to try to secure lower wage workers and resist this development. Others may move out of the country entirely. But most will stay. In fact, the higher pay may improve retention rates and increase efficiency.
Foreign multinationals are attracted to China for reasons other than cheap labor. After all there are parts of India and sub-Saharan Africa that also have very low wages. China offers relatively better infrastructure and unique clusters of component suppliers, not to mention a rapidly growing market of consumers.
The combination of upward pressure on Chinese wages and the appreciation of the yuan on a trade weighted basis (more than 15% appreciation against the euro, the currency of its largest export market) is moving China in the desired direction of rebalancing its economy.
It will not be sufficient to satisfy many in the US Congress, but then it is difficult to see what would. The last Asian country that received such focus by American politicians was Japan.
No matter how much currency appreciation Japanese officials allowed, it did not satisfy their demands. The yen has appreciated by 77% against the US dollar in the last 20 years and yet it still has a trade surplus with the US on par with that of the early 1990s. Japan is currently experiencing outright deflation. The stock market peaked 20 years ago and still some captains of industry and their political allies complain about the unfair weakness of the yen.
China is no longer a low cost country. They moved up the ladder.
They somehow broke the circle of the world tour of misery as they are now moving to the next level.
Embarassing (felt embarassing by many in the West)
Getting back to basic Eco 101 just for the sake of the author here:
Q. If Jonny lives in land X and makes $3/hr * 40 hrs per week but his living expenses are only $200 per month is he better or worse off than:
Jonny's fat American cousin living in Vegas who makes $12/hr *40 hrs per week whose living expenses are $2000 per month?
Take your time before chosing:
A: Jonny is better off than his fat American cousin
B: Jonny is worse off than his fat American cousin
C: Jonny does not know or care if he is better off
D: All of the above (For MHFT)
( Just added "fat" as that is how the rest of the world sees us)
The only problem is the US minimum wage will not be $7.50 in 5 years. Political pressure will force it up and Chinese and Indian wage pressures will probably subside. In 5 years we will be right where we are now.
Here's some more issues. Mexicans and Indians have access to their native market's "Real" (not European/American tourist) prices. $10k goes a hell of a long way in India and Mexico, if you can get the 'normal' (not gringo) price.
Many Indians in the US have investment visas that have massive tax advantages. When the tax advantages are about to expire, they have another family member apply for an investment visa and then transfer the assets to them. I know many Indian people who do this with hotel property income. A big competitive advantage against "Native" Americans.
Indians buy homes and finance education as extended families; whereas Americans buy as a nuclear family. Would the Average American want to live with their parents, their mother-in-law, klepto cousin Carl, their anemic goth neice Fuschia, and crazy Uncle Al - even in a 5-bed McMansion? Probably not. When was the last time you heard of a Father whose 5 brothers all pitched in equally to send his son to school?
Lastly, when facing unemployment, Indians and Mexicans can cool their heels back home and live for peanuts. Americans still need to come up with $1000+ at the bare minimum in monthly living expenses.
I read articles like this and think of how desperate the investor class is getting. They are finally realizing that the US economy isn't creating enough decent paying jobs to support all the income promised to the rentier class.
What a fucking joke. I wonder if this guy is set up so that by our actions we're letting off a little bit of pressure to keep us from going over the edge.
What I think people are missing is that these emerging economies are not necessarily stable. Developing economies are just that, emerging and dependent on the industrial world to keep buying their products. No exports, no emerging economic growth. Stagnation and economic collapse will be the result. Dominoes will all tumble over from the top down.
Under your premise that will be never. Companies will seek out markets where labor is always cheaper if allowed. The rural reaches of China, India, Laos, Vietnam, Africa, the list is endless. You had better go back to the drawing board and redo your hypothesis. Because uder this model, no jobs will ever return to the US.
Any manufacturing move out of China will go to Mexico, not the US.
There is a stunning lack of the fundamentals of economics on this economics oriented site.
Bemoaning $8.00 an hour labor demonstrates a complete ignorance of the simplest economic principles. Why is $8.00 an hour labor offered instead of $80.00? Come on you can do it. Give it a shot. Tell us why?
Why do these simps responding to low labor rates not understand that a "living wage", is impossible in a world with 6 billion people in it, to do the work that 3 billion could accomplish and still have time left over for Margaritas once a day?
When do those who believe in socialism, realize that at some crucial juncture, only a military junta in this country could enforce the dictates of Marx, Mao, Lenin, and the Bamster?
