The mingong famine

It seems that the industrial machine is running low on cheap migrant labor (mingong in Chinese) – a counter-intuitive notion to say the least.

Shortages of oil, copper, steel and energy are understandable, but people to work at factories and construction sites? How is that possible in a country with the world's largest population and an unemployment rate that is estimated to be as high as 23%? (Sure, the official unemployment rate is only about 4.5% but the government figures don't take into account rural unemployment or recently laid-off urban state workers).

Startling as it is, the evidence is clear. Despite its 100 to 200 million surplus rural laborers, China is facing a shortage of migrant labor in its coastal industrial regions such as Fujian, Zhejiang and Guangdong provinces, with Guangdong currently experiencing a shortfall of around two million workers.

The situation has forced some enterprises in the Pearl River Delta to offer staff RMB 100 (US$12) for every friend or relative they can convince to come from the countryside to work on the production line. That's a healthy incentive considering Guangdong province's legal minimum monthly wage of RMB 574 (US$69).

Recruiting bonuses

In Guangzhou, the local government is so concerned about the diminished supply of workers that it raised the city's minimum wage in August from RMB 510 (US$62) to RMB 684 (US$83) a month, an increase of 34%. Guangzhou's legal minimum is now higher than any other city's by nearly RMB 50 (US$6).

That is an abrupt change and indicates the seriousness of the problem. The Chinese government recently published a report showing that in the 12 years since 1992, migrant workers' monthly wages in the Pearl River Delta region have increased by just RMB 68 (US$8), far less than the increase in the cost of living.

Some economists have estimated the cost of migrant labor could rise by a further 20- 30% over the next year and there is concern that wage rises will push up export prices and stoke inflation, which rose 5.3% in July from a year earlier, the fastest pace in seven years.

But this labor shortage is not across the whole country and is not likely to be a permanent phenomenon. If anything, it is an indicator of a healthily functioning free labor market. One explanation for the current scarcity is that many rural residents are increasingly unwilling to sell their labor in the cities at the current prices – in other words, market forces are working to force an improvement in the Dickensian working conditions of China's manufacturing boomtowns.

The laborers who come from the hinterland to China's booming coastal industrial areas fulfill the same role that illegal Mexican laborers have in the United States. They aren't officially encouraged to move into the cities but their willingness to work low-skilled, dirty and dangerous jobs for little remuneration is the key factor underpinning China's impressive export-driven growth.

Government policy changes made this year to lower the agricultural tax, combined with a 16% increase in grain prices in the first half, have translated into a rise in rural incomes, which had been stagnant and even decreased in recent years. Even a modest rise in rural income is likely to convince peasant farmers that they are better off staying home instead of heading off to a job in the coastal cities where industrial injuries and occupational diseases are commonplace and workers often end up unpaid at the end of a job.

FDI shifts north

A more long-term explanation for the shortage is the shift of foreign direct investment (FDI) away from the overcrowded coast to the cheaper interior and western regions. Statistics published in September showed Guangdong registering a 10% decline in FDI for the first seven months of this year with the drop for Shenzhen alone at 18%, while the southwestern province of Yunnan saw a nearly 600% increase and China's western Shanxi province surged 200%.

These figures imply that industry is moving closer to the sources of labor, in order to continue to keep costs low. In all likelihood, the recent agricultural price increases are unlikely to be sustained, considering China's WTO accession rules, which throw the country's mostly small-scale agrarian farmers into global competition with heavily subsidized, industrial Western farms. While the continued elimination of agricultural taxes over the next five years or so should provide some respite for rural incomes, over the long term China's state planners intend for the urbanization trend to continue and increase dramatically. In order for its agriculture sector to compete in the global market China is encouraging a shift to large-scale industrialized farming and expects the percentage of the population living in urban areas to increase from the current 36% to 54% and higher by 2020, adding at least 350 million people to the cities.

This continuous rural to urban exodus is expected to provide a ready flow of cheap unskilled labor and will probably keep labor costs (workers' wages) low for years to come.

That is the theory anyway. But then it pays to remember that these statistics are actually people – eating, breathing unpredictable human beings who often act irrationally in purely economic and statistical terms.