Tuesday, December 28, 2010

A Chinese Unemployment Problem Straight Ahead?

Beijing city is set to raise its minimum wage by 21 per cent next year, the second such rise in barely six months, reports FT.

The increase, which will come into effect on New Year’s Day, raises the statutory minimum monthly wage in the Chinese capital to Rmb1,160 ($175) and the hourly rate to Rmb6.7. It comes on the heels of a 20 per cent rise in June.

Every province and municipality in China has announced a rise in its minimum wage this year, with increases ranging from 12 per cent to Beijing’s 41 per cent.

Although stagflation is a monetary phenomena, where price inflation continues but the economy contracts because not enough money is printed to support the previously distorted economy, an increase in the minimum wage IF it is above market wages will only result in higher unemployment and look an awful lot like stagflation.  One can only hope that market wages are above the minimums set, otherwise get ready for climbing Chinese unemployment.

I hasten to add that this is coming on earlier news that China plans to institute price controls. This, of course, will only result in shortages.

Bottom line: China's leadership is clearly as ignorant about basics economics as are most other leaders from around the world, and it will result in hardship for an economy that is just now attempting to climb out of the suffocation from the Mao years.


  1. There's a political angle too. Hu visits DC beginning Jan 19 and the very visible CB measures that result in a strong Yuan vs the USD relieve congressional pressure. I suspect the Chinese CB will ease up on the tightening after his visit, and the government will attempt to rely mainly on price controls. This, of course, will make things much worse as you point out.

  2. Does anyone have good data on the existing wages in Beijing?
    The rise may be a meaningless number if almost everyone is working for wages above the new minimum. For example, the most recent U. S. minimum wage rise had no effect in the DC area, as even dishwashers and busboys were already making more than the new minimum.

  3. Ive come to the conclusions that the politicians know very well the consequences of their actions (money printing, price controls, ...) but they still do it because they want to solve the problems they have in the short term, and delude themselves thinking that the effects wont be so bad (and when they come they will be able to blame it in someone else).