China and the high cost of hiring labor

Andrew Batson reports:

…[recent developments] may well mark the beginning of an important longer-term shift in China’s labor market and policies: the State Council lowered employers’ required contributions to two social insurance programs, injury and maternity insurance, a move it said would save firms 27 billion renminbi a year (see the China Labour Bulletin for an English-language summary). Yes, I know this sounds boring and technical, so why is it important? Because it starts to address one of the biggest but least-known issues in China’s job market: the very high costs employers face to hire workers.

It is not a very well-known fact that China has some of the toughest labor regulations in the world, and some of the highest required contribution rates to social insurance programs. As a result, the “labor wedge”–the percentage of the total cost of an employee that comes from things other than wages–in China is around 45%, as high as in a number of European countries (this is according to an estimate by John Giles in a World Bank paper;…

This fact does not square with the widespread perception of China as a nation of sweatshops employing hordes of migrant workers, and indeed is a relatively recent development stemming from the 2008 Labor Contract Law. But China’s problem with these generous worker protections is ultimately the same one that many other developing countries have encountered: strong legal protections and generous insurance programs are so expensive that in practice they only become available to part of the workforce. Effectively China has two labor markets: one for urban white-collar jobs with all the legal protections, and one for blue-collar jobs held by rural migrant workers that generally lack the full set of benefits.

That is yet another neglected China story…

Comments

Sounds impressive that in spite of such high contributions they hold a dominant position in labor intensive assembly work like Foxconn.

read the last sentence.

Hard to imagine Foxconn as a stealthy gray market employer in the unorganized sector managing to evade required payments.

I was to say that. Either the contributions are mandatory or not, Foxconn is not an informal enterprise hiding from tax collection officers.

Well yeah, but Foxconn hires rural migrant workers for blue-collar jobs held that generally lack the full set of benefits. They aren't evading anything, it's within the law. That's the point.

@AC

In which case the article is a misrepresentation. If you have a hole big enough for Foxconn-like companies to legally not pay up then the fact that *some* white collar labor becomes expensive hardly matters.

A hidden wage of 45% imposed on $25 a week is still not very high...and like with many countries without a strong rule of law, just because something is on the books doesn't mean it is enforced - and those who try to have it enforced often end up fired, beaten, dead, etc.

Cite on median wage in China being $25 / week. Its my understanding the minimum wage per month is $1,600 RMB.

That's about $65 / week. For the minimum.

Foxconn is going to assemble Xiaomi phones in Brazil, and is making a $1 billion dollar investment in a plant in Indonesia. Foxconn also has a small assembly plant (10,000 workers) in Vietnam.

Hedging their bets.

I just looked up the renminbi and apparently it takes 6.2 of them to equal $1USD.

I don't think many Chinese workers would consider themselves overpaid. They may make more than average workers in nearby Asian nations but think how much health-damaging and life-shortening pollution they put up with. Think how they've been fleeced by their elite -- most of whom are dying to get out of China and leave the mess they created far behind as they go aboard and live off their stolen and stashed billions.

Since China took away the traditional "multiple children" retirement and benefit plan, it had a responsibility to replace that with social insurance. To me, the scandal is how poorly that was done; the differences between the covered and uncovered workers; and that there is still is such as thing as being an internal migrant in China.

That reduction of a few billion $USD in employer payroll taxes doesn't seem like much to me in real terms. Is it to appease foreign companies and employers who have seen their Chinese labor bills go up a lot in the last 10 years? As technology starts to eliminate millions of jobs in China, how will the workers respond and how will social unrest be kept down? Think of tens of millions who never left the farms and the tens of millions who did and don't want to return.

By cutting the social insurance, they will boost the economy US free lunch economic style by shifting that cost to workers who consume less and invest more in the stock market pumping up share prices driving those firms to export jobs to Vietnam or any other very low wage nation, and force Chinese workers to become billionaire by running those outsourced operations as independents and then going independent and listing on the stock market with highly inflated share prices.

