Labor’s Prospects in China’s Goal for Stability and Prosperity By: Louis A. Bradbury* 2 December 2004 In November 2004, more than a thousand workers in a Guangdong factory demonstrated to demand one day off per week. They got it. A recent headline in the South China Morning Post announced that ‘Labour shortage driving up wages’ and reported that in Beijing there were 10.4 job vacancies for every 10 job seekers. In the Pearl River Delta, officials were quoted as saying that the lack of skilled workers was causing wages to rise and would force some factory owners to move to other areas. The Chinese economy is expanding at an annual rate of more than 15% so far this year and the government is trying to slow that growth to 9%. Do these examples indicate that the demand for Chinese labor exceeds the supply and suggest that Chinese workers will now have the upper hand in dealing with their employers? Probably not, because the truth is that, these stories notwithstanding, it will likely take the better part of 25 years to produce enough jobs to absorb the real oversupply of labor, assuming that the Chinese economy can meet the ambitious goals set out by Beijing. Nonetheless, the labor force generally will enjoy increasing wages and benefits from the growing economy and, as illustrated above, in certain areas it will enjoy even greater increases due to regional shortages of labor and the needs for skilled labor. On the occasion of the 55th anniversary of the founding of the People’s Republic of China in 2004, Premier Wen Jiabao said that a new Chinese world order could be realized by making use of strategic opportunities for nation building, pursuing an independent foreign policy and focusing on peaceful economic development. Wen also said that with respect to Hong Kong, Beijing would work to maintain long-term prosperity and stability under the Basic Law. The mantra of “prosperity and stability,” as espoused by many Hong Kong leaders and “tycoons” in advocating for the election of Beijing-friendly legislators in the recent Hong Kong elections, was regarded by many as a cynical attempt to intimidate voters or cause them to focus on their economic wellbeing rather than their democratic rights. However cynical many Hong Kong voters felt, the twin goals of “prosperity and stability” reflect the Beijing government’s fundamental strategy for developing China over the next 25 years. Beijing has announced that it intends to integrate fully all Chinese citizens as workers into the market economy by 2030. This is a daunting goal given that it is estimated that with a population of 1.3 billion, only 500 to 600 million Chinese currently are employed in the modern market economy directly or indirectly, compared to the balance which are either subsistence agricultural or underemployed workers. To achieve its goal, China must create over 500 million new jobs to absorb the existing population as well as the estimated population increase of 300 million over the next 25 years. That is roughly 20 million net new jobs per year for the next 25 years. The actual number of new jobs required will be less than the current population and future population because many
people will remain in the agricultural sector and others are dependents of workers, such as children and the elderly. Beijing’s goal of prosperity for all its citizens in such a relatively short time is not solely a matter of high aspirations, it is extremely important politically. Having announced this goal to the 700 million not working in the market economy, it must deliver the jobs to those people to satisfy their growing expectations in order to maintain stability. As with any ambitious plan to change a society, the government must be viewed by its citizens as capable of managing the change effectively and equitably. Many Chinese do not believe the government has the ability to achieve this goal and most do not believe it will happen fairly or equitably. The gap between the have and have-nots in China is widening in reality as well as in perception. Many ordinary workers believe that official corruption is rampant among government officials, the Communist party cadres and the military. As state-owned industries are “auctioned off” at often ridiculously low prices, many local officials receive improper payments from or interests in the privatized businesses. Many of the enterprises taken private over the last few decades ended up being controlled by the People’s Liberation Army (PLA) as well as former party and government officials. These financial windfalls are well known to workers and have created great resentment and anger among the working classes and have undermined the proposition that the government is acting fairly and equitably in this process. While this may not cause a regime change, it has caused much worker discontent and anger which have become underlying factors motivating recent worker demonstrations and protests. Beijing’s concern about stability is not academic, as recent incidents of public unrest and civil disobedience illustrate. Recently 100,000 people gathered in Sichuan province to confront local authorities to protest the amount of compensation that landowners would receive