A Paradoxical Framework To Restoring The American Labor Force: Much More QE?

Tyler Durden's picture

Back in May, Zero Hedge penned "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?" in which we predicted that rising labor costs courtesy of the Fed's ongoing exporting of inflation could easily backfire, and force large, profitable multinationals, for whom dollar weakness goes straight to the bottom line, to reorganize and pull offshore workers back to the US. It appears the theory is slowly shifting to practice. As Reuters reports, Conglomerates ranging from Emerson Electric to Honeywell International feel pressure on margins from double-digit wage increases in China. So have toymaker Mattel, fast-food chain Yum! Brands and computer maker Dell, analysts and investors say..."Input cost increases have been a steady headwind to margins for some time now," Fairchild Semiconductor International Chief Financial Officer Mark Frey said last month. "I do believe that labor inflation will continue high for quite a while," Yum CFO Rick Carucci said on the company's earnings conference call. He called commodity prices another "wild card" for the company." Curiously, China is proving far more adept at pushing labor price increases than America's sad, and largely ineffectively unionized labor force: ""A lot of the wage increase is to keep civil unrest at a minimum," said William Blair analyst Nick Heymann, who said suicides at an Apple supplier and the "Arab Spring" protests have alarmed Beijing. "These guys have watched North Africa and the Middle East with a lot of trepidation."" And as we speculated, the perverse outcome of Bernanke's policy to reward only companies at the expense of US Laborers (i.e., middle class) will soon backfire, as more and more companies end seeing their margins cut, in the process being forced to hire ever more people. "Wages are getting large enough that you start to feel the difference," said Hal Sirkin, a BCG senior partner, who said U.S. companies are looking at alternative manufacturing sites. "One of the answers is to start moving back to the U.S." And when they do, they may, just may, start hiring Americans once again.

More from Reuters:

China this year adopted a five-year plan that calls for 7 percent growth in per-capita income, ahead of earlier targets, and fresh investment in research and development, to boost domestic consumption and modernize its economy.

Manufacturing wages are a fraction of those in the United States but are narrowing the gap, both fueling and responding to China's inflation, now at three-year highs. Between 1978 and 2009, wages jumped almost 13 percent a year, six times the pace of U.S. wage rises, according to BernsteinResearch.

By 2015, wages around Shanghai, adjusted for productivity, will be 61 percent of those in low-cost U.S. states like Alabama, according to the Boston Consulting Group (BCG). Transport and other considerations further shrink that gap.

The next few years will bring a wave of reinvestment by U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make China a less attractive production center, BCG predicts. Its July BCG paper names 14 companies rethinking where they produce goods, including NCR (NCR.N), Ford (F.N), Flextronics (FLEX.O), Ashland (ASH.N), and Jarden's (JAH.N) Coleman unit.

Where China once had ample labor, and supply was well balanced with demand, that equilibrium has broken down, BCG argues. The change does not mean shutting Chinese factories and firing workers; it means selectively scaling back future expansion or investment. China's size will ensure it remains a major global player.

Another key component to the future success of American labor? The emergence of China's middle class:

Ultimately, the success of that drive to shore up China's consumer base may determine how U.S. companies perceive the risks and rewards of operating in China.


"The customer base in China is just so immense," said Tim Hanley, Deloitte LLP U.S. Process & Industrial Products Leader. "Companies that were in China as a low-cost exporting base recognize they need to be there. That's where demand is."

The paradox in all of this is that while the short-term pain may be acute, the one thing that may eventually restore America's labor force is not just one more QE but many more inflation exporting episodes down the line, until the point where corporations are ambivalent about where to base factories, and as a result start hiring US workers yet again. The other thing that likely be necessary is for China to finally depeg and float its currency, which means that America has to telegraph that the US consumer is finally giving up the ghost making the opportunity cost of continuing China's export-oriented mercantilist model less attractive. Of course, for that to happen, we would need to get our mortgage house in order, whereby Americans once again start paying their mortgages, a process which would massively cut into discretionary purchases of made in China trinkets and electronic gizmos.

Alas, this pathway to actual success for both US and China middle classes is based on the fundamental confidence in respective administrations that there is a future that is feasible for everyone, and not one purely based on rolling off the last days of the global ponzi, which alas is the existing economic model. Until that changes, which is a sufficient and necessary condition, all speculation about how the world may eventually be fixed is moot.

