The Wage Gap Between the U.S. and China Continues to Narrow

August 29, 2013

This week’s Chart of the Week examines the difference in average wages in the United States and China. As China has experienced substantial economic growth, it has also seen its average yearly wage for employed people in urban units rise from ¥9,333 in 2000 to ¥41,799 in 2011 (most recently available data). When converted and normalized into 2011 U.S. dollars, this is an increase from $1,472 to $6,468, which constitutes a 14.6% compounded annual growth rate in real dollars. On the other hand the U.S., like most other developed countries, has experienced stagnant real wage growth, fluctuating between $41K and $44K over the past decade.

A significant difference between the two wage levels remains with the average wage in the U.S. almost seven times higher than the average Chinese wage. However, many of the largest sectors of the Chinese economy are far more labor intensive and better represented by the U.S. minimum wage. The current minimum wage in the U.S. is $7.25/hr or $14,500 annually. Assuming there is no change in the U.S. real minimum wage, the Chinese average wage is on pace to surpass this in 2017.

While China has often been a cheap source of labor for businesses, wage increases could hurt the competitiveness of firms located in China. If Chinese wage growth continues on the current trend companies may decide that it is no longer optimal to produce in China. The effect this would have is twofold. As businesses leave China, the growth in the Chinese economy could slow. Secondly, this could lead to more jobs returning to the U.S., lowering unemployment and increasing wages.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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