Bureau of Labor Statistics Includes Chinese Worker Compensation Costs in International...

The total hourly cost of a production worker in the United states rose slightly last year to $23.65, but that doesn't come close to the hourly compensation costs for a worker in China, according to the Foreign Labor Statistics division of the Bureau of Labor Statistics.

For the first time,

BLS is including China in its annual series on "International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing." It is doing so because of growing interest in China's labor costs. But since China does not break out compensation costs for production workers, BLS provides the average total compensation for all workers, which is $0.67 per hour, or 3 percent of the average hourly compensation of manufacturing production workers in the United States. The highest total compensation costs for manufacturing workers among the 32 countries BLS tracks is Denmark, at $34.46 per hour.

The $0.67 an hour figure for China could be even lower. Production workers tend to get paid less than all other employees in a manufacturing operation, including supervisors and office workers, explains Erin Lett, an economist with BLS's Foreign Labor Statistics division. "We think the bias is that it is overestimating, but we don't have data to prove that."

The figure for Chinese production workers also could be lower because of difficulties Chinese government statistical agencies have in capturing data on millions of migrant workers and workers employed in small-scale private enterprises. Workers in the "informal" sector of the economy could also be getting paid far less than the average. In 2002, China had an estimated 109 million workers in the manufacturing sector, according to research funded by BLS. This number is far higher than most analysts in the United States used until recently, which, in most cases, was 83 million.

The BLS report, which measures total employer costs per worker, shows that large increases in hourly compensation costs of foreign workers compared to U.S. workers are often the result of increases in the exchange rate for that country. In 2003, the total compensation costs for production workers in Europe increased by 23 percent compared to those of U.S. workers. This tracked closely with the value of Europe's currency, which increased by 19.8 percent during that period.

So if China's currency is currently undervalued by as much as 75 percent, it means that country's workers are getting squeezed by China's currency policies. Underpaid workers relative to the U.S. dollar can be considered another subsidy--and incentive--for U.S. companies moving production to China.

BLS measures of hourly compensation costs include "social insurance benefits" such as government mandated labor taxes, private benefit plans, retirement and disability pensions, health insurance, income guarantee insurance, sick leave, life and accident insurance, occupational injury and illness compensation, unemployment insurance and family allowances. In the United States, these social insurance benefits account for 22.5 percent of all compensation costs, lower than for all of Europe (at 27 percent).

These costs to employers are difficult to measure in China, due in part to the fact that Chinese companies and workers didn't pay income taxes, value-added taxes, corporate income taxes or payments for social insurance during the Maoist decades from 1949 to 1978, according to Judith Banister in research she conducted on Chinese labor costs for the BLS. The cost of company medical clinics, housing, and meals are also difficult to measure.

Because social insurance programs are expensive to employers, Chinese companies "have developed a culture of tax avoidance," Banister explains. "When foreign and multinational companies come to China and attempt to acquire or set up a joint venture or merger with a (usually state-owned) Chinese company, the foreign company insists on engaging in a due diligence process to determine whether the joint venture, merger or acquisition is in the interests of its owners and shareholders. The auditors and accounting companies frequently discover that the target company has two sets of books: 'management accounts' and 'tax accounts.' The tax ledger is designed to minimize tax exposure, particularly corporate income taxes, value-added taxes, personal income taxes for employer and employees, and required social benefits payments. It is believed that non-public-sector domestic Chinese enterprises avoid taxation and social benefit payments to an even greater extent than the state-owned and collective-owned enterprises."

Total compensation costs for 71 million Chinese production workers employed in rural manufacturing plants was an estimated $75 per month, according to Banister. Subtract out social insurance costs and their take-home pay is about $70 per month or around $837 per year. On a purchasing power parity basis, they would be making less than $2 an hour in the United States, or $3,890 a year.

For urban production workers, total compensation costs for employers were $175 per month. Employees' take-home pay was $112 per month, which is equal to a purchasing power parity of $522 in the U.S. "The average city manufacturing employee in China could purchase goods and services that give the worker and family a living standard equivalent to annual take-home pay of about $6,300 in the U.S.," writes Banister. Their take-home pay in America would be less than $3 per hour.

The BLS report is located at ftp://ftp.bls.gov/pub/news.release/ichcc.txt. The 106-page Judith Banister report commissioned by BLS titled "Manufacturing Employment and Compensation in China" is located at http://www.bls.gov/fls/chinareport.pdf.