The absolute last thing that can be allowed in China is for the Chinese economy serve any market except the export market. Yes, goods will be sold in China, food, uniforms, cell phones, but those are all business expenses to getting Chinese rich enough so they can buy green cards in the US.

Once they can live in the US, they can buy Chinese goods, but not in China.

@jerseycityjoan:

"I don’t think many Chinese workers would consider themselves overpaid."

Can you find workers *anywhere* who would consider themselves overpaid?

Rahul --

No, not many people think they are overpaid. Certainly very few are willing to give up what they make even if they know that they are being paid above the true or market value of what their work is worth. Given how wages have stagnated for decades while prices in the US have gone up far above the rate of general inflation for our biggest ticket items (eg housing, healthcare, education), most Americans feel pretty squeezed.

That's why I rebel against the idea of Chinese workers being considered very expensive for their employers. American workers are being jerked around, the Chinese workers are too, as are workers in most countries, rich or poor. Various political and business pressure groups and experts in countries all over the world will claim labor costs far too mcuh yet we see the elites have no problems paying themselves a lot more money or receiving much higher rates of return from investments than they used to.

What is the true value of one's work?

The most important modern variable in considering "the true value of one's work" in most companies is how much the person who determines raises personally likes you.

This is chiefly some function of how much they like your sense of humor, whether you share the same political and religious beliefs, whether or not you do the whole deification of the boss thing, if you and they are overweight, and whether or not they desire...special relations with you.

Batson is right about the two tier labor market. The hukou sees to that, along with various schemes to deny workers (farmers) payments when due. The workmen's comp insurance is supposed to be available to peasants working in cities, but as a practical matter it often is not. And for most workers in China, with an urban or rural hukou, health insurance is only available in the place of your hukou. If you are from Hubei, working in Hangzhou, your health insurance is no good in Hangzhou.

But Tyler is incorrect, if by neglected story he means that these developments have not been addressed. There is a lot of coverage on these topics, including some academic work, if you dig a little.

What's not highlighted in Cowen's selection of quotes is this one from the IMF: "Social contribution rates, which are high and very regressive, should also be reduced as they distort the labor market, make growth less inclusive, and favor informal over formal employment." So it's the "high and very regressive" taxes that China has chosen to cut during this economic downturn, unlike the usual practice in the U.S. promoted by the right, which is to cut taxes that are progressive rather than those that are regressive. I've commented before that China is an economic laboratory for economists willing to learn, with its fiscal stimulus on an historic scale and now tax cuts at the lower end of the income scale to be contrasted with the path chosen in the West, especially in the U.S., which is monetary stimulus alone together with cuts in progressive taxes for job creators promoted by the right.

The U.S. has a legendarily progressive income tax and no national sales tax.

Care to back that up?

I agree that the US income tax system is progressive. State, local, and payroll taxes are much less progressive though. I have not seen data suggesting they are "legendarily" progressive.

I find it quite interesting that the tax rates in virtually all developed countries are extremely similar.

http://www.pbs.org/newshour/updates/calculator-compare-taxes-might-pay-u-s-developed-nations/

There is constant whining about taxes being too low/high, but there actually seems like a pretty consistent global policy of 50% marginal tax for top earners, with zero or negative rates for those not earning money and a smooth monotonic function in between.

You're forgetting about regressive payroll taxes, including the share paid by the employer. In effect it is not nearly as progressive as it seems - the rich pay a higher rate but stop paying social security, and get many, many more deductions because the rich invest, own homes, and self-educate at far, far higher rates than the poor.

Its probably somewhat less progressive than most of the northern European states, where marginal rates of taxation are higher but where the poor generally pay a disproportionate share of the sales tax.

But its not a terribly important question.

What are you talking about? Obama got his Robin Hood policies with his stimulus package and temporary cuts in the payroll tax as well as permanent higher marginal income tax rates and the medicare tax surcharge.

I'm shocked, shocked to find that all of the animals are equal, but some of the animals are more equal happens in an ostensibly communist nation!

