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In recent months, some manufacturers in the Pearl River delta area of southern Guangdong Province have been faced with a new dilemma. They have been receiving new work orders for the usual wages, but have been unable to find enough workers to fill the positions.
The labor shortage has resulted in a high turnover of workers which has triggered a demand for higher wages.
The era of ubiquitous, cheap labor in China seems to have come to an end. Manufacturers have been running on thin profit margins. Offering higher wages equates to loss of profits.
Confronted with the dual pressure of a diminishing market externally and higher costs internally, manufacturers in Guangdong are incurring less and less profit, making it difficult for them to survive.
Relocation Phenomenon of Factories and Labor
The labor shortage is primarily a consequence of the low wages paid by the manufacturers. Most service and manufacturing industry employees make less than 1,500 yuan (US$219) a month. Some maintain that the labor shortage indicates that the low-wage workers have moved on in search of higher salaries and better benefits.
However, this does not explain the true labor situation of China’s coastal region. The reality is that migrant workers have chosen to move to provinces with a lower cost of living.
In southern Guangdong Province, they could barely support themselves on their 1,000 or so yuan (US$146) salary. In the interior provinces, on the same salary, they could afford a better lifestyle even with some money left over.
Simply put, southern Guangdong Province is faced with competition from the interior provinces. Since 2007, investors have begun moving to southeast Asia or interior Chinese provinces due to high land costs, the rising prices of raw materials, and high taxation in southern Guangdong Province.
From that point on, the main reason for lower production costs in the interior provinces was not low wages (since wages could not go any lower) but more favorable tax benefits and a cheaper cost of living.
Will the Labor Shortage Force Manufacturers to Upgrade to High-tech?
In Dongguan, Guangdong Province, manufacturers that are hiring the most people are in the shoe, purse, furniture, clothing, publication, and electronics businesses. These are traditionally labor-intensive industries. Some industry watchers have referred to southern Guangdong's labor shortage as “a collective moan of low-tech (or outdated) industries on the eve of their departure from Guangdong.”
They have theorized that when labor-intensive manufacturers can no longer survive based purely on low-cost labor, Guangdong can use this factor as an opportunity to replace such industries with high-tech or high-end service industries, attracting and recruiting college graduates to join the work force. This could prove to be one-sided wishful thinking.
Since the late 1980s, Shenzhen, a manufacturing hot spot in Guangdong Province, has been planning such a transformation and upgrade of its industrial mix. Its implementation started in the mid-1990s with workers being charged a high premium for “temporary residential permits” in hopes that low-paying manufacturing businesses would subsequently move out.
What resulted instead was the development of labor-intensive manufacturing businesses in the nearby cities of Dongguan and Panyu. In Shenzhen itself, the high-tech sector never really took off.
China needs to rethink how to position “Made in China” in the global value chain through the development of an international division of labor.
China Needs New Angles to Attract Foreign Investment
When China decided to engage in economic reform 30 years ago, the orientation of its international division of production was mainly inter-industry (division among industries) and intra-industry based (division within the industry). Learning from the experiences of the four small dragons—Asia, Hong Kong, Taiwan, Singapore, and Korea—China was able to attract industries from Hong Kong and Taiwan, due to its low labor and land costs.
