August 22, 2010 1:55PM

China’s Rising Wages and Benefits

“Bashing Beijing Will Not Help Our Trade Deficit” was the admirable title of Robert Pozen’s Wall Street Journal article.   Unfortunately, he went on to suggest an alternative from of China bashing.  “American politicians should not push so hard for yuan appreciation . . . Instead they should support higher wages and a stronger safety net for Chinese workers.”

“If wages go up in China,” says Pozen, “then the prices of its exports will rise – absent a proportional increase in labor productivity. . . .And if wages rise in China, its workers would have more money to spend.”

A Bureau of Labor Statistics study, in the April 2009 Monthly Labor Review, found that “compensation costs in China’s manufacturing sector . . . increased more than 40 percent” from 2002 to 2006 − more than 10 % a year. The figure includes “employer payments for social benefits such as workers’ compensation, unemployment insurance, medical insurance, and old-age pension funds.”
Pozen urges American politicians to tell the Chinese government to somehow cause compensation costs to rise even faster than the gains in productivity.  That is, he advocates a government-mandated increase in unit labor costs, which would be quite impossible.  It would also be hypocritical advice, since unit labor costs in U.S. manufacturing fell steadily from 1992 to 2007 -- by 16.4%.
By contrast, U.S. unit labor costs in manufacturing rose 4.6% in 2008 and 3.2% in 2009 (with a 5.6% rise in real hourly pay), which explains why so many manufacturing workers were fired.  For China, like the U.S., rising unit labor costs with stable or falling prices would squeeze profit margins to zero or less and result in mass layoffs.

Pozen rightly notes that assembly of goods in China “constitutes no more than 10%” of the value-added in many exports labeled “made in China.”  Prices of such multinational products cannot be arbitrarily increased to please American politicians, because higher prices would encourage more multinationals to do what many are already doing – namely, to move labor-intensive work on low-end products from China to cheaper places like Vietnam or Bangladesh.

Pozen also proposes that, “American politicians . . . should support higher wages and a stronger safety net for Chinese workers.”   If only China had Social Security, Medicare and Medicaid, he argues, then Chinese people could become as profligate as Americans, lulled by the increasingly naïve belief that government will take care of them.  

Lacking the equivalent of Social Security or Medicare/Medicaid, China has no payroll taxes at all, no capital gains tax, and only a 15-25% tax on corporate profits. It is not such a bad thing that China does not share America’s looming “safety net” crises in entitlements and public pensions.  By ignoring Mr. Pozen’s advice to emulate this country’s runaway spending on transfer payments, the Chinese government has not felt itself obliged to emulate this country’s impulse to tax the stuffing out of corporate profits, capital gains, and employer payrolls.  

Imagine what your 401k would be worth with no tax on capital gains.  Imagine what U.S. employment would look like with no payroll tax and a 15-25 %tax on corporate profits.

American politicians are giving them advice?