Winning the race to the bottom

Low wages in states such as Mississippi, Alabama and South Carolina, and rising wages and worker unrest in China, may cancel out the cost advantage of locating factories in China, according to the Boston Consulting Group, a management consultant firm.

In short, the United States is competing by driving down the earnings of American workers rather than on the basis of superior inventiveness, productivity and management.

Here is the situation, as reported by Labor Notes:

Wages for China’s factory workers certainly aren’t going to rise to U.S. levels soon.  BCG estimates they will be 17 percent of the projected U.S. manufacturing average—$26 an hour for wages and benefits—by 2015.

But because American workers have higher productivity, and since rising fuel prices are making it even more expensive to ship goods half way around the world, costs in the two countries are converging fast. …

BCG bluntly praises Mississippi’s “flexible unions/workers, minimal wage growth, and high worker productivity,” estimating that in four years, workers in China’s fast-growing Yangtze River Delta will cost only 31 percent less than Mississippi workers.

That’s before you figure in shipping, duties, and possible quality issues. Add it all up, says BCG, and “China will no longer be the default low-cost manufacturing location.”

Labor costs typically are only 10 to 15 percent of the total cost of a manufactured product, so a small wage differential doesn’t make a big difference.