China’s Rising Wages Propel U.S. Prices

Great video and article found here in WSJ about the economic effects of rising wages of China’s workers. China’s government, the report says, is trying to shift its economy towards higher value added manufacturing as it loses its status as the world’s “dirt cheap” producer of consumer goods.

Linked to this idea is Geoff’s interesting blog of this morning which looks at how economies can develop a comparative advantage and how difficult it is for governments to “kick start” new industries (The Art of Economic Complexity). However, this rise in the wage bill of Chinese manufacturers will mean higher prices of goods made in China and the macroeconomic implications of this development are many.

You’d expect to see a fall in China’s trade surplus as their exports become more expensive especially as the Yuan has strengthened against the dollar. Although looking at the graph below and article here, China’s surplus is actually on the rise. Also the Chinese government is keen for the living standards of its people to rise and so higher wages is a way to boost domestic consumption and reduce reliance on exports to expand the economy. With these higher wages, Chinese workers` demand for goods rises and this in turn pushes up demand for and the prices of the commodities used to produce them. So will we see further inflationary pressures in the west as even higher commodity prices coupled with higher prices for Chinese exports work their way through the system?

On the other hand, as the gap between western and Chinese workers closes, there may be less incentive for multinationals to export their production facilities and work to China and stay put, creating more jobs in manufacturing in those parts of the US and Europe where wages are generally lower.