Working Conditions in China: Supply and Demand

by on December 27, 2012 at 9:01 am in Current Affairs, Economics, Law | Permalink

The NYTimes has a lengthy and self-congratulatory article on improved working conditions in Chinese factories which it suggests are due to negative publicity from earlier NYTimes articles. Indeed, as soon as the NYTimes starts to investigate, we are presented with this boardroom set piece:

“The world is watching!” [Foxconn Chairman] Mr. Gou yelled, according to multiple people. “We are going to fix this, right here!”

The Times articles, part of a larger series, are well written and informative and no doubt they have prodded some changes at certain companies. China, however, is a very big place and the real story of better working conditions is a story of supply and demand.

Wages in Chinese factories have been low because wages in China’s agricultural interior were even lower and the great migration from the country to the city, one of the largest migrations in human history, meant that there was a ready supply of workers desperate for work and the more work the better. Even today many workers want longer hours:

In March, when Foxconn announced that workers’ hours would be reduced to China’s legal limits, employees began complaining. “Absolutely I’d like to do overtime to work more than 60 hours, but now there’s a ceiling on it,” said Ma Changqiao, a 23-year-old at Foxconn’s Chongqing factory.

As the great migration leveled off, however, wages began to rise. At first, workers wanted all of the increase in wages in money but as the more basic needs of workers and their families have been met the demand for better working conditions and more leisure has increased and this has made it profitable for firms to supply better working conditions.

Thus, the real story of better working conditions is not a spate of negative publicity, a mere blip in the face of much larger forces, but rising wages with a touch of Maslow’s hierarchy.

To its credit, the NYTimes article provides evidence for the larger story although you have to dig past the self-congratulatory material. The article notes, for example, that working conditions are also improving rapidly in little known companies not subject to NYTimes oversight:

The factory, in Chongqing, makes computers for Hewlett-Packard, a company with little of Apple’s glamour. It is operated by Quanta, a little-known Taiwanese manufacturer.

Inside the plant, amid thousands of workers in bright white uniforms, are occasional flashes of pink worn by people like Zhang Xuemei, a bubbly 19-year-old with glinting earrings whose sole job is to chat with co-workers.

For eight hours a day, Ms. Zhang collects complaints about the factory’s free meals and dorms. She listens to workers who are divorcing, homesick or arguing with managers. When she finds someone suffering, she refers them to the company’s full-time doctor or professional counselors.

Quanta’s 10-story dormitories feel like a college campus. There is a free movie theater, television rooms, a large martial arts gym, two spacious karaoke bars, a huge cafeteria and an aerobics hall playing a Chinese remix of “Gangnam Style.”

and here is the key

And the amenities are partly selfish: one of the biggest problems for Chinese factories is that workers are constantly leaving. Hewlett-Packard hopes that by improving living conditions, turnover and training costs will fall.

Addendum: Tim Worstall points out that “Manufacturing wages have been improving at 14% a year (yes, after inflation) since 2000. That’s a decade before anyone started to agitate about the working conditions at these factories. Or at least it’s a decade before anyone took any notice of such agitation.”

wiki December 27, 2012 at 9:17 am

Please note that the hukou internal passport system is still in effect although not absolutely enforced. This means that China is not allowing increased migration to offset the more inelastic supply of workers. Since a small change in the rules would drop city wages lower it means that China prefers to restrict internal migration to prop up rents to the residents of the developing/developed areas of the country. This is probably a smart policy from the standpoint of creating an internal political dynamic in which winners continue to support liberal economic reforms.

sean December 27, 2012 at 11:08 am

you wouldn’t happen to know any good articles or books on the hukou system would you?

david December 27, 2012 at 2:49 pm

Then again, it also means that it is inevitable for a large urban and rural population to realize that their interests are diverging. And then you get a Latin American/Thai/etc. split where the urban middle class vigorously opposes democratization and the rural class vigorously support populists who argue, successfully, that there is some inherited class barrier keeping them out.

Mark Thorson December 27, 2012 at 9:58 am

Employee turnover isn’t just a problem for low-wage workers. Two years ago, I was working for the U.S. office of a Chinese semiconductor company, and there was high turnover among the engineers and marketing executives based in China. We were afraid to share some of our competitive information with China, because we knew that it would leak out as their people migrated to other companies. I wonder to what extent this occurs at all levels in the Chinese workforce. If it’s ubiquitous, that would be a crippling factor against Chinese industry. How can you develop new products if the engineers are constantly leaving and walking out the door with your new product plans, manufacturing technology, etc.?

Anthony December 27, 2012 at 3:03 pm

To what extent does this occur among the American workforce?

Mark Thorson December 27, 2012 at 3:46 pm

All of the other companies I’ve worked for have been U.S. companies, and their turnover was not nearly as high. Perhaps this one Chinese company was exceptional among Chinese companies in having high turnover in engineering and marketing positions. I don’t have any experience with other Chinese companies.