for the flooding of their land by a new hydroelectric project. The protest became violent, requiring the local authorities to call in the PLA to restore order. Elsewhere, in Henan a riot erupted after a traffic accident in which a Hui Muslim accidentally ran over an ethnic Han girl, resulting in violence that killed 148 people including 18 police. Again, the PLA responded and martial law was declared. Demonstrations and violence of this magnitude are real threats to stability and order even though the root causes and conditions behind the riots may differ. In both cited cases the demonstrators violently turned on government and constabulary forces resulting in loss of life. What must amaze and concern Beijing is that more than a 100,000 people organized and congregated for a massive demonstration without using public media and in a region with limited public transportation. If such situations become larger, more disruptive and more frequent, they will inevitably create real and perceived instability. As Beijing and local authorities have to focus more resources and attention on keeping public order, it will be more difficult for them to continue implementing policies to promote prosperity. In addition to rising economic expectations, Chinese society is changing dramatically as readily available information systems make it increasingly difficult for Beijing and the regional governments to control the dispersion of information and restrict communication both within and from outside China. The widespread use of cell phones and the limited restrictions on international calls makes it almost impossible to limit access to
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information, as does the internet which is available on a walkup basis in internet cafes or home computers from Beijing to Lhasa albeit with some systematic restrictions that block access to many sites and identification and registration requirements. It is not hard to see that Beijing must be concerned that the failure to create new jobs and to maintain existing ones in the face of rising expectations of the population could result in a significant challenge to stability. Accordingly, Beijing sees itself in a race to create the prosperity (and jobs) necessary for the integration of the total population into the market economy and to maintain public order and stability in the face of growing impatience by non workers as well as the insecurity of the current participants in remaining integrated into the market economy. Having adopted a model of peaceful economic development, China must move cautiously, but expeditiously. Thus it must be obvious to Beijing that stability abets prosperity and that prosperity increases stability--a very symbiotic relationship. Beijing must be concerned that a lack of stability and prosperity could ultimately threaten the power base and legitimacy of the current leadership and the Communist party. Deng Xiaoping characterized China’s current situation as like a person “crossing the river by feeling the stones underfoot” to reach the other side. Anyone caught in the middle of a river has a limited range of choices to get to the other side and the more rash or dramatic the choice, the more likely the chances of a dangerous slip or fall. How does Beijing’s goal of achieving prosperity and stability impact the wages and wellbeing of the labor force? The plans for prosperity rely on the continued growth of the economy through the development of internal markets, but more importantly the growth in exports. Much of China’s extraordinary economic success is due to the low cost and relative high quality of its exports. The low cost advantage derives mostly from low direct labor costs and the low capital costs to the extent of labor used in construction of plants and equipment as well as locally sourced raw and finished materials. It is generally accepted that the driving force behind China’s booming economy is cheap labor and that the wages, working conditions and benefits for workers are significantly inferior to those generally found in the developed economies of the world. In examining the prospects for improved working conditions for Chinese labor, it is necessary to consider the roles and interaction of four key groups: the labor force itself in its myriad groups and skill levels; mainland employers, primarily referred to as factory owners; foreign investors and outsourcers; and the Chinese government, which has the ultimate responsibility for achieving “prosperity and stability.” Each group has considerable impact on the economic development and wellbeing of the labor force although this article primarily focuses on industries employing entry level or unskilled labor such as the textile and clothing industries, although many of the conclusions apply in the higher skill industries. In the current environment each group also has a range of options it can choose among as it seeks to obtain its primary objectives without risking unintended and unwanted consequences. The mainland government can choose options that could jeopardize its policy of prosperity and stability if it decided the pursuit of some other political goal was a higher priority.
