Minimum wage, China vs India: is cheap labor the real answer for China’s success in manufacturing?

China has been said to be the World’s factory and cheap labor is said to be the reason why China attracts most of the manufacturing activities away from developed countries as well as from other developing countries.

Africa’s wage level is much lower than China, but they are never on the radar screen as threat to China’s position though. Nevertheless, let’s make a more relevant comparison between China and India.

India has a hard time in attracting manufacturing firms to move there. Many Indians attribute the “failure” to “that’s because we don’t have cheap labor; we focus on service industry with higher value-added”

Let’s compared the minimum wage of China and India to get a idea of who really has cheap labor.

Take China’s Guangdong province as an example. This province is where manufacturing activities agglomerate and where most immigrant workers from inland provinces are employed.

The hourly minimum wage in Guangdong province of China (Effectively July 2006- July 2007) :

Shenzhen (Special Economic Zone) and Guangzhou (two core cities, where manufacturing activities are moving out): 
4.66 Yuan/hour ( = 0.58 USD= 26.7 Rs.)

Shenzhen (outside SEZ), Foshan, Dongguan, Zhuhai, Huizhou, where most of the “sweat shops are actually located:
4.02 Yuan/Hour (=0.5 USD = 23.1 Rs.)

For India, I heard that the minimum wage is  between 7.5 -12.5 Rs./Hour.

(Please correct me if I am wrong; and if anyone can provide me with the minimum wage level, the actual enforcement, and the coverage of workforce,    in typical manufacturing-intensive regions in India, it would be most helpful for me to make a more representative  comparison)

So, minimum wage in China's manufacturing sector is between two to three times that of India!

You may argue that laws are never actually enforced in China. Well, indeed, complicated laws usually get circumvented in China. That’s why the most common violations of labor laws in China are, among others, paying normal wage for overtime work, insufficient safety and health work conditions, insufficient compensation for work-related injuries, no compensation for lay-offs...  These laws get circumvented because employers always managed to maneuver the vague language of the laws in favor of themselves. 

Minimum wage requirement however is in general complied by employers particularly in foreign-owned factories, because it is so easy for regulators to monitor and verify, particularly considering that most factories in the area are in the formal sector and not small workshops.

The most power force however is the market: today if you pay lower than the amount required by the minimum wage, I doubt you are able to recruit any skilled workers to work in Guangdong province, and most employers find it not worthwhile to go down the skill ladders. Labor cost after all constitutes only small fraction of the cost in typical factories producing electronic equipments and employers do not want risk having lower quality of disgruntled workers.  For details see my previous post in the Bulletin: “Unlimited labor supply in China? Not anymore! Wages are hiking!”

As a matter of fact, this is exactly why the minimum wage is set to the level where it is now, i.e. almost equal to market-clearing prices. The employers basically control the whole legislative process.

But still, the minimum wage level in Chinese “sweat shops” is much higher than in India where unions have bargaining power in the legislative process of labor laws.

Well, maybe the difference is not that high. First, living expenses in China is higher; second, Chinese workers in “sweat shops” typically have at least 9 years of education.

After all, it is the whole package: infrastructure, administrative efficiency, and education level of workers, flexibility of hiring and firing, etc. that are driving the location decisions of manufacturing firms

Update:

In a report by Deloitte and Touche "India and China: The Reality Beyond the Hype", it is cited that, according to IMF data, typical monthly wage for manufacturing workers in China is almost 4.7 times that in India. But I am not able to verify the number  it from the original source.  (Hat tip: PSD Blog)

Comments

[ajit]

Could you please elaborate on the statement; 'many Indians attribute the failure to that is because we do'nt have cheap labor,we focus on service industry with higher value added' ;or provide us with the link to the source material? I agree that India lags behind China in attracting manufacturing firms and when it comes to the location decisions it is the whole package of infrastructure,administrative efficiency,flexible labor laws .But since the high skill intensive sectors like automotive components,speciality chemicals,electrical and electronic products already account for 40% of India's manufacturing output,India is in a good position to attract manufacturing firms operating in these sectors and related R&D.This is the explaination for higher value added.I agree that India's minimum wage level is lower than China's and in comparison it favours India.

[ajit]

This is regarding my earlier comment on this post.Please refer to 'When to make India a manufacturing base ' in Mckinsey Quarterly 2005 special edition:Fulfilling India's Promise

[R-Squared]

I do think that China needs to learn from India in high-value-added manufacturings. See, although China's wage level is 3 times that of India's, it's still merely 50 cents/hour. Certainly the wage will keep on rising, but in no way can this help wage level substantially converge to industrial countries unless China start to develop and own technologies. In India, particularly in IT industries, the wage convergence however is very real, because the production is less "commodity" like what China is producing.
What we however have to have in mind is that, there are 1 billion Indians and 1 billion Chinese. In the short term, it is not possible to turn everyone into engineers, or drive all of them into R&D sector. You need to give jobs to those less educated, who are more likley to find their position in more labor-intensive industries.
Chinese style sweat shops are not final solution to development problems, it is neverthless a neccesory step to accmmulate capital. Now that China's fiscal revenue is substantially iimproved, it is able to afford to pay for free 9-year education and beef up higher education. Things have to be done step by step, and I really don't believe the idea of great leap forward. It didn't work in China, nor do I think it will work in India. We always have perceptions that all indians are college-educated engineers; it is not true.

[Tabbatha]

I feel that is well said. Good job on this. I understand because in school I am working on a portfolio of India.

[krishna kumar]

i think in china the productivity of labour is also great because of the work culture and technology available.

but more than anything else, curruption india and delays are another reason. manufacturing needs confulence of various manfucturer in one area, once some people manfuacturing certain items in an area, more people start flocking to same area. then infrastruce bottle neck comes in and chinese finish infra project faster than any other nation today. hence in the tally china wins over india.

i also think india environmental laws are stringent compared to the chinese, which is good but has led to curruption and delays

always the difference in valuation of currency always plays a role? it gets complicated here for me..

[yoofan]

minimum wage in India is 45 rupees an hour - that's above 8 yuan an hour.

[yoofan]

whoops - my bad - i read my figures wrong.

it is actually 22 rupees an hour, about 3.5 yuan

[V.J.K.NAIR]

Statutory Minimum Wages in India varies from state to state and industry to industry. With 40 years experience in the field I can say certainty that at no area i n the country the said Rs.45/- per hour minimum wages exist. In practice the statorily fixed daily wage for 8 to 12 hours work is below or at the best hovers around Rs.100/- and therefore the hourly rate works out to around Rs.8/- to Rs.12/- only.

[cazzo]

THE DIFFERENCE IS THE CHINESE IS A HONEST HARD WORKER, THE INDIAN IS A SHONK AND A CROOK BY NATURE

CHEERS

Idi

[Sachin]

Obvioulsy you lack the intellect or the experience to equate a chinese over an indian...you're an idiot....i would put both in the same boat. And for you, i would recommend an educational trip to NYC, where we have both and then judge

[Sachin]

Obvioulsy you lack the intellect or the experience to equate a chinese over an indian...you're an idiot....i would put both in the same boat. And for you, i would recommend an educational trip to NYC, where we have both and then judge

[Sarah]

Where can I find documented statistics on the minimum wage for India?