New Labor Contract Law Raises China’s Labor Costs
As millions of migrant workers are about to return to factories across costal provinces in Southeast China after the lunar new year, a report from China’s most high profile domestic investment bank, the China International Capital Corporation Ltd. (CICC) concludes that many small and medium-sized labor-intensive enterprises believe the new Labor Contract Law will increase labor costs and affect their recruitment plans.
CICC’s investigation in Jiangsu and Zhejiang provinces reveals that in most areas there is little room left for further rural labor transfer. Due to a relatively insufficient labor supply, wages for migrant workers in recent years have been growing at an annual average rate of 10-15%. Meanwhile, the productivity of private enterprises has been increasing at the same speed, if not faster.
The Yangtze Delta, in which Jiangsu and Zhejiang are located, is one of China’s most important export-oriented economic zones. Most of the private enterprises in these two provinces are in labor-intensive industries, areas that have a great need of migrant and technical workers. The report indicates that the diminishing supply of workers has added to the difficulty in recruiting new workers. To retain workers, private enterprises have had to increase wages, resulting in wages maintaining an annual growth rate of 10-15%. However, most of the companies looked at as part of the investigation claimed they could afford such growth because the productivity of the businesses had also increased. They also predict that wages in 2008 will continue to grow by at least 10%. However, the New Labor Contract Law will have little impact on large enterprises and high-tech enterprises.
The kind of small and medium-sized labor-intensive enterprises surveyed in Jiangsu and Zhejiang province did not pay social security premiums for all their employees. The new law, which forces them to pay the premium, will raise labor costs in these companies. Regulations about overtime wages in the new law will also add to these costs. Most companies investigated believe the new Labor Contract Law will significantly increase potential risks for labor-capital disputes and could therefore influence the company’s recruitment plans.
Many companies are unsatisfied with the new law. They claim that unequal rights and duties in the new law could be easily abused by employees and will add to the implicit costs of companies. The new law aims to provide migrant workers with endowment insurance, but this isn’t suitable for China’s current situation and can’t be enacted anyway because of the high mobility of the rural labor force and the current social security system which has yet be unified nationwide. Meanwhile, most migrant workers are unwilling to pay the social security premium, as they would prefer to receive more cash in their pay packet. So neither companies nor workers welcome the new law. Some entrepreneurs even believe the government is attempting to shift its social responsibility onto private businesses.
Another concern about the new law lies in the inflation problem that is likely to worsen due to raised labor costs. The investigation shows that incremental labor costs may not be completely shifted to the product price. Because of the low technical content and low threshold, there is fierce competition in labor-intensive industries. Despite the constant increase in raw materials and labor costs, most small and medium-sized private enterprises have not shifted incremental costs onto consumers. Instead, they have offset these costs by improving productivity. In fact, the majority of these companies are operating within meager profit margins.
A clothing company based in Wenzhou, a city in Zhejiang province famous for highly developed private sector economy, estimates the new Labor Contract Law may add an extra 15% in labor costs to companies. But because of the acute competition they are unable to offset these costs by lifting prices, but may rather have to reduce prices in order to promote sales.
The report concluded that while the new law may not cause apparent inflation pressures in the short-term, it would possibly affect companies’ income and employment prospects. Large enterprises and state-owned enterprises will basically remain unaffected as they have long been paying social security for all their employees; High-tech companies, benefiting from a high added-value, small number of employees and regular social security payments, are also unlikely to be influenced. But for those small and medium-sized enterprises with low added value, the new law will undoubtedly raise labor costs. And fierce competition among them makes it difficult to shift cost pressures by lifting product prices. Seen from a mid and long-term perspective, the negative influence on the income of small and medium-sized enterprises may promote purchases and mergers among such industries. This will lead to an increased degree of concentration within the sector and ultimately see labor cost increases reflected in higher product prices. Therefore, pressures on commodity prices brought about by the new Labor Contract Law can’t be ignored