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SheepDog-One's picture

WTF is this pie in the sky, it would take us 30+ years to rebuild a US manufacturing base the way it once was. 

edit- I just read this twice...if THIS is what passes for economic reasoning we are kornholed totaly. What...now that we've sold all our manufacturing base overseas to .50 cent a day labor and promise of free money borrowing to buy their cheap crap, we'll now move those jobs BACK HERE? 

This article makes me want to check into a mental hospital.

espirit's picture

"One of the answers is to start moving back to the U.S.

I agree with SD-1, WTF?  The other answer is to move into another low cost labor pool - Africa.

Michael's picture

I told you, the US will get No new good paying manufacturing jobs ever again. NAFTA, CAFTA, and GATT made sure of it.

So tuff shit sheeple.

Stoploss's picture

Im with you dog. So if the labor rate 'doubled', that means it's a whopping 1 - 1.50 /day.

OMFG, they're all going to go broke! Quick! back to the US for 100+ a day!.

SheepDog-One's picture

I guess the economic turmoil has caused people to become loopy, it doesnt make a bit of sense! Unless theyre talking about new slave state USA with full 3rd world .50 cent wages as the norm...the party is over!

Great Dane's picture

Or .25 cent /hour (illusionary) 'credit' to reduce your time served in the 'correctional' system.  Prison labor from coast to coast will be a growth industry!  Wait. How to fill those prisons?   Immigration, drugs and oh... prison sentences for those up & coming rioters after food prices explode and the food stamp allowances do not.  BINGO!!   Am I warm here?

Did I win a cookie?

Andy_Jackson_Jihad's picture

What's not to make sense?  This is a market trying to reach equilibrium based on decisions of many individual actors.  You know, how its supposed to work? Wages and trade deficits/surpluses should equalize too.

Instead of telling everyone that the FED has decided to keep our wages high and raise those of the chineese.  The buying power of those will drop for us and rise for them.  It sucks we can't have dudes on a factory floor living in a 5000 sq ft house and driving a 50K pickup truck anymore but neither is it OK that we live like fat kings while little yellow people build trinkets for a bowl of rice a day.

Personally I question anyone that projects the chineese will take over everything like their past  growth will continue forever.  Playing catch-up is easy when others have lead the way first.  it will be interesting to see how creative they will be when their economy is as developed as the west.  Judging by all the knock-offs, counterfits and generally cheap crap comming out of there I don't think their living standards and productivity will ever reach parity with ours if they didn't have the dollar reserves to temporarily boost themselves as we have for so long.

there are many on here saying that our system can't escape from reality forever with credit bubbles and financial gimmickery and here is the first sign that its not.  This is good news.  I never wanted to tell my kid that he should go to business school and learn how to bullshit people or get victimized by the bullshitters.  Maybe I won't have to.

V in PA's picture

"By 2015, wages around Shanghai, adjusted for productivity, will be 61 percent of those in low-cost U.S. states like Alabama"
Yeah. Three years is too far into the future to plan on possibly taking your company elsewhere.

Trimmed Hedge's picture

I see you're not very familiar with the dysfunctional bureaucracy of a typical large corporation....

HistorySquared's picture

While there may be some benefit, the bulk of the benefit will go to India, Vietnam, and other low cost labor nations. Unless of course, we go Weimar Republic, then ya, we'll get those low cost labor jobs back. 

RafterManFMJ's picture

Um yeah!


Look, Chinese labor also offers unlimited ability to damage the environment, to order workers to work 18 hours per day, 7 days per week, to have 'trouble makers' i.e. those who refuse to do as master says, beaten even unto death,  the ability for US Corporate types to escape from crimes ranging from rape to child sodomy by just paying bribes to...well you get the idea.


Mainland China, the labor colony of the American Elite, isn't just about the dollar cost per hour - it offers so, so much more.  And if things somehow get to law and orderly, there is always Vietnam or Somali...you are an imbecile if you think 'US' companies are coming back anyway but at the barrel of a legislative gun.


You want 'em back - place a 30 percent tariff on all goods imported by foreign companies where 'foreign' is defined by having more than 15% of labor force outside the US States.  Pass a law putting the maximum pay and bonus for all executive suite types at 50 times the lowest paid worker OR contractor working for the company, including overseas 1 dollar per hour workers (Only for publicly traded companies. Private, do whatever you fin want with your own pay.)