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The Labor Force. The daunting goal of creating 500 million new jobs in 25 years and the huge oversupply of willing workers limits the options available to workers to improve their working conditions and economic wellbeing. Not only do classic laws of supply and demand limit labor’s options, but Chinese law works against them by prohibiting the formation of free and independent labor unions to advocate for them. All workers are free to join an affiliate of the All-China Federation of Trade Unions (“ACFTU”) which “represents all workers”. ACFTU affiliates have acted more often as representatives of management in resolving labor issues and rarely has it either advocated for increased compensation or benefits for workers or endorsed protests. Yet workers in some factories have planned protests and demonstrations in order to pressure the factory owners to increase compensation or provide other legal benefits. In virtually none of these situations has the ad hoc group taken on any formal role of representation on an ongoing basis. An interesting development in this regard is the Beijing government’s requirement that Walmart, among other western companies, must allow its employees in China to be represented by a union under the umbrella of ACFTU. Ironically, this may not significantly benefit Walmart’s Chinese employees with a truly independent union, but it may be an unwelcome precedent for Walmart applicable to other countries where it has consistently blocked independent union organization on behalf of its employees. Although Chinese law imposes minimum wage and employee benefit requirements on all employers, the labor laws are not vigorously enforced. For new unskilled workers in entry level jobs or in industries requiring lower skills, the minimum wage (about 576RMB or $68 per month or its equivalent based on pay by piece completed), employer-provided dormitory style housing and meals may initially provide significant improvements in the economic wellbeing of many workers in contrast to the conditions available to them in their rural subsistence communities. The numbers migrant workers flooding to major cities (often in violation of internal migration rules) reflects the individual’s choice of this option and the expectations it engenders. This flood of workers has a downside as it has also resulted in an oversupply of workers which has traditionally kept wages low and allowed some employers to avoid providing all the legally required benefits. Rural migrant workers’ wages have increased by only about 10% during the last ten years, while the urban cost of living has more than quadrupled over the same period, making it very difficult to survive in the urban environment. Yet as their skills increase, workers are often able to obtain improved wages and working conditions. Recent reports from factory owners in Guangdong indicate a lack of skilled labor has caused them to either increase wages for existing workers or hire more skilled workers away from other factories by offering higher wages and other incentives. Likewise it appears new workers are not migrating to the large cities in the same numbers as before, thereby increasing the demand for more skilled workers resulting in upward pressure on wages and benefits to keep qualified employees in mature urban areas such as Guangdong. This has enabled workers at many urban factories to demand higher wages and better working conditions. Even when labor is in high demand in urban areas, the oversupply of labor nationally operates against the urban workers as it motivates some factory owners to relocate to
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areas with an oversupply of workers and lower wage levels. Faced with this situation of a limited supply and greater demand for skilled workers, Guangdong officials have indicated a concern that many factory owners will consider relocating to smaller cities in China where the labor supply still exceeds demand and labor costs can be kept lower. Recently, three thousand workers protested outside a Shenzhen factory claiming that the owner planned to relocate the factory to Zhuhai and layoff all the workers without paying them previously negotiated termination compensation. The Guangdong officials were so concerned about the impact on their local economy of losing jobs to other areas of the country that they are considering incentives to keep existing employers in place as well as to try to attract new industries. These isolated local situations notwithstanding, the oversupply of workers through China as a whole continues to keep a lid on wages. Notwithstanding the restrictive impact of the supply overhang of labor generally, there are of course unique situations where an oversupply does not exist or other unique factors mitigate the surplus. Likewise some factories may not find relocation a viable option if they are capital intensive or other economic factors make a move too costly compared to meeting labor’s demands. The general oversupply of labor will make these anomalies short term while workers either retrain or relocate to the sites of these anomalies or factory owners relocate to areas of lower labor costs. The Factory Owners. While it is risky to generalize too much about the widely diverse employers and factories operating in China, it can be said that virtually all employers, whether domestic manufacturers or foreign owned operations, are engaged in very competitive businesses and seek to maximize profits through increasing sales and minimizing costs, particularly those relating to capital. Much of the economic advantage that Chinese factory owners offer to the world is low cost, high quality goods. This advantage is almost entirely based on the low cost of direct and indirect labor. As discussed above, the oversupply of labor as well as the legal ban on independent labor unions keeps these costs down. The factory owners face significant competition in most industries - whether producing for themselves or outsourcing. Currently, China has excess