The High Cost of Cheap Chinese Labor

Labor churn should be taken into account when assessing the costs of doing business in China.

It’s well known that low-skilled Chinese labor is abundant. Over the past two decades, some 140 million low-skilled workers have either moved off the payrolls of state-owned enterprises into the private sector or migrated out of rural areas into the cities to seek their fortunes.

What’s less well known is that the average worker earns just 75 cents an hour. Migrant workers—who account for one-fifth of the 750 million people in China’s labor market—typically earn less than $130 a month. When you are making that kind of money, a five-cent-an-hour raise is a significant increase. No wonder, then, that Chinese workers leave their employers in droves. Turnover rates among low-skilled workers are frequently in the range of 30% to 40% annually—and sometimes rise above 100%. Compare those figures with industrialized countries, in which annual employee turnover rates in manufacturing are roughly 5%.

Companies that seek to exploit cheap Chinese labor may be penny-wise, but some are pound-foolish. If your head of manufacturing in China can’t even hang on to a low-skilled workforce, he will certainly not be able to help you if you need more value-added work done. Companies such as GE have acknowledged the difficulty of finding mid- and senior-level managers. L’Oréal China reports that it loses almost all the new Chinese university grads it hires within three years.

When Chinese employees leave for work that pays better, the costs to companies are high. These include the same problems that plague any firm with high turnover—higher HR management and training costs, greater quality control problems, increased chances of competitive disruption, and more difficulty establishing a stable corporate culture.

The lesson in all this? The costs of labor churn should be taken into account when assessing the costs of doing business in China.

A version of this article appeared in the June 2006 issue of Harvard Business Review.