The Labor Shortage in the Pearl River Delta

UNCLAS SECTION 01 OF 03 GUANGZHOU 000301

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ELAB ECON EINV CH
SUBJECT: The Labor Shortage in the Pearl River Delta

REFERENCE: A) 06 Guangzhou 31579; B) 06 Guangzhou 32421; C) 06

Guangzhou 32431; D) 06 Guangzhou 32432

(U) This document is sensitive but unclassified. Please protect
accordingly.


1. (U) SUMMARY: In the wake of the week-long lunar new year holiday,
Guangdong's Pearl River Delta (PRD) businesses and governments are
fretting about a labor shortage that has become more pronounced
during the past few years. Migrant workers who left for the holiday
are switching jobs, staying home, or traveling to other
manufacturing centers such as the Yangzi River Delta, where wages
are higher and working conditions better. The shortages are most
acute for jobs that require technical and managerial skills and
those in the lowest-paying industries, such as textiles. Despite
government efforts, such as minimum wage hikes, the shortages will
likely intensify as the PRD's demand for skilled professionals
rises, other parts of the country industrialize and compete for
labor, and the workforce ages. END SUMMARY

The Chinese New Year Migration
--------------


2. (U) Most PRD factories shut down for the week of the lunar new
year holiday (February 17-24 in 2007) and many of the area's migrant
workers return to their homes in China's interior provinces. PRD
factory owners are concerned about the number of workers who are
switching jobs when they return or not coming back at all. Migrant
workers comprise 35 percent of Guangdong's work force, according to
the All-China Federation of Trade Unions. Local newspapers and
television stations have been running stories on the labor shortage
and quoting factory owners who are having trouble filling their
jobs. In one story, a Guangzhou garment factory owner lost
two-thirds of his workforce and was recruiting workers directly from
the city's railway and bus stations. In another, an electronics
factory owner could fill only 700 of 1,000 openings, despite
offering pay above the minimum wage.

Government Numbers Point to a Shortage
--------------


3. (U) The extent of the labor shortage is difficult to determine.
Local PRD labor departments report that Guangdong is experiencing a
shortfall of migrant workers for the third consecutive year; 60
percent of Guangdong employers were affected by shortages in 2006.
The Guangzhou labor department reported the city has 1.2 job
openings for every one job-seeker, while Guangdong authorities
reported that the province only filled 4.8 million of the 7.3
million job vacancies in 2006. Compounding the problem is the fact
that workers are changing their jobs more frequently as they seek
out better pay and benefits. Guangdong labor officials expect the
demand for skilled workers to increase by 20 percent this year and
the demand for unskilled workers to rise by 10 percent.


4. (U) The Guangdong Labor Department has stated, perhaps somewhat
optimistically, that companies that pay well and provide good living
and working conditions will have no trouble finding enough workers.
They also announced that the number of migrant workers arriving in
Guangdong after the holiday was up 8 percent over 2006 and 90
percent of workers in Guangzhou have returned to their jobs. This
assertion was contradicted by an Italian company representative who
said his firm has faced difficulties not only in attracting but also
in retaining skilled workers, many of whom depart shortly after
being trained by the firm. Loyalty to a firm is totally lacking,
according to this representative, despite good pay and benefits
which are well above minimum levels.

Vacancies: Not Across the Board
--------------


5. (U) Local government and industry concerns about a labor shortage
seem to fly in the face of national pronouncements that China is not
generating enough jobs. China's Labor and Social Security Minister
Tian Chengping recently announced that China will have a shortfall
of 10 million jobs by 2010. A closer look at the labor market
shows, however, that the PRD's vacant jobs are at opposite ends of
the labor spectrum: those that require specialized skills and those
that require no skills and in which laborers' working conditions are
poor. For the majority of jobs, which fall between these two
extremes, there are generally enough workers to maintain Guangdong's
strong economy, which has had almost 12 percent growth for the past
20 years and has the highest per-capita GDP in China.

An Evolving Economy
--------------


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6. (U) The shortage of workers to fill jobs in technical and
managerial positions points to a gradual shift that is taking place
in the PRD economy toward higher value-added and high-technology
industries. Behind this shift are market forces, such as higher
land and labor costs and an appreciating RMB, as well as government
efforts to establish a long-term, sustainable economy. Two-thirds
of Guangdong's manufacturing industry is process and assembly,
almost all of which is for export, compared to 55 percent
nationally, according to Huang Jingbo, Dean of Zhongshan
University's Economics Department. Process and assembly factories
have low profit margins, offer the lowest wages, and have very
little technology transfer. This move away from low-end, process
and assembly manufacturing accounts for the 20 percent increase in
demand for skilled workers in the PRD in 2007 and has increased the
burden on the region's universities and vocational schools to train
enough professionals.

