Talent Management Column

The Labor Market Bites Chinese Factories

As retention of factory workers becomes a problem for companies in China, wages and benefits are increasing. But employers still face a labor shortage -- and their potential responses to it may have big implications for China and the rest of the world.

Monday, February 27, 2012
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I've spent most of this month in China where the most interesting and pressing issues are about human resources, especially in the labor market.  

The ostensibly endless supply of cheap factory workers is drying up. That has big implications for China and for the rest of the world.  

As in many countries, factory work is not high-status work in China. To get people to work in factories, especially at low wages, businesses went to rural areas in the west of the country -- where opportunities are quite limited -- and recruited people to come to the factories in the east. 

The model they used was not unlike that of the early textile factories in Lowell, Mass., in the 1800s: The jobs don't pay enough to live in the communities where the factories operate, and the workers don't necessarily want to move away from their homes. So, the employer provides dormitories for those workers and essentially creates a community, albeit one that is often a hard place to live.  

As long as there was an abundant supply of workers willing to come from those rural areas, the employers did not have to pay much or treat employees especially well.

The now famous Foxconn facility with its 500,000 factory workers and well-publicized suicides is, many people here argue, one of the better employers, but even they held wages and labor costs in check.

Here's what's happening now, as described to me by an owner of one of the smaller factories: 
The action takes place around the Spring festival when all of the factories close for a month. Yes, it seems remarkable to shut down that long and, in part, it is an accommodation to worker demands to go home to their rural communities and families. (Think of this as unpaid vacations.) 

It started to get a bit harder to retain workers about two years ago, and so this employer and others like it sent representatives to the villages of their workers, passing out presents and money to employees, in part as a way to encourage them to come back. (Think of it as holiday bonuses.)

Wages started creeping up, but because they were creeping up everywhere, employers didn't notice it doing them any good in terms of retention.  

In the past, when workers did not come back to work on time after the break, employers would just hire new ones. Now, this company and others like it are finding more and more workers coming back later and later because they know there will be vacancies -- if not at their current employer, then with another -- and the companies will be more desperate to hire after they have started up operations again.

When they do come back to the company's dormitories, the first thing they do is check in with other factories in town to see what wages they are offering. Employers are offering "switching fees," what we would call a hiring bonus, for employees who quit jobs elsewhere and start up with them.

After totaling up the new offers and switching fees, they then go back to their current employer to negotiate for wage increases.  

Many employers seem to be quite shocked and puzzled by this turn of events and don't know what to do about it.

The spot market approach they have been using -- of relying on huge surpluses of labor to keep wages low, to keep workers from quitting and to ensure that they performed in order to keep their jobs -- isn't working anymore. In fact, it makes job-hopping easier and, with a tight labor market, they are getting burned as the workers turn the tables on them.  

Employers are complaining about a labor shortage because they can't find workers at the wages they have been paying. (Sound familiar?) Nevertheless, wages are now going up, by quite a lot; in this particular factory, by 50 percent in the last two years.

After years of holding the line, even Foxconn announced wage increases this month. Wages are still pretty low in absolute terms in these factories, about $500 per month, not counting overtime, but labor costs appear to have gone up now to levels equivalent to those in Mexico.  

For human resources, the good news is that at least some of the employers have begun to wonder whether there isn't a different way to manage labor. Would it be better, they ask, to develop longer-term relationships with employees?

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In the process, they will eventually discover modern management, or at least some variation of it. When we remember that more than 400 million people in China have been pulled out of poverty in this generation through economic development, much of it based on these factory jobs, it is hard not to be staggered by the magnitude of these new developments.


Chinese factories may have a new pool of potential workers, however.  

The big news in Chinese labor circles this month is the revelation that large numbers of new college grads are now earning less than most factory workers. This is a shocker in a country that reveres education, expects college graduates to earn way more than low-status factory workers, and has a red-hot labor market for most white-collar jobs.  

A McKinsey study making the rounds claims that only 10 percent of those graduates are employable by international standards. As in the United States, the demand is for people with specific work skills and, especially, job experience, not for education per se.

Employers are setting up their own training programs, although not fast enough to cool off demand or to absorb the college grads.

Will the Chinese factories get very creative and redesign factory work to make it more attractive to individuals who would have gone to college? Could those jobs become a gateway to the middle class, as was the case in the United States two generations ago?

Because we are talking about hundreds of millions of people, whatever happens will be big.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His latest book, with Bill Novelli, is Managing the Older Worker: How to Prepare for the New Organizational Order.

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