Wage rises are good for Chinese workers, and especially so if they reflect a genuine tightening of the labour market. This may well be happening after the years of extraordinary capital accumulation and an emerging decline in young new entrants to the labour force. Wage increases can also reduce inequality, after years of sharp increase in income and wealth differences, which constitute a political time bomb. This is also good news internationally. Wage growth can contribute to international re-balancing through supporting domestic consumption and real exchange rate appreciation. And it will, over time, induce the upgrading of Chinese production processes, and an associated shift in the more labour-intensive parts of manufacturing supply networks to lower wage countries. This could potentially benefit India and lower the wage scale in Bangladesh, provided the domestic environment for investment is good.
What is problematic for China is the absence of independent unions. An irony of communist China is that state-controlled unions typically work with the state and party to ensure a good investment environment for domestic and foreign investors. That helped support rapid capital accumulation and growth. But as the labour market tightens, aspirations rise and the complexity of negotiations increases, it has substantial problems. Independent unions are, in fact, highly desirable for inclusive development in a capitalist society. Neither free-wheeling capitalism nor paternalistic state regulation does a good job of jointly meeting societal demands and the needs of growth. Free-wheeling capitalism falls short because of the large asymmetries of power between firms and workers. The tough head of Foxconn may well be good for capitalist dynamics, but there is a need for counterweights to ensure worker rights are respected. And conditions at Foxconn are reportedly much better than in many firms, let alone in the unorganised sector. Absent structured mechanisms for worker protection and negotiation, and discontent will get channelled into other forms of actionillegal action or the desperate action of worker suicides.
Heavy-handed government regulation is also problematic. Regulation typically only applies to large firms in developing countries, raising the costs of labour hiring and creating the paradox of an anti-labour bias in investment. This is all too familiar from Indias organised sector. Outside large firms, regulations are at best ignored, and at worst, become a fertile source for bribery and abuse of small firms.
So what is desirable Genuinely independent unions, competitive product and labour markets, and a regulatory structure that supports freedom of association and basic worker rights are complements, not alternatives. Unions working in competitive markets can help protect and represent workers without creating protected enclaves. Unions are significantly distorting when embedded in protected markets or political patronage. Moreover, in developing countries, unions often need to take non-traditional forms, helping organise informal workers and negotiating with the state. Indias Self-Employed Womens Association is an excellent example, now with some 1.2 million members.
This is where China has problems ahead. Party and government may like to see better conditions for workers. But support for genuinely independent unions looks highly unlikely. After all, independent unions have also played major roles in the transitions to democracy, from South Korea to South Africa. There is often a tendency to decry unions as a source of distortion, protection of entrenched groups and a burden on growth. This sometimes happens. But the broader picture is that independent worker organisations are a central and invaluable part of society, both to protect the rights of workers and as a functional aspect of a capitalist economy. Providing the environment for this is an important part of the institutional and policy agenda for any developing country. It will be a particularly tough challenge in China, given the threat it brings to the hegemony of the communist party. There could be a lot more expression of worker discontent in the years to come.
The author is at the Harvard Kennedy School and the Centre for Policy Research