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Why a pay raise for workers signals key shift for China's economy

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The pay raises reflect a shortage of workers that employers on China’s east coast have been complaining about for several months. In February, the state-owned news agency Xinhua reported a shortfall of two million workers in the Pearl River Delta area.

Fewer migrants are seeking jobs on the coast partly because China’s population is rising more slowly than before, partly because more factories are opening in the interior and offering people work closer to home, and partly because “the new generation of workers is less prepared to put up with a low-paid job and a boring life,” says Lai Desheng, a professor of labor economics at Beijing Normal University.

At the same time, adds Jim Leininger, who works for Towers Watson, a human-resources consulting company, “the trend towards higher quality and production efficiency requires more experienced and skilled workers … who can command higher wages.”

Factory shakeout

Rising wages pose a serious threat to small, low-end manufacturers making shoes, clothes, or toys, whose profit margins can be as slim as 2 percent. Such companies, often owned by Taiwanese or Hong Kong investors, are already beginning to move their factories to lower-cost countries such as Vietnam, Cambodia, and Indonesia. Others are moving inland, taking advantage of lower wages and taxes there.

More sophisticated manufacturers, however, are likely to stay put in southern China. Some, like Honda, are producing mainly for the Chinese market, so moving abroad would make no sense. Others, like Foxconn, rely on a close network of local suppliers who can react quickly to design changes – a network that cannot be moved elsewhere wholesale.

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