20 years ago, Eastern Europe looked like the heaven for cheap workforce. As much of the production from the Western Europe moved East it created a big pressure on the local workforce. Big companies started to compete on getting the most out of the limited workforce which in lead to an increase in wages, to the point it became less profitable.
I was expecting this to happen to China and it did. The Wall Street Journal has a report Rising Wages Rattle China’s Small Manufacturers that explains the implications of rising labor costs:
“Wages in China have been rising for years, but pressure is now particularly strong as the rebound in the nation’s economy runs up against the shrinking supply of younger workers caused by the one-child policy. Big foreign companies have felt the effects, with the local operations of Toyota Motor Corp. and Honda Motor Co. hit by strikes and Hon Hai Precision Industry Co., the world’s biggest contract manufacturer of electronics, promising raises of at least 30%.
But the impact could be even more pronounced on China’s more than 10 million small businesses, which account for 60% of the economy and 80% of jobs. Many small, light manufacturing businesses crowd together in highly specialized “clusters,” particularly here in Zhejiang province on the eastern coast. “The cluster-based model is labor-intensive. The real question is whether it can survive in the new environment of labor scarcity and higher labor costs,” says Zhang Xiaobo, an economist at the International Food Policy Research Institute in Washington, who has researched the effect of clusters on rural development. “Right now is a critical transitional period. Some clusters will survive, some will collapse.”"