production capacity in many industries and, as in the textile industry, the ability to create new capacity quickly at relatively low capital costs. Competition for orders is stiff and many outsourcers use many different factories, viewing the output of competing factories somewhat like commodities and moving their orders with little difficulty. Obviously, strong customer relationships develop, but the existence of so many factories and the relative mobility of sourcing pressures factories to keep their prices as low as possible or in line with the lower cost producers. The international pricing system creates an effective “race to the bottom� that imposes significant financial pressure on the factory owners and their only effective response has been to transfer this pressure directly to the factory workers by keeping wage levels artificially low. The only major cost factor that factory owners have some control over is labor, principally because of the oversupply in China. Factory owners have little or no control
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on raw materials or energy costs as the prices of these items are usually set by international markets. It is unlikely that employers will increase wages and benefits unless they are given no choice. Given the untapped labor potential in many parts of China and the relative ease in moving some types of manufacturing facilities, employers can be expected to relocate if labor costs escalate too much. In addition, as Beijing has granted economic autonomy to many regions, employers may be courted by some regions with incentives that enhance the benefits of moving production facilities from higher labor cost areas. This competition among regions gives factory owners some options to relocate their operations as long as the labor oversupply exists in areas that are just starting to participate and compete in the market economy. In addition, as China improves its transportation infrastructure with new airports, highways and railroads, the eastern coastal industrial zones will also lose some of their competitive advantage for export trade over the inland provinces. In short, the factory owners have several limited options with which to respond to any localized labor demands or scarcities. They can meet the demands so long as overall costs are contained enough to keep them competitive (ie., making a profit or a manageable short-term loss). If direct labor costs (and indirect labor costs) render them noncompetitive, the factory owners may have a more viable option of relocating to an area that promises and lower labor costs. The Foreign Outsourcers. The impact of foreigner outsourcers on labor in China is indirect, but nonetheless significant. Most foreign outsourcers are US or other western companies which source the manufacture of their products in China primarily because of to the significant cost advantages offered by the low cost of direct and indirect labor. Most outsourcers operate in competitive western markets and often do not have much pricing power in their relevant markets. Accordingly, a major part of their ultimate profitability of a ultimately depends on lowering production or outsourcing costs. This keeps the outsourcers pressuring the factory owners for lower costs or increased product benefits at the same cost. It is critical to this dynamic that labor costs be contained. Notwithstanding the obvious benefits of low cost labor, many foreign outsourcers have become concerned about allegations of the poor treatment and abuse of labor in China. In response, many corporations have created corporate responsibility offices and have agreed to follow the ILO fair treatment of labor standards. Many outsourcers now require factory owners to comply with local laws on minimum wages and working conditions and even require audits of employers’ books to insure that pay and working hours comply with these requirements. Nonetheless, the personnel in corporate responsibility offices often admit that the audits are often incomplete or the factory owners keep separate for books and records for the auditors which confirm compliance with these standards. The outsourcers have limited options in increasing labor benefits. Unless all other outsourcers make the same demand for improved conditions, the factory owner will have to raise contract prices to the outsourcer demanding the increase in labor wages and benefits, which would likely put the outsourcer at an economic disadvantage with respect
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to its competitors also outsourcing in China. An interesting example of this is Microsoft, which outsources its X Box in China. One of its corporate responsibility inspectors visited the factory and was dissatisfied with the conditions of the employees living in the company’s dormitories and insisted that they be upgraded. The factory owner responded that it would do so if Microsoft increased its contract price for the x boxes to permit the renovations. Since Microsoft was only one of the outsourcers whose product was manufactured in this plant and the other outsourcers were not willing to pay for the costs of renovating the dormitories, Microsoft declined to cover the upgrade costs, but the factory owner agreed to paint the dormitories within a year. Microsoft is currently trying to obtain agreement among all technology corporations outsourcing in China to require minimum labor standards of factory owners in their outsourcing contracts. Rarely is a for profit business a good vehicle for social change, unless it sees a distinct economic advantage or it is required by law to implement change. That is appropriate because a business enterprises’s raison d’etre is not to foment social change, but to strive to make and sell its product at a profit. Reliance on business enterprises (both outsourcers and factory owners) to improve labor wages and benefits unilaterally without a clear economic advantage or necessity is a wasted effort. Protection of workers is a goal of business enterprises only to the extent necessary to obtain a