Stock options vest only after 20 years, no more of this fucking pump and dump where they rape the company to get the stock up, dump it, and leave a smoking ruin behind.


But hey, what do I know? I just work for a living.

Oh regional Indian's picture

Really chillign thought SD1, the return of wage slavery to the land which exported it, eh? 

Well, I'll tell you, seeiign it's pernicious effects first-hand in India, every day, all the time.... it's not pretty and it is inevitable. Cycles, large and small, all con-verging....



karzai_luver's picture

The only way any amount of jobs beyond a trickle come back will be if the companies are then owned by the "foreign" interest.


Can't work any other way. Peeps that manage to work then will be working for the man only that man will own this country as well as the jobs in it.





mkkby's picture

Agreed SheepDog.  Eventually high oil prices (shipping) will force manufacturing back to near the end consumer.  But that's a very long time off.

snowball777's picture

How long did it take us to tool up for WWII?

Doesn't the rebuilding of the manufacturing base itself create jobs?

Does not starting to rebuild get you any closer to the manufacturing base of yesteryear?

Maybe the core problem is your defeatist attitude.

Pay Day Today's picture


Part of the fault lies with free market neoliberalism. It's conditioned governments and citizens into a state of faux learned helplessness.

America could again be an unparalleled society of opportunity and collective wealth within 10 years if it wanted to be. It has the brains, it has the capital, it has the vision.

Why let 100,000 has-been toll boothing corporate and political Kleptocrats stand in the way.

V in PA's picture

Time to send the kids to Tech school.

silvertrain's picture

And there would be your bottleneck..Skilled trades are NEEDED NOW..People now however would like to work from home doing nothing and make a bundle..Manufacturing will return in the US, but the US has become way to lazy..

anynonmous's picture


please try and avoid linking to that site and instead post the link to the primary source

BI = Huffington Post

SheepDog-One's picture

Yep, ran on ZH yesterday....so SEC is going to ask S&P if any of them knew of a downgrade?

Well of course the answer is 'Yes, we all knew'.

'So, S&P, you KNEW you were going to downgrade US debt then? AH HA! We gotcha'!!

Allrighty then!!

V in PA's picture

If you can't link it to FOX News, then it didn't happen.

falak pema's picture

Well, because of the writedown of US, S&P will be a little more standarised and a lot poorer, if the SEC has anything to do with it.

docj's picture

Not going to happen. They'll just go back to the future and start exploiting poor Africans again - this time though they'll do it on their turf, not ours.

DosZap's picture


Bro, too late, the Chinese already beat us to it.........................

BigJim's picture

"One of the answers is to start moving back to the U.S."

or.... moving it somewhere else again.

Freewheelin Franklin's picture

Right. Someplace where the  labor ain't too damn high.



TruthInSunshine's picture

Thailand, Malaysia, Singapore, Indonesia, Vietnam, Bangladesh, Cambodia, Laos...




These alternatives to China will be the new lowest cost production centers. The U.S. is not going to see any large scale return of a manufacturing base.

You need at least one historical example of a nation that lost its manufacturing base due in part to the greed of inept unions and the unyielding pressure of quarter-by-quarter profit maximization brung about by the financial community you say?


The United States is precisely 50 years behind England - both on the upshot and the downshot- following in nearly identical footsteps. And for many of the same reasons, too.

A corrupt government, a central bank that makes decisions on montetary policy to enrich its cronies, a nation which can't forge a plan to save itself because there are way too many making vast fortunes off its slow decline, nepotism and revolving door hanky panky between government and industry, a corrupt judiciary, lazy and greedy unions, lazy and greedy executives, lazy and greedy shareholders, cultural and societal rot, political correctness to the point of silliness, collective delayal of painful but necessary choices as a society, an us against them mentality by most, rotting and decay of the public education system....

laomei's picture

labor is a miniscule portion of total price for most items.  the real profit margin is taken by the brand-name white collars.  china's focus is not on the west (which is dead and fucked) it's on the markets that the west takes for granted or ignores entirely.  when you blow $100 on a waffle maker, you are not buying a product, you are buying a brand.  the product itself is only $2... hell i can get it here for a whopping $4 shipped and at my door next day, or $5 a unit in bulk on the ship.  like it or not, the factories belong to china, the labor belongs to china... you just make shit here and slap a brand and a price tag on it.  


