Good news for the global economy: China is letting wages rise in an effort to rebalance its growth

05/31/2010 11:48 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Workers struck Honda’s transmission factory in Foshan, China, ten days ago.

The most amazing thing about the strike, which forced Honda to suspend production at its four joint-venture assembly plants in China, is that we know about it at all.

Most strikes in China don’t get much space in the country’s government-controlled press. They’re typically hushed up and resolved in a day or two under pressure from the government on workers and employers. That practice is designed to prevent news of a strike for higher wages and better working conditions at one factory from fueling nationwide demands by workers.

In the case of the Honda strike, however, the government allowed relatively extensive coverage in state-controlled newspapers and on the Internet for the first few days of the strike. As the strike dragged on, Beijing gradually clamped down on reporting on the strike. But the amount of initial coverage and the extended duration of the strike without official action are signs of a change of direction in China’s economic policy.

What’s the change?

Some part of China’s leadership is clearly serious about rebalancing the Chinese economy to increase the emphasis on domestic consumer purchasing and to decrease the reliance on exports and infrastructure for economic growth. China’s economy is almost a mirror-image of the U.S. economy where 70% of the economy is based on consumer spending. In China consumers account for something like 30% to 40% of GDP.

A rebalancing of the Chinese economy that increased demand from Chinese consumers for the goods of other countries would be good news for the global economy. The global economy remains too dependent on buying by debt-strapped U.S. consumers for its long-term health.

One way to increase domestic demand would be to let wages rise. And Beijing seems to be committed to allowing wages to rise in its export industries. For blue-collar manufacturing workers in the export zone around Hong Kong wages have doubled in the last five years.

Honda’s most recent offer to workers at its transmission plant is for a 24% pay increase to 1,910 yuan ($280) a month. Trainees at the factory now make $132 a month and more experienced workers $220 a month. (As of May 31 the company said most workers had accepted this offer.)

Don’t look for wage increases like this to destroy the low-cost labor base that makes China’s export machine work. While there are no good nationwide statistics on productivity in China, the data suggests that productivity growth is keeping up with wage increases.

What we’re seeing instead is a government decision to let more of those productivity gains flow through to workers in the form of higher pay rather than to corporate bottom lines.

China still has a long way to go to match the thinking of Henry Ford who rocked U.S. capitalism in 1914 by paying his workers $5 a day. (That’s equal to about $110 a day in 2008 dollars.) Ford explained his decision by saying that he wanted his workers to be able to afford the cars they built. The Ford Model T, introduced in 1908, initially sold for $825. Its price dropped every year as Ford’s company refined its assembly lines.

The five-door Honda Fit sells for $15,000.

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