productive workforce. It is a rare corporation that would unilaterally grant wage increases, if it meant losing a competitive pricing advantage in its business. Witness the example of Microsoft above. In many more mature economies, workers are often represented by independent unions and national laws give certain rights to employees, which combined with different economic circumstances, give the workers more options in relations with their employers. The significant oversupply of labor in China and the law prohibiting independent worker organizations denies these options to Chinese workers except in a few unique situations where a temporary shortage of labor and necessary skills has given workers more negotiating power in ad hoc situations. The Chinese Government. Creating 500 million jobs in 25 years requires a lot of “prosperity and stability.” Beijing’s ability to achieve this goal is dependent on many factors not in Beijing’s control, as the dependence on increasing exports and the volatility of world financial markets and foreign economies. The recent boom to bust economic cycles of the Chinese economy over the last 20 years illustrates how difficult it is for Beijing to manage its economy. It is also important to recognize that the ‘Chinese government’ is not just the national government in Beijing, but also includes many provincial and local government entities that have been granted substantial economic autonomy, such as the special economic zones (SEZ). These entities often have as much practical impact as Beijing on the economic activity in their zones. China can improve labor wages and working conditions by merely enforcing the current applicable laws and enacting new provisions. Considering that China’s labor laws are quite sweeping and comprehensive, a modest effort enforce these laws would likely result in a greater improvement in worker compensation and benefits than all the social responsibility efforts of the foreign outsourcers combined. That is not a practical option. First, it is unclear to what extent Beijing of can actually effect such enforcement without
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the active cooperation and participation of the economic zones. In many regards, Beijing is removed from the day to day management of much of the economy and must rely on reports from the provinces and Special Economic Zones to identify issues and to implement solutions or corrective policies. Many commentators believe that many of these provincial reports are skewed to provide the data and results they believe Beijing wants. A clear example that fosters such cynicism is that in mid-April 2004, Beijing announced the need to slow the economy slightly and imposed certain fiscal restrictions. During the last week of April, Beijing announced on the basis of regional reports that the economy had slowed in response to the new policies. Since even the most advanced western economies cannot measure changes in the rate of economic activity in less than two weeks, it is logical to assume that evidence of a slowdown may have been manufactured or, if accurate, indicated that a slowdown was already occurring, but it was much too soon to see the effect of policies announced less than two weeks earlier and perhaps not even yet implemented. For Beijing to be able to know its options, let alone choose among them, it must have accurate and timely information. Second, apart from the practical problems in unilaterally increasing worker benefits, such actions would likely raise the costs of manufactured products and exports. Increased costs would cause outsourcers to explore other lower cost sources in other countries, thus operating to prevent factory owners from passing on all or a part of their increased labor costs. This may cause some factory owners to try to avoid providing the new benefits. More likely some outsourcers will go to other countries or just curtail purchases rather than pay higher prices, which in turn may lead to the loss of manufacturing jobs in China. With the social and economic goal requiring more than 20 million new jobs a year, the government must think carefully about implementing policies that would slow the growth in new jobs, let alone undertake actions that might result in the loss of existing jobs. A unilateral increase in worker benefits presents a significant equity issue as well. Can China mandate increased economic benefits to current participants in the market economy while the non-employed majority of the population receives no additional economic benefits without exacerbating the widening gap between the haves and have nots. Much of the social unrest has occurred in rural area where the local population has not yet shared significantly in China’s economic boom as the recent large demonstration by Sichuan farmers illustrates. China will not enforce the existing labor laws unless it senses an international or domestic imperative to do so. As part of the political issues surrounding trade deficits, the AFL-CIO in the United States suggested that the issues of labor exploitation in China might constitute an unfair trade advantage. The US government has not pursued that theory. Unless that pressure is coupled with the possibility of economic sanctions, China will resist improving labor conditions except to the extent it reacts to labor restlessness or the cost of the improvements do not materially impact exports and the creation of new jobs. Despite its political rhetoric, the US government will not likely impose any kind of significant sanctions in response to Chinese labor policies. First, WTO rules do not