'Slave' labor rates exist and will exist forever. Because there are twice as many people consuming than there are producing.
That EURO buying support has returned ...
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Forget about labor costs. If you think we can compete with the operating margins in Shenzen, think again.
"This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places."
$8 an hour, also known as "California minimum wage". Abused? Did I mention that the $8/hr comes with taxpayer funded medical care, taxpayer-funded government school indoctrination, etc? Not even the teenager working at the local tastee freeze gets the same benefits with his minimum wage.
If they are so abused, they can always go back to mexico. But they rarely do. Why are *your* much abused illegals putting up with such atrocious treatment?
Textile workers in india do not get $3 per hour. $3 is almost 150 INR. Where I grew up in India, when I visit they get 200 - 300 INR for a whole day. and they usually work more than 8 hours a day.
A call center employee in india probably makes $3 per hour, and they get paid more because they can speak english in a "foreign" accent :)
I too bought VNM based on your prediction and dropped it at a slight loss. Im still holding EPI though.
even if everyone in the world were working for the same wage, some countries would have more favorable environmental and safety regulations. also some (socialist) countries would continue to dump their products at below cost to remain competitive.
I saw Bourdain in Vietnam, he loves it, he wants to move his family there. he likes the laid back countryside, no agribusiness, a tight social base
always thought it was too bad they won the war, they could have had all those reparations if they had been smart enough to lose. and someday perhaps they will an industrial shit hole, but for the moment, it seems like a decent place.
Nice call on RIG.
This agrument makes no sense in the fact that you are comparing wages of apples and oranges. The Asian and Indian populace seems much more motivated (and thus are much more productive) than their North American counterparts. Also missing from the equation is the general work ethic of those in North America (regardless of their country of origin) as well as the governmental regulation impact, labor unions (and this is paramount to the discussion), socio-economic considerations, and the fact that available government assistance to workers (or the non-worker as the case may be) as an motivational factor not to be productive. Wage comparison is is a totally invalid argument and the answer is quiet simple - Jobs will stop leaving and begin to return when the costs of those jobs justify retaining them in the U.S. from an economic standpoint, and that involves much more than hourly wage rate comparisions.
Weak piece. Will wages stay the same in the U.S while they rise eleswhere? As wages rise around the globe, import prices will rise as well(inflation). Ignoring a potential rise in rates this will result in severe stagflation in the U.S. Sure there will be a time when job growth returns but it is a much more painful route than you outline.
Is it really the minimum wage jobs that have been sent overseas. I'm afraid it was the much higher paying manufacturing jobs with generous benefits. So the wage gap is much greater. Those jobs are not coming back in our lifetime.
@Madhedgefundtrader
What do you do mean $8 an hour for our much abused illegals? I personally know of adult U.S. citizens offered $8/hr to do manual labor in Cleveland, Ohio. Taxes are then taken out of that figure, reducing the hourly net to about $4/hr (my estimate). It seems that the Indians are not far behind at all.
Because madhedgefundtrader knows as little about the American job and labor market as he does about the correct definition of supply and demand. Period!
American day laborers are paid surprisingly very little, and frequently work beside those "abused illegals" for the same wages, and compete for the same homeless shelter space with them, and watch as those "abused illegals" walk off the job when the weather gets too rough (but usually don't complain as that means more work for the American day laborers).
Nope, reality, education and knowledge has little to do with this post, nor with the madhedgefundtrader.
(And I fully realize that the real reason behind those U.S. Chamber of Commerce-supported laws against renting to illegals in Iowa, and those laws recently passed in Arizona, are simply more control upon them.)
Consider the growing power of the unionized Government workers (Federal/State/local) which will continue to demand lush wages, health care, and pensions. There is a complete disconnect to the private sector which must bear all the pain. Under the law, these Government pensions must come first and require first call on tax revenue leaving the poor and unemployed to suffer. There is potential for civil unrest in this inequity.
Based on your suggestion last year, I bought VNM, held it for one year, dumped it at a small loss a year later. Last week.
*Sigh*
Why doesn't anyone ever seem to take into account productivity or use of capital in these types of articles? How many dollars worth of textiles are those workers in India, China, and the US making for their low, medium, and high wages?
Unemployment will end in the US when we stop treating our capital like shit and driving it to the four corners of the globe. Cut taxes, cut regulations, drop subsidies and protective tariffs, and you will see capital flood back into this country, and with it an enormous increase in productivity, followed closely by enormous increases in wages, followed by not all that much inflation (as it is government overspending that causes inflation).