So, my question to you then... is what is your marvelous solution when the chinese partners just continue to crank out product with their own brand name slapped on it and sell it for half of what you can?  hell.. china has an entire industry centered around third-party "finishing" so they can slap on whatever label they want to for where it was made.  


2 words of advice

dont fight a land war in asia

don't think for even a second you are better at making money than chinese

robertocarlos's picture

I disagree, I think labour is 100% of the price of all things.

laomei's picture

it's just that some labor is far more productive than other "labor".  if the "labor" you are referring to only serves to increase price, it's parasitic and nothing more.

snowball777's picture

Glorious solution: Buy American.

Pay Day Today's picture

In fact US companies need to band together and create collective marketing programs encouraging just that.

Thing is, how many 100% US content items are actually out there these days?

High Plains Drifter's picture

yes pretty soon, we can all work for 2 dollars a day.....

SheepDog-One's picture

Hooray! Economic problems solved! New normal for USA is 3rd world wages manufacturing cheap plastic crap and paper drink umbrellas for .50 cent a day wages, yipee!

pazmaker's picture

Don't hold your breath....there are plenty more countries and cultures to exploit by the multinationals before moving back to the USA.

fuzed's picture

Yes there are a few, but they not only need a cheap underfed labor class, they need stabilty,  (i.e. like not pakistan - where some shops set out and found it was too unstable).  Vietnam, maybe some of Africa, but definitely not all.   the setup of all necessary conditions is drying up some.   And maybe in abou 5 years, the Morlocks  American works will be conditioned correctly.

TruthInSunshine's picture

They need infrastucture, reliable utilities (part of infrastructure in the broad sense), and a stable government.

john39's picture

and someone willing or able to buy the crap.  buyers getting a bit scarce.

Andy_Jackson_Jihad's picture

Hey I know!  What if some large US companies that are well connected get the USG to help them work deals with these underdeveloped countries to build infrastructure on credit.  Then they can begin making drink umbrellas and shoes to pay it back.  BUT they never keep up with the interest and then the IMF allows some big US companies to develop any resources under their little brown feet because they defaulted on the loans!  Then we can build a whole domestic economy around packaging domestic debt and all the people in the US can have jobs getting eachother into more debt in exchange for some of those resources the brown people lost in default and everything will be OK again!  Man, why hasn't anyone thought of this before?!

pazmaker's picture

South America is ripe for harvest. Political turmoil,military juntas, and coup d' etat have become a thing of the past. Most of these countries have more stability and have infrastructure.

Monthly wages based on minimum wage?


Brazil $350.00

Argentina $444.00

Chile $457.00

Ecuador $264.00

USA  $1257.00

Add in the strict labor laws and environmental laws of the USA compared to other countries.....

I don't think too many jobs are coming back

falak pema's picture

Also american executives are going long on hispanic gals...so that helps in sending US supervisors out there to manage.

The only problem will be their frustrated wives back home. We need a plan B for them. Equal opportunity is a legal obligation even for home sex to wayward, lonely moms.

Trimmed Hedge's picture

If you think all labor is created equal, then you've got another thing coming.

I assure you: More often than not, you get what you pay for....

hedgeless_horseman's picture

"One of the answers is to start moving back to the U.S." And when they do, they may, just may, start hiring Americans once again.

In 2009 Farouk Shami moved his overseas manufacturing to Houston, then ran for governer of Texas.

Most notably, when asked if he believed it was possible the U.S. government had involvement in the September 11 attacks in 2001, Shami stated that he was "not sure" if the U.S. government was behind the bombing or not. After being given a chance to clarify his statement, Shami again stated the jury was out and refused to rule out the possibility. In the same interview with a Dallas radio station, Shami stated that he mostly hired blacks and Hispanics because he does not believe that "whites" wanted to work on factory floors. He stated that white people would want positions as supervisors or would want to be paid more than their counterparts...



What is there not to love about this self-made man?  Instead, Texas got Rick Perry* again, the man who will soon win the GOP presidential nomination.


*Perry supported Al Gore in the 1988 Democratic presidential primaries as chairman of the Gore campaign in Texas.  Red Team...Blue Team...they are all in the same League.

pazmaker's picture

Hey thanks for the link!   My wife buys some of that bio silk shampoo...we won;t be buying it anymore!

hedgeless_horseman's picture

Why not?  Because it's MADE IN U.S.A. by Americans?

pazmaker's picture

no, because of the owner and his racial remarks about wanting to only hire blacks and hispanics.