Foreign Companies Feel the Squeeze
--------------


7. (SBU) Foreign companies in the PRD, including those in the
American Chamber of Commerce-South China, are clearly concerned
about the lack of skilled managers and technicians. The shortage
has led to higher turnover rates, unsustainable wage increases, and
companies poaching talent from each other (see ref A). According to
Mercer, managers can earn a 50 percent pay raise by switching
companies and some managers in PRD-based firms are earning as much
as their Hong Kong counterparts. According to an AmCham-South China
survey that will be released on March 15, U.S. companies cite a lack
of qualified managers and specialists as their second biggest
concern overall, after regulatory issues. Rising labor costs ranks
fourth. In an October 2006 AmCham-South China survey, the lack of
skilled talent topped the list of human resource concerns.

The Unskilled Worker Shortage: Poor Conditions
-------------- -


8. (U) On the other end of the spectrum, PRD businesses with the
lowest paying jobs and the poorest working conditions, such as those
in the garment industry, are also facing a shortage. Most of these
factories are owned by domestic, Taiwan, or Hong Kong investors and
operate on the thinnest of profit margins. They are being squeezed
by rising labor, land, and energy costs as well as the appreciation
of the RMB. Foreign-invested factories, which have a better
reputation because of competitive pay packages and good working
conditions, are, for the most part, finding enough unskilled
workers. (Foreign subsidiaries are not without problems; PRD
factories producing goods for Apple, Disney, and McDonald's made
news in 2006 when media and labor groups exposed poor working
conditions).


9. (U) Low-end factories are more likely to flout labor laws by
paying less than the minimum wage, requiring overtime without
compensation, and ignoring worker safety (ref B). The lack of
effective trade unions and lax enforcement by labor bureaus means
the situation has been slow to improve. As a result, the PRD has
developed a reputation for poor working conditions and low pay and
migrant laborers are choosing to go to other manufacturing centers
instead, such as the Yangzi River Delta (YRD),where wages are
higher and working conditions better.

Government Efforts to Attract Workers
--------------


10. (U) PRD governments have taken measures to alleviate the
shortage. The Guangdong Labor Bureau offers labor rights training
programs and legal aid centers in a number of PRD cities to improve
conditions for migrant workers (ref C). The bureau is also pushing
local governments to improve health care and educational
opportunities for workers' families. In early 2006, Shenzhen became
the first city in China to adopt a medical insurance system for
migrant workers. Guangzhou's Labor Department remains understaffed,
however, and reportedly plans to hire 100 new inspectors to ease the
burden. To compensate, local governments rely on labor NGO's, both
registered and unregistered, to provide assistance and training (ref
D).


11. (U) Local governments are also rapidly hiking their minimum
wages to attract workers. The average minimum wage increase in 2006
across the province was 17.8 percent - the highest to date.
Guangzhou raised its minimum wage four times between 2000 and 2006,
from 450 RMB (USD 58)per month to 780 RMB (USD 101). Shenzhen's
minimum wage has been raised twice during the past two years and
currently stands at RMB 810 (USD 101). The minimum wage in
Dongguan, Zhuhai, Foshan, and Zhongshan is RMB 690 (USD 86). In
addition to wage increases, Guangdong's labor bureau has urged local

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labor departments to organize more job fairs and offer job referral
services.

An Aging Workforce
--------------


12. (U) Experts also point to the aging of China's workforce as a
factor in the PRD's labor shortage and predict more pronounced
shortages over the long term. Cai Feng, Director of the Chinese
Academy of Social Science's Institute of Population and Labor
Economics, said in February that China's labor supply is peaking,
causing "a structural labor shortage" in some regions. The number
of Chinese over 60 years old will increase from 143 million in 2004
to more than 200 million by 2014, according to government estimates.


Comment: Beyond the PRD
--------------


13. (SBU) Whereas PRD business owners once could rely on an
unlimited supply of labor, they are now being forced to compete for
workers with other regions of China. Skilled workers in the PRD
have never been in a better position to negotiate their pay and
benefit packages. Migrant laborers, who are increasingly well
connected, are less willing to accept poor working conditions and
more liable to switch jobs. As the work of NGO's and government
labor bureaus expand and improve, low-end factories will be forced
to leave - to inland China closer to migrant worker homes or abroad
- in greater numbers because of labor costs. Local governments are
hopeful that, with the proximity of the PRD to ports and Hong Kong,
high-tech factories will take their place.


14. (SBU) For those factories that are priced out of the PRD and
move further inland, wage pressures will likely prove inescapable.
Labor shortages and rising wages are already occurring north of the
PRD in central Guangdong. The owner of a newly built factory that
produces shoes for Nike in Qingyuan, which is two hours north of
Guangzhou, told us that rising labor costs would likely force him to
relocate again within five years. A 30,000-employee electronics
factory down the road, which recently moved from Dongguan, has
reportedly had trouble finding enough workers. This will likely
force enterprises to relocate further inland, a move that will be
encouraged by the rapid development of the better and more efficient
transportation network that is being constructed under the 11th-Five
Year Plan.

GOLDBERG