Mediocrity indeed.
I'll answer that:
Cut Taxes- I am falling down on the floor at the naivete of such a ridiculous idea. Congress is the only entity that can Cut taxes. I rest my case
Cut regulations- and render unemployed some of the largest waste of humanity in SEC, IRS, FDIC, and a thousands of other 'regulatory' employees? Employees whose only contribution is get an increase in taxpayer funding each year so that their honchos can hold onto their worthless jobs?
drop subsidies- and, what, go back to real capitalism wherein the losers who cannot or will not 'just do it', fail?You haven't been to a schoolyard lately that outlaws Dodge Ball because it is so unfair.
Protective tariff elimination- so that the South can rise again?
You have to be Pollyanna to think in such outrageous terms.
Simpler...the "faith-based economy"; faith in the chowderheads (Fed) that got
us in this mess.
Of course, the manufacturing universe is far bigger than the US and China. There's also Africa, Central Asia, Southeast Asia, the Middle East, etc., all of which are underdeveloped by any measure, and all of which will eventually follow China's path. But don't worry, in a century or two the workers of the world will be at parity, then we can start rebuilding the middle class! If we can remember what a middle class looks like... and if the overlords in the world-wide two-class serfdom will allow it...
Probably not. China was an exception. And therefore poorly resented.
The best plan was to organize a world tour of misery.
Take a country with a low general environment.
Move activity there with wages on par with the low general environment.
Over a decade, as people work, they are able to better their general environment.
Consequence: it is no longer suitable for the activity.
Move activity in another place with a suitable general environment.
And so on...
Of course, as the activity has quitted the first country, the capability of maintaining the improved general environment is decreased.
In the end, the country will degrade enough to welcome once again the activity it grew too rich to harbour.
Repeat the cycle.
Yup. This weeks winner (loser) is Bangladesh. Textiles are moving there faster than Metamucil through a goose.
Ahhh... so you see wage arbitrage as a never-ending race to the bottom? Interesting possibility...
Yeah, that's a pretty insanely broad and shallow analysis that consequently falls flat. Where is the analysis regarding shipping costs (which are at this point almost trivial), modern infrastructure (many Chinese plants are actually tech-superior to US plants), political system (China's governmental apparatus is more stable and efficient than the US in regards to manufacturing), etc. Chinese wages would need to get in the 85-90% range (accomplished either by the currency float or a drop in US wages, which given the artificial ceilings is not likely) for it to be worth looking at increasing domestic hiring.
This is why sane people see it as unlikely that the US will increase domestic manufacturing unless something fairly radical happens politically as far as tariffs/tax incentives/etc.
We have plants left? We have domestic manufacturing? I thought we had "evolved" into a servitude economy.
Foxconn hell? no thanks. population the size of philidelphia in 1 square mile, sleep in the dorms, eat in the caf, work 12 hrs, back to the dorms. no fucking wonder they were committing suicide.
mcguire
"sleep in the dorms, eat in the caf, work 12 hrs, back to the dorms."
That's how SHAW Brothers made movies in the sixties and seventies.
Strange analysis.
Managing working populations in these areas of the world yield something: a huge turnover in workforce.
Those jobs are rather tedious and people grow weary of them in a three-four years span.
When China was still a low cost country, the turnover was impressive. Most of the times, young women working to earn enough to pay for their marriage.
Because that was the crux of the situation, the jobs paid well compared to other sectors.
In the western world, it wont be the case. The jobs will be low end paying jobs, that barely allow the ends to meet. People working them several years in a row are more or less people trapped in those jobs. People more or less wanting to move to better jobs.
So what is the best? A population for whom a chain production job is only temporary, pay well relatively to other sectors and allow to move up socially or a population who will get trapped in a job they work to pay the bills, with no hope to progress in society?
What workforce is the easiest to manage? What worker is going to be the more enthusiastic?
People will wait for 'big brother' to hand out jobs like candy. They will wait until it is clear that there is no big brother, no centralized, scaled, industrialized work opportunities left. Wait long enough and Peak Oil will have destroyed the entire industrialized establishment, by bankrupting it from the bottom up.
The last bastion of centralized workforces is government and most governments are broke. Even the Feds are likely to start shrinking even as more and more of the baby- boom workforce reaches retirement age. Positions or 'slots' will simply disappear. The wealth to support these jobs is vanishing along with cheap energy resources.
