China Center Chart of the Week: Rising unit labor costs underscore the imperative for economic transition

This members-only chart shows China’s unit labor cost – the average cost of labor per unit of output (ULC) – as a percent of the United States’ ULC. Growth in a country’s ULC is a key measure of its competitiveness, particularly in relation to changes in the economy’s labor productivity – an increase in labor efficiency can offset an increase in wages. In relation to the U.S., China’s labor costs have risen rapidly since 2003, despite the fact that China gained significant scale within the world manufacturing market during that time. Because Chinese labor productivity grew quite rapidly during the period, exporters and manufacturers for domestic consumption were able to absorb cost rises through increased production per worker.

However, in recent years China’s labor productivity growth has begun to decelerate despite the fact that the country’s overall labor productivity levels remain quite low compared to more advanced countries – e.g. 17 percent of the U.S. as of 2011. Slower productivity combined with continually rising costs will eventually begin to eat into China’s overall competitiveness. This erosion will manifest in lower profitability for manufacturing and industrial firms – a situation that has become noticeable in 2012.

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