China Vows to Increase Wages and Improve Employment

February 10, 2012 Posted by China Briefing Reading Time: 4 minutes

Op/Ed Commentary: Vivian Ni

Feb. 10 – In its latest 12th Five-Year Plan on Employment Improvement (“Plan”), China says it will continue working on increasing wage levels and controlling unemployment rates. Under these new targets, enterprises operating in China may face the challenge of increasing operational costs.

Minimum wage and social welfare
According to the new Plan, the average annual growth rate of China’s minimum wage levels will be over 13 percent between 2011 and 2015. The minimum wage standards in most areas will not be lower than 40 percent of the local average wage level.

For a long time now, China has garnered a global reputation as a country boasting cheap, plentiful labor and low overheads. In recent years, however, this perception is beginning to lose its veracity as employment costs continue to rise at a rapid pace year-in and year-out. Between 2005 and 2010, the minimum wage standards in the country increased by an average of 12.5 percent every year and now currently range from RMB1,500 in the southern trade base of Shenzhen to RMB870 in the southwestern municipality of Chongqing.

In addition to pledging higher wages, the Plan also stresses the complete coverage of social insurance. China enacted the new “Social Insurance Law” in July last year, which for the first time included foreign employees into its national social welfare program. Local governments are now taking measures to gradually enforce employers to make mandatory social insurance payments for their foreign employees.

Furthermore, the protection of labor rights is set to be strengthened, which will likely force employers to offer greater benefits to their workers. Labor contract signing rates will reach 90 percent between 2011 and 2015, compared to the rate of 65 percent between 2005 and 2010. Also, regulations on working hours, annual leave and sick leave, national holidays, and protection of female employees will be further toughened. For instance, China is considering a plan to extend the existing 90-day maternity leave to 14 weeks, and offer female workers better work conditions.

Improvement in the job market
In general, the Plan admits that there is a labor supply surplus in the job market, but makes no mention of the waves of labor shortages many manufacturing companies in coastal areas have suffered in recent years.

The government aims to control the unemployment rate to under 5 percent between 2011 and 2015. The jobless rate between 2005 and 2010 was 4.1 percent.

However, the reliability of the official jobless statistics is somewhat controversial. In March 2010, when attending the State Council-hosted China Development Forum, Chinese Premier Wen Jiabao said the unemployed population in China had achieved 200 million. The figure cited by Wen represented over 10 percent of the total Chinese population.

Opinion: A glance at companies’ increasing burdens
Companies in China are under the pressure of both increasing labor costs and growing tax burdens.

The minimum wage level is often used as an example of China’s shrinking cost advantage. However, for a rapidly-developing country like China, increases in labor compensation are almost inevitable.

While the Plan says there is a significant surplus of labor force in both urban and rural areas, many manufacturing plants – especially those in China’s eastern and southern coastal areas – have been complaining about labor shortages for years. What this means is that many migrant workers prefer to settle somewhere else rather than receive a salary in metropolitan areas that would not be enough to survive on.

If companies don’t have enough workers working for them to satisfy their orders, profits will shrink anyway. There have also been examples of labor unrest in South China where workers went on strikes due to low salaries, bringing considerable losses to their employers. Therefore, although China’s minimum wage policy does seem to be imposing higher burdens on businesses, an offer of financial incentives to employees is often a price companies cannot avoid paying.

What should Chinese policymakers do to not scare away investors with high operational costs while at the same time maintaining social stability? Lou Zhongping, president of Zhejiang-based straw manufacturing company Soton, believes it is time for the government to reduce tax burdens on private companies.

Lou, the founder of a typical Chinese labor-intensive manufacturing company, said he has contributed one-third of the company’s profits to a 12 percent employee salary increase this year, which he believes is critical for the company’s development.

The tax burdens imposed by the government – on the other hand – have grown much faster than both employee salaries and the profits of small and medium-sized enterprises, Lou said in his micro-blog.

China’s total tax burden ranked second on the 2009 Tax Misery Report by Forbes. The high tax contributions made by companies have significantly eaten away at profits, but has not necessarily brought back the quality public services they need. It is essential now that China considers a change in its taxation policy that would allow businesses to get into a more robust development mode that would finally benefit both the economy and the job market.

Related Reading

Human Resources in China (Second Edition)
Specifically designed to cover the most important issues relating to managing a Chinese workforce, this guide details the HR issues that both local managers in China and investors looking to establish a presence on the mainland should be aware about.

China’s Social Insurance Law
A summary of some of the key points in the newly implemented Social Insurance Law, which covers a great deal more than just incorporating foreigners into the system. We explain the costs and benefits of participation by foreign employees to both companies and individuals as well as take a look at some of the trends across the country relating to the implementation of the law.