Greg December 27, 2012 at 4:09 pm

You could make much the same argument about turnover in the San Francisco Bay Area. Transfer of competitive information is obviously a problem at a micro scale, but it’s probably a benefit on a regional scale because it increases the overall knowledge in the economy.

Mark Thorson December 28, 2012 at 11:59 am

All of the jobs I’ve had have been in the SFBA, and none had the problems of turnover that the home office of this Chinese company had. However, at most of these companies turnover was high and a problem.

If I started a company, I’d only do it around here for proximity to venture capital and the ability to quickly staff up a large workforce of skilled people. If I didn’t need to staff up quickly, I’d go elsewhere and staff up more slowly. I’d look for someplace where people were more tied to the land, so they’d be less likely to leave after I trained them.

My first job was at National Semiconductor working on a project in which the chip was being designed in Israel. The long distance caused a lot of trouble, and I asked why National had a semiconductor design lab in Israel. I was told that there are a lot of very competent chip designers who won’t live anywhere else, so their services are available cheaply. That impressed me.

I think I would choose such a place, where talented people live and the people are very committed to living there. Israel is one such place. For similar reasons, so is Salt Lake City.

Bill December 27, 2012 at 10:14 am

Yeah, those “self-congratulatory” investigative journalists.

I mean, that article is sooh self-congratulory. I mean, Alex keen sense of causation let him conclude about the Times “no doubt they have prodded some changes at certain companies.

I felt the same way about reading Jacob Riis book–so self-congratulatory–or the Rachel Carson–man, was she ever self-congratultory.

Let this be a lesson: Don’t investigate if you don’t want to be called self-congratulatory.

Hear that Woodward and Bernstein.

Brian Donohue December 27, 2012 at 10:41 am

Of course you can’t see it, but the idea that liberals front-run inevitable social change and then congratulate themselves when it happens is so banal as to barely merit comment.

Predrag December 27, 2012 at 12:35 pm

The idea that social change is inevitable is actually quite convenient for the conservatives who refuse to accept the concept of collective social responsibility.

As I said below, the timeline here is crystal clear. The TImes has every right to be self-congratulatory.

Brian Donohue December 27, 2012 at 12:40 pm

Oh ah. Apparently, the NYT is SO influential, employers scrambled to provide 14% annual pay increase back to 2000. Talk about clout!

As we speak, these geniuses are laying the groundwork for another succesful rising of Sol tomorrow, and I have every confidence they’e gonna pull it off.

Predrag December 27, 2012 at 2:08 pm

The pay raise was 14% annually, until the Times’s first article. After that, Foxconn gave them all 40% raise, followed by another 50% raise.

The point here being, the 14% annual raise was clearly the result of social advances. The flurry of actions that took place this past year (significantly greater than the mere 14% raise per year) all happened after the first article was published.

No matter how you try to argue for the other side, the causality is quite obvious. Time has full right to be self-congratulatory (which actually they aren’t that much in the article).

Brian Donohue December 27, 2012 at 2:32 pm

So you’re saying the NYT produced basically a doubling in Foxconn wages over the past two years? Cuz that’s what it sounds like you’re saying. Is this anywhere near the truth?

I didn’t see the 40% in the article, but I did see this:

“Foxconn, which is based in Taiwan, also promised to increase wages, so employees’ total pay would not decline despite fewer hours — the equivalent of a 50 percent raise for many workers, analysts say.”

Hours are being cut, less OT is being spent. Oh, and here’s a thank you note from Foxconn workers to the NYT:

http://online.wsj.com/article/SB10001424127887324296604578175040576532024.html

Given that trend wages were set to rise by 40% (including inflation) over this two year period, and given that labor conditions in China may be tightening, there may not be a whole lot left over for the NYT to crow about here.

Adam December 27, 2012 at 10:18 am

I think this post is far too quick to dismiss the interplay between public pressure and market forces. Perhaps (probably) in the longer term market forces alone would yield most or all of the welfare gains that the combination of publicity and rising wages are bringing about, but it seems entirely plausible that, for example, the combination raises the bargaining power of both workers and of reformist blocks within the companies (or governments) themselves. This applies generally; the Civil Rights era in the U.S. is an obvious example.

In fact, this seems like a good case study in Tyler’s “blindness” series. Liberals are often blind to the extent to which social welfare gains are dependent on a strong economy, which in turn might mean tolerating worker displacement, short-term inequality, etc. Libertarians/conservatives tend toward a market determinism when it comes to social progress, not so much because the determinism is obviously empirically true, but because its hard for libertarianism/conservativism to incorporate theories of justice that depend upon collective action.

mw December 27, 2012 at 10:42 am

Bingo.

ac December 27, 2012 at 12:32 pm

No no, Alex is right, I much prefer HIS self-congratulatory article on how a liberal economic market can improve working conditions.

