China’s Minimum Wage Growth Slows, But Businesses Still Feel the Squeeze

Minimum wage growth may be slowing, but China’s rapidly evolving economy is presenting other labor-related challenges, which mean that rapidly increasing wage costs will continue to be a burden for businesses in years to come.

So far in 2017, six provinces have increased minimum wages, with Shanghai raising minimum wages by 5 percent year-on-year (yoy) to RMB 2,300 ($334) per month. Shanxi province has also announced a 3.7 percent increase in minimum wages compared with 2016, to RMB 1,680 ($244) per month.

Despite the announced increases, minimum wage growth is stalling, with the recorded increases in Shanghai and Shanxi being markedly lower than the 12.2 percent and 25.5 percent yoy growth registered between 2014 and 2015. Also, fewer provinces are raising minimum required compensation. Six provinces have raised wages so far in 2017, down from the nine recorded in 2016, 19 in 2015, and 24 in 2014.

This falls in line with government statements about reining in wage increases to preserve competitiveness. Xin Changxing, a vice minister in China’s labor ministry, called for wage control in 2016 to maintain private investment growth and stop China from losing its edge over other Asian locations. Looking at minimum wages alone, China’s $155 monthly minimum wage at the end of 2016 falls behind the $281 on offer in Thailand and $280 in Malaysia, but it surpasses regional competitors like India ($137) and Vietnam ($107).

But focusing on minimum wages misses the point. Only 11.8 percent of businesses surveyed by AHK Greater China, part of the German Chamber of Commerce, cited minimum wage increases as being very important factors influencing wage levels. And that’s because labor shortages are having a much more fundamental impact on labor costs, and this factor looks set to significantly impact margins in the coming years.

China is seeing fewer workers enter the labor market as its population ages and businesses, particularly in the fast-growing services sector, are struggling with a mismatch between their need for highly-skilled workers and the tight supply of qualified candidates.

AHK’s survey of China’s labor market showed that finding workers, especially high-skilled employees, remains a major challenge cited by 85.2 percent of respondents. This factor forces those companies to raise salaries to attract and retain workers, regardless of government-directed changes in minimum wage rates.

That’s why average monthly salaries, which are unrelated to minimum wage levels, grew by an average of 9.2 percent yoy to RMB 7,665 at the end of Q1 2017, according to a survey of advertised salaries on Zhaopin.com.

And this is a reality that businesses and the government will have to face, with average labor costs forecasted by the Economist Intelligence Unit to rise 12 percent per year between now and 2020.

While wage growth is a positive for forecasters predicting the emergence of China’s consumer-led economy, it’s another matter entirely to expect these increases to deliver sustained growth in disposable income.