What, you mean to tell me that Chinese people buying multi-million dollar houses in Sydney and Vancouver aren't workers and peasants? I think its just that the superior efficiency of a planned economy has made every Chinese person wealthier than the oppressed proletariat in the imperialist countries.

High cost of hiring in China? Isn't it that we are transferring our labor and manufacturing sites there because of their cheap labor? They've got the toughest labor regulations in the world? What with all those overworked factory workers. Really, I'm confused.

Lawmaking versus enforcement?

THIS. Often these laws are in place so the local officials can shake down the factory owners.

I was under the impression that most of the growth in manufacturing in China was taking place primarily by Chinese firms? As in, the American company contracts with the Chinese company to manufacture X number of cell phones or what have you, then they work out where the sale takes place, and basically there's one exchange of goods for money? Rather than, say, a US company buying land, building a factory, hiring and managing workers, etc? This would insulate general foreign perception.

Also, when real growth is 20% per person per annum, its pretty easy to keep people happy - even the bads get 5%, and generally I would suspect you'd give the good workers close to their share of the growth.

I would suspect that, mysteriously, there are a lot fewer disputes, a lot less harassment claims, a lot fewer complaints to state agencies, a lot less complaints about working 8 minutes late, a lot less office drama queen breaking down crying even day, etc when raises are averaging 18% than when wage growth is averaging 2%.

You are correct. When idiots bemoan American manufacturers sending jobs overseas they don't realize that if they didn't some Chinese exporter would find a US importer and the same thing would happen.

The other thing to know about the Chinese labor market is that, until recently, the retirement age was 55 and employment contracts are the norm (as opposed to at-will employment).

What's the social norm for duration of these contracts?

I took one labor econ class years ago, so maybe the econometrics have changed, but both the theory and empirical evidence at the time was that employers offered various ratios of take-home pay and insurance depending on the preferences of their work force, but the overall cost to the employer was roughly the same. So a reduction in social contributions results in an equal increase in take-home.

As business conditions get worse, employers facing sticky wages will tend to fire workers. Lowering social contributions allows employers to lower total pay without lowering take-home pay, which is the stickiest part of total pay. Employers can lower their total cost of labor without firing. If hiring costs are high or jobs require firm-specific knowledge, employers may want to avoid future hiring and training costs by keeping their current workers. Otherwise they may fire the same count of workers they would have fired without the lower social contributions. Under bad economic conditions, the remaining workers will probably by happy to keep their jobs with the same take-home pay, so employers will pocket the reduction in social contributions.

Basically, employers will try to cut costs wherever they can, which means they will fire the employees they think they don't need, regardless of changes in social contributions. I think the biggest thing restraining firing would be the employers estimates of future hiring and training costs.

According to the China Labor Bulletin, only one third of workers have a pension. If we take that as a proxy for all social contributions, then only a third of Chinese workers have employers who pay into legally mandated insurance schemes. The CLB says that China's aging workforce is starting to demand that employers pay into the legally mandated insurance. Employers who are forced to start making contributions are going to see a huge jump in labor costs. In a worsening business environment, it's hard to see how that doesn't result in lots of lay-offs.

According to Batson, China wants employers to use the reduction in social contributions to hire more workers, but employers in a worsening business environment aren't going to hire workers they don't need. The CLB says that the contribution reduction is an attempt to encourage more employers to pay into social insurance, but the reduction in mandated payments is small and swamped by the increase in costs that comes from switching from no payments to full payments.

All in all, this can only affect the one third of workers who are most fortunate, who have jobs in the formal sector with employers who make all mandated social contributions. Its not likely to cause an increase in workers who are covered, it's not likely to increase overall employment, and employers' decisions on whether to lay off workers are most likely to be determined by other costs.

Of course, this is the opinion of someone who took one labor econ class years ago.

Isn't this essentially the Hukou / Iron Rice Bowl issues by another name?

Effectively California has two labor markets: one for urban white-collar jobs with all the legal protections, and one for blue-collar jobs held by rural migrant workers that generally lack the full set of benefits.

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