Cheap labor never stays cheap

Labor costs continue to rise. Companies feel the pinch of surging raw material prices. Margins are declining. Companies can"t find the labor they need, and manufacturers strive to cut costs and keep work on their shores. This sounds like the problems manufacturers face stateside, but it"s not.

It"s in China.

Alexandra Harney, a former Financial Times correspondent, said in an article Slate posted last week: The era of cheap Chinese consumer goods may be finally ending, thanks to irrepressible inflation. Now when the Chinese present their lists, some American importers are conceding higher prices, meaning that American shoppers, for the first time in years, are starting to pick up the tab for rising costs in China. Some Chinese factories are now asking their American customers for price increases of as much as 20 percent to 30 percent.

Inflation is one among a confluence of events that have caused Chinese manufacturers on the coast, and even in rural provinces like Hunan, to lose their edgecheap labor. The driver: Chinese workers want a better life.

BusinessWeek and others recently reported that a new labor law implemented Jan. 1 has significantly increased labor costs. Double-digit wage increases have hit coastal China, and the All-China Federation of Trade Unionsa state-backed labor organizationhas an expanding membership. Workers are organizing.

Then there"s the lack of labor. It sounds crazy to say that the world"s most populous country can"t find enough people to fill its factories, but it"s true. The country still has over a billion people, but the population continues to age at an alarming rate, thanks to the country"s one-child policy. The result: China"s working-age population is on the decline.

As Harney explained, China"s Generation Y, the children born after the one-child policy came into effect, are increasingly aware of their rights to a legal wage, health insurance, and a certain number of days off every month. Their demands for better treatment will continue to drive up the cost of manufacturing in China. Already, southern China"s Guangdong province, known as the workshop of the world," is short 2 million workers, the equivalent of 14 percent of America"s entire manufacturing workforce.

Where will the world"s manufacturers turn next for cheap labor? According to a report titled Research on the Competitiveness of Chinese Manufacturers 2007-2008, from the American Chamber of Commerce in Shanghai, of the companies planning to move business off China"s shores, 63 percent chose Vietnam, 37 percent India, as reported in China"s weekly business newspaper, The Economic Observer.

But those companies may face some obstacles, Harney said. According to her article in Slate, &there is no other China waiting in the wings to make cheap goods reliably for American shoppers. American importers are now arriving by the planeload in Vietnam, hoping to take advantage of the country"s lower wages. But Vietnam, hard as it tries, has only 85 million peoplethe size of one Chinese province. In the same article, she added that as the principal alternative, India"s road and port infrastructure, while improving, is nowhere near as efficient as China"s.

According to sources, no dramatic changes will come any time soon to global trade balances, but the events this year could be a harbinger of what"s ahead: A global economy subject to more natural swings of economic forcesand less reliance on impoverished laborers who work long hours in dangerous conditions.

It"s about time.