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permit sanctions for low labor benefits under these circumstances and generally prevent the imposition of sanctions in the absence of specified events, such as dumping. Low labor cost structures are generally not a factor in anti-dumping enquiries. Second, the US population now enjoys significant economic benefits from low cost products made in China. A significant change in the cost of those products would antagonize US consumers and could lead to additional inflation in the United States. The imposition of sanctions would increase the costs of goods from China and would likely reduce Chinese exports, which would in turn reduce the growth of the Chinese economy and negatively impact China’s ability to buy US exports and its capacity to continue to buy large amounts of US Treasury obligations. In the first six months of 2004, the combined increase in the purchase of US Treasury debt obligations by China, Japan and Hong Kong equaled the US$250 billion US budget deficit for that period. In other words, despite political rhetoric to the contrary, the US and China have a codependent economic arrangement in which China uses its trade surplus with the US to fund the budget deficits of the US. While US policy seeks to equalize the trade balances with China, it cannot reduce its imports from China without risking that China will no longer have the trade surpluses with which to buy US Treasury obligations or antagonize China to the point where it would decide not to buy US Treasury obligations or worse opt not to roll over current Treasury obligations. The US appears to be facing many years of deficits, for which it needs the financing available from the China connection. At the same time, China is in somewhat of a bind; retaliatory action would lead to economic and political repercussions that would significantly setback China’s goals for full population participation in the market economy. The US would suffer serious economic disruption as its cost of funding its budget deficits would increase, as well as its domestic interest rates, thereby reducing economic growth if not causing an actual recession. While this economic (and political) symbiosis may not be able to continue indefinitely, it is unlikely that either China or the US will move unilaterally to change it in the near term. Improvements in the wages and benefits (other than as may naturally occur in a booming and expanding economy) of Chinese labor is not likely to be a major issue for the US in its dealings with China. While other geopolitical issues may at some point become significant enough to disrupt the symbiotic and interrelated trade and economic ties between the US and China, these ties will not be negatively impacted by US concerns for the welfare of Chinese labor in the short term. Notwithstanding current economic dynamics between China and the US, future economic and political changes in China, the US and other places will change dramatically over the next 25 years. How they will change is speculative, but all anyone has to do is review the last 25 years of world economic and political history and it is evident that many unforeseen and unexpected events will significantly impact and alter the economic and political dynamics of today. China’s success in reaching full worker participation in the market economy is a very long term goal and the current economic plans and circumstances may be quite short term. China’s leaders must retain the flexibility to respond to and anticipate the inevitable economic and political changes that will inevitably occur over the short and long term periods. China will not be able to control
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many of these events, but it will have to manage their impact and effect on labor and its ability to create new jobs. While the creation of 500 million new jobs is a long term goal, China has chosen a fairly short term strategy for implementation that essentially allows the expanding economy to trickle benefits down to existing workers in a haphazard manner while it creates new jobs for the unemployed. China has chosen to ignore the long term impact of abusive working conditions on worker health and future medical needs and the failure to fund mandated retirement benefits. Planning for these long term medical and pension crises cannot be deferred indefinitely without creating even greater impediments and threats to the success of China’s plan for the job creation his and total worker participation in the market economy. It remains to be seen if China can manage incipient worker demands for improved working conditions and economic rewards and his create new jobs while deferring the improvement in worker benefits and conditions indefinitely. Conclusion. The foregoing discussion may suggest bleak prospects for the improvement of worker income and benefits in China. That is not necessarily so. It is a fact that for many years to come China will have a tremendous oversupply of labor. If Beijing can maintain stability within its borders and without as well as continue to orchestrate economic policies that successfully foster economic development, it will in time achieve relatively full participation in the market economy. As development occurs many people will benefit and see their incomes and economic opportunities increase. It will not happen to everyone or even necessarily on any equitable basis, but the economic wellbeing of the labor force will improve. The goal for China will be to manage change so that the disparities in economic sharing do not create significant social tensions. If, as Deng Xiaoping said, China is a like a “person crossing the river by feeling the stones underfoot� to reach the other side, the route to the other side requires stability and caution, but it also may require taking risks whose consequences may not be foreseeable. China must balance the increased economic and political expectations of its population with what it can deliver to them in an increasingly interdependent, but highly unpredictable, international economic and political environment.
*Louis A. Bradbury advises a number of not-for-profit organizations active in the areas of HIV and human rights. He was previously the president of the largest non-governmental AIDS service organization in the United States and prior to that was the president and CEO of a Fortune 500 company. He holds degrees from Harvard Law School and Northwestern University.
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