After hunger hits the more illuminated will start cottage industries and service their local communities. There is always a need for repairs, for basic doctor/nursing services, for vets, as well as an increasing demand for local agriculture, non- auto transport (rail and bicycle), tool making, machine work, and in technical areas specialists such as agronomists and hydrologists.
People making clothes (and tailoring them) will be a new industry, also shoes, hats, dyes, decorative weaving, building arts and decoration, street paving and stone masonry, metal founding and forging, carpentry and cabinet making, canal building, wooden boat building, tree and forest management, wildlife management, oil and toxic chemical remediation, hard- science support such as education (and facilities construction and management) and research. Many more will engage themselves in agriculture and food marketing; more markets and fewer restaurants.
People today - particularly Americans who receive all inputs from television - are not creative. There is no reason to be; people are passive 'consumers' of jobs, products, culture, propaganda and frauds. The fraud machine is broken ... leaving nothing of value behind. Nature abhors a vacuum; as idleness has consequences - beginning with the immediate crisis - the buried- as- useless native creativity of Americans will emerge from hiding.
"Nature abhors a vacuum..."
Sounds nice, and highly repetitive, but you'd get an F in physics and astronomy, dood.
Take a trip across the Universe and get back to me, will ya?
Precisely how is he (steve from VA) wrong?
China = cheap labor
Today -China = labor unrest
"This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force...."
Ahhhgggh!
To read such mediocrity so early in the morning.
Go back to bying BP at $44-46
__
All will be well when slave labor rates reach parity.
You always create articles with no substance and your analysis is severely lacking. For example,
>>This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods.<<
"Half", why half, why not 39%, why not 64%. Where do you get such an arbitrary "half"
Oh thats right Korea - as if Korea's development occurred in a US-Korea global vacuum. There were and are a multitude of factors much more powerful than the Korea/US wage ratio that have affected Korea's growth - China, India, and the rest of the Asian subcontinent development, deflation in Japan, global recession, etc.
And there are headaches in managng these overseas work forces and no headaches managing domestic workforces? You've noted the effects of what political risks and supply disruptions?
It sounds as if you've bought into Viet Nam and are trying to pump it - fair enough - but you going to have to do a lot better than you're doing to convince me to jump on board.
This one is like most of the stuff you right - pretty lame.
Close, but no cigar.
When profits return as a result of producing in the United States, jobs will return.
Why is it we hear all these conversations on jobs and the economy, and most seem to forget the reason people produce in the first place-to profit from those efforts.
I guess the logic here is if we could get Americans to work for $0.48 cents per hour we would have zero unemployment and we would give the extra money to the executives who need bigger bonuses.
Exactly, good citizen Gimp, this madhedgefundtrader exemplifies the idiocy and ignorance of all those futilely acting as if they actually comprehend ANYTHING about economics an real finance.
There is NO economy in the USA -- with the GDP at over 80% comprised of the Fantasy Finance sector --- explain what economic system exists.
Which is why any so-called Recovery is mathematically possible -- as other intelligent types of already pointed out at this site.
"This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches .."
His quote above is the same typical and patently simpleton and moronic drivel the National Association of Mfrs., Peterson Institute and Business Roundtable has been pumping out for decades: labor too costly, me go cheapee, cheapee land.
The Chinese don't give a rat's ass about this clown poster's philosophy, which is why his wet dream will never come to fruition.
The Neofeudalism Movement is obvious to everyone with at least two neurons to rub together.
Madhedgefundtrader should attempt to do a valid post on tax recovery -- no, not further taxing of labor and untaxing of the wealthy, but tax recovery on the super-rich and corporations (GE, ExxonMobil, etc., etc., etc.) which don't pay taxes.
Pathetic and useless post......
The only thing all those senior management twits are concerned with are the quarterly reports, while they export all the innovative technology and jobs possible.
This poster knows nothing of real economics...
no, not further taxing of labor and untaxing of the wealthy, but tax recovery on the super-rich and corporations (GE, ExxonMobil, etc., etc., etc.) which don't pay taxes.
You are 100% correct here. Corporations DO NOT, HAVE NOT, and NEVER WILL pay taxes regardless of what the published levy rate is. Get it through your heads popusocialists, taxes and fees are just another expense that corporations pass on to consumers. When taxes get so high forcing prices yet higher, this hidden tax on individuals maeks it impossible for them to afford goods and services.
Corporations do not pay taxes - people do!
Nice!