A version of this article was first published in Tradegood Viewpoints, March 14, 2014.
Ask any Asia-based exporter today what their biggest headache is and they’ll tell you it’s the wave of rising wages surging across the region. And those increases are coming not just from the usual suspects — labor demands and shortages — but also from new government-mandated minimum wage levels.
The upshot is that average pay in Asia has roughly doubled in the last decade, compared with only a 5% increase in developed countries and around 23% worldwide, according to the Geneva-based International Labor Organization. The ILO reports that the wage gains were led by China, where average wages more than tripled during the period. But Southeast Asia is not far behind, with a series of new minimum wage requirements that are beginning to erode companies’ ability to make cheap toys, clothes, and furniture.
Asian governments say they are doing it in order to boost citizens’ purchasing power and curb popular discontent over widening wealth gaps, something they fear could lead to social instability.
In Jakarta, the capital of Indonesia and home to 10 million people, the governor last year approved a 44 percent increase in the minimum wage to US$226 per month. The national government is thinking about extending it throughout the country. In January, Thailand rolled out a new minimum wage of US$10 a day, which, for some workers, was a one-off hike of about 40 percent. The Malaysian government introduced a new base salary of about US$295 per month, expected to benefit about 3.2 million low-income workers. And in China, where provincial governments set minimum wages, Guangzhou city, with a population of 13 million, raised its minimum wage by 19.1% last year to about US$250 per month.
In all, since 2011, more than 20 Asia-Pacific countries have either raised minimum wages or introduced them for the first time, according to the UN’s Economic and Social Commission for Asia and the Pacific (ESCAP). Officials there say that, in turbulent economic times, governments need to increase the pay of the poorest workers to promote inclusive and sustainable growth and head off income disparities. They argue that Asia can no longer rely on exploiting its cheap human capital if it wants to boost domestic demand and lessen reliance on exports.
The overall effect on industry, however, is likely to vary from sector to sector. The ones that will suffer most in the short term are labor intensive, low cost employers in the agriculture, fisheries, and garment industries, economists say. Firms in these sectors will naturally gravitate toward lower cost destinations, such as Myanmar or Vietnam, or consider automation where possible.
That trend seems to have already started. According to the Footwear Distributors and Retailers of America, US shoemakers are increasingly moving production out of China to Vietnam and Indonesia. China’s share of US shoe imports fell to 84% in 2012, the lowest in 11 years, from 85.4% in 2011, while Vietnam’s grew to 8% from 7%. Hong Kong-based clothing and consumer-goods supplier Li & Fung, whose customers include major US retailers, sourced 24% more from factories in Vietnam in the first half of 2012, compared to a year earlier.
What all this means, says a Swiss banker who analyzes Southeast Asian economies, is that the low-cost manufacturing model that made southern China the world’s workshop for two decades is on its way out. The eventual demise of this tried-and-true system – one made up of millions of cheap Chinese workers, concentrated supply networks, and consolidated transportation – is likely to have wider implications for the global economy, including a paradigm shift where wages in Asia keep rising.
“This is not over yet,” said the vice president of a major furniture importer in the US who has had to impose a 5% price increase on customers. “The wage increases I hear about in Asia are astronomical, and our American customers just laugh because they can’t relate to it.”