This Week’s Phantom Inflation Threat: Higher Wages for Chinese Factory Workers

Wages have been increasing lately in China, which it seems to me is what you would expect from a very poor country posting very rapid GDP growth. And as part of the press’ seemingly limitless appetite for stories about hypothetical inflation scenarios, David Barboza posited on June 7 that “economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones.” If you read the article carefully, I think you’ll see that he actually has some trouble finding economists who’ll endorse this thesis. And I think Tom Mitchell’s Financial Times article contains a good explanation of what’s wrong with it:

For now economists say that while China is one stage in the production chain for many of the world’s consumer goods, the limited amount of value actually added by the country’s factories suggest that any rise in costs could have limited impact on consumers. Although China has been increasing the sophistication of its production, much of its output still relies on low value added assembly.

“For the vast majority of Chinese exports, particularly consumer electronics, there will be almost no effect on the consumer at the end of the supply chain,” says Nicholas Lardy of the Peterson Institute for International Economics. He adds that labour generally represents only around 5 per cent of the retail price of consumer electronics in the US and so even a 30 per cent rise in wages in China would have a negligible impact.

The incidence of any losses due to higher wages should mostly fall on firm profits, in other words. As Mitchell explains, if there’s an issue here for the west it relates to “potential interruption of supply chains from any prolonged labour unrest in China” rather than anything pertaining to wages as such. Broadly speaking, though, growth in China has been one of the few spots of good economic news lately and higher wages would be a natural consequence of that growth — a consequence that will likely prove beneficial to the rest of the world as it becomes possible to sell more stuff to Chinese people.