Readers of this magazine may someday be able to tell their descendants about long-ago times when labor in China was dirt cheap. And they may get the same kind of bemused reaction that tales of home life before TV now elicit from youngsters.

The end of inexpensive labor in China? More and more experts say this is the future. In the larger picture, that means pencil pushers scheming to send industrial jobs to China will have to come up with a new schtick.

What’s going on is that the surplus labor coming to factories from the Chinese countryside is drying up. As such, China is simply following the same path as other early industrial economies, in which a traditional agricultural sector exists along with a modern industrial sector in the cities. In the early stages, kids coming off farms provide a large labor pool for factories, which offer better pay. This pool of young workers is at first effectively limitless, because industries can continuously demand more workers without raising wages, or by just raising wages to well below the rate of productivity growth.

But at some point, demand exceeds the supply of workers, and the changing balance forces wages to rise. This has happened before. Workers of the first industrial revolution in the U. K. saw stagnant wages until about 1840, after which pay grew dramatically. Wages in Japan didn’t change much until around 1960 and then rose rapidly thereafter.

It now looks as though China is about to experience the same kind of surge in wage growth. The number of young workers entering the labor force is set to drop by one-third over the next dozen years. Chinese businesses will increasingly have to pay up for entry-level workers and then work harder to keep them, because good help will be progressively harder to find.

Economists say this structural change in labor markets means the Chinese economy will only grow by putting more emphasis on doing things efficiently. And there’s an open question whether it can switch from a growth mode characterized by just building more factories and infrastructure, to one driven by more productivity.

The rise in Chinese wages also means households there will consume more. That will be another big switch. Economists say Chinese household consumption actually dropped from 46% of GDP in