Brian Donohue December 27, 2012 at 12:35 pm

Indeed. Especially brazen is Alex’s claim to have invented the invisible hand. Some people.

collin December 27, 2012 at 12:09 pm

I wonder how much China is actually entering their “Roaring Twenties” as the Chinese aught’s more closely aligned to the US during the 1910 -1920’s which had incredible growth spurred by export markets. Both the US and China had incredibly high growth during that period and only when working class wages increased enough to have consumer goods did the economy grow incredibly ‘boom.’

Also I wonder if the Chinese economy starts having increased union activity as that is one way to decrease worker mobility without simply giving big wage increases.

Predrag December 27, 2012 at 12:31 pm

There is a very clear timeline of cause and effect in place here. NYT has every right to be self-congratulatory on this. The whole “natural pace of social change” idea certainly has some value, and likely may have played a part in this, but has most certainly NOT been the critical catalyst for the changes that had transpired in mere ten months.

Apple has always been careful about its suppliers and has been known to require standards that were higher than others. Still, over the past year, Apple made significant changes in its dealings with the suppliers, tripling their own social responsibility team and significantly improving oversight. Now, Apple has been dealing with Chinese suppliers for over ten years. Why would all the significant and sudden changes to their dealings with them happen only over the past ten months? What could have possibly percipitated this sudden, unexpected and major shift??? It couldn’t possibly be a series of articles in a major daily publication, could it…?

Mark Thorson December 27, 2012 at 12:52 pm

Maybe it was the performance art of Mike Daisey?

8 December 27, 2012 at 2:16 pm

This worked because there’s a large overlap between Apple bots and NYTimes bots.

Anon. December 27, 2012 at 2:12 pm

The whole point is that Apple is only a tiny part of China’s gigantic economy. The economy has been, for many years, improving at a rapid pace, and with it have the conditions of workers. To credit a NYT piece with improving conditions elsewhere, and/or improvements before the NYT piece, and/or improvements that would’ve happened even without the NYT piece, is disingenuous at best.

Jeffrey Graf December 27, 2012 at 1:06 pm

“working conditions are also improving rapidly in little known companies not subject to NYTimes oversight”

That line made me laugh out loud. I wish Alex would blog more.

8 December 27, 2012 at 2:10 pm

Look at a demographic table, the entry-level female population peaked around 2010/2011. The wage scale operates at the margin and the number of young factory workers began to decline. The decline in labor supply is now working its way through the economy.

rz0 December 27, 2012 at 9:20 pm

In the interest of accuracy, the article Alex links to does not mention the Times’ series on Foxconn. It is not self-congratulatory in the least. The only media outlet it mentions is “Saturday Night Live.”

Better hacks, please.

Brian Donohue December 28, 2012 at 9:13 am

Uh…it’s a five-page article. From page 2:

“In 2011, The New York Times began sending Apple and Foxconn extensive questions about working conditions in factories manufacturing Apple products. The resulting articles in late January detailed problems ranging from excessive overtime and under-age workers to sometimes deadly hazards, such as workers’ using a poisonous chemical to clean iPhone screens at another manufacturer, and an explosion in Ms. Pu’s Foxconn plant that killed four workers.”

rz0 December 28, 2012 at 4:14 pm

Sorry – didn’t show up as multipage on my phone.
The paragraph you cite is the only mention of the Times series in the entire 3,300-word article.

Dan Ikenson December 28, 2012 at 9:19 am

The dynamics Alex describes are no doubt true. Labor supply and demand are determinative of wages in a competitive market. But the notion that “the world is watching” is also very important for labor conditions. Capitalism, the profit motive, and self interest ensure that brands like Apple are attentive to perceptions about their products and how they’re made. Shoddy conditions are bad for business. As somone once wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

Kachi December 30, 2012 at 12:23 am

I have been in the sourcing industry for the past 16 years and have worked for the leading retailers in the world. Workers rights and social compliance is nothing new and are pretty consistent around the world. They cover safe working conditions, wages, overtime to name a few.

This article is very accurate in describing the challenges industries face. I see it everyday when i go and visit new and existing factories across all of Asia. The same factories that produce products for retailers you visit regularly. The bottom line is factories and companies which buy from them, exist to make a profit.

I have worked for companies that do take social compliance seriously, which have regular unannouced audits, sizeable penalties for non compliance that are donated to charities or re-invested into the same factories to improve livelihood of workers, which can be achieved by not pulling out business but using it as leverage to make changes. I learnt to be very proud to work for such companies.

It is therefore very surprising to read articles which suggest the biggest companies in the world (let me put it simply), either dont know about social responsibility or who dont really care about it. I wonder if these same companies spend time with factories on product development, product safety, trial production run…etc. I guess you know the answer to that question…If only they spent the same amount of time ensuring that the people who make the products feel proud that they are producing for them. Now that would be something of an achievement.

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