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Rising labour costs in China ‘will not result in increased US employment rates’

Analysts hit back at the Boston Consulting Group’s prediction that rising wages in China will lead to a shift in American investment back home and, consequently, higher levels of employment

Analysts have hit back on a widely publicised Boston Consulting Group report, which stated that a rise in labour costs in China will encourage American investors to move back home, creating more than three million jobs in the US by 2020.

The report, published on Friday, is a follow-up to one released by BCG in August that claimed “the combination of rising Chinese wages, higher US productivity, a weaker dollar and other factors will virtually close the gap between the US and China for many goods consumed in North America”.

But analysts say this prediction is unfounded.

Arthur Kroeber, non-resident fellow of foreign policy at the Brookings-Tsinghua Centre in China, is dubious of the affects of rising wages in China on American employment rates.

“The hourly labour wage-rate in the US is approximately $34 to $40,” says Kroeber. “In China, it’s about a 10th of this, at around $4 to $5 an hour. Even if Chinese labour costs are rising at around 15% per year, the large wage gap between China and the US will remain for much longer than predicted by the Boston Consulting Group.

“Inflation and rising interest rates in China will affect foreign investment in the country, but the Chinese government has planned for this. Investment will slow down in comparison to previous years, but it will still remain relatively high.

“Much Western investment and manufacturing in China is geared towards a Chinese market, thus there is little reason to move Western investment out of China.”

Some industries have moved out of China in recent years, but business has settled in other Asian countries, such as Bangladesh, Vietnam and Indonesia. Therefore, the extent to which rising labour costs in China will affect US unemployment and the economy is difficult to predict.

The BCG report stated that in the next five years or so it projects “that China will lose most of the huge cost advantage over the US that it has enjoyed since it joined the World Trade Organization in 2001. As a result, many companies will rethink where they produce certain goods meant for sale in North America.”

The group adds: “Chinese wages are projected to continue rising by 15% to 20% per year in US dollar terms, outpacing productivity growth in China. Consequently, when US worker productivity is factored in, the once-enormous gap in labour costs between China’s coastal export zones and select lower-cost US states is projected to close to less than 40% by 2015.”

But while some experts have dismissed claims that this will lead to a rise in US employment, some analysts do agree with the report.

“In China, the labour supply curve has been perfectly elastic in the past, but this is changing as labour costs rise in China,” says Bhanu Baweja, global head of emerging markets and fixed income at UBS. “Higher labour supply is available now only at higher wages.”

And BCG argues: “When shipping costs and other factors, such as the hidden costs and headaches associated with extended global supply chains, are accounted for, China’s cost advantage will be marginal.”

The group says that industries which will return to the US include transportation goods, electrical equipment, furniture, plastics and rubber products, machinery, fabricated metal products and electronics – resulting in higher employment rates in the US.

It says jobs will be created in factories and through supporting services, like construction, transportation and retail.

“But the creation of higher employment rates in China is a lengthy process,” says Baweja. “What we are more likely to see in the mean time are more trade barriers between China and the US.”

A bill which would make it easier to raise tariffs against Chinese goods, if China continued to undervalue its currency, is being debated in Congress.

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