Monday, May 9, 2011

Wages paid to Chinese factory workers are increasing rapidly. Does this mean a resurgence in US manufacturing? Does globalization have a natural "self-correcting" mechanism?

The graphic below shows the rise in wages paid to the average Chinese worker in the past year. In dollar terms, the amounts are still small compared to US wages, but they are increasing. China has become the world's manufacturing floor based on its comparative advantage in relative wages paid to workers, but that advantage is slipping.  This bad news for consumers of imported Chinese products because they WILL become more expensive in the near and medium term.  The GOOD news is that the closing of the wage gap will aid US workers in parts of the US where wage rates are generally lower.  Even though the wage differential is still significant, it will become less advantageous for producers to re-locate to China based solely on wages paid to workers.  Once the wage gap between American and Chinese workers closes, the only other significant criteria for locating a business in either place is worker productivity.  Are we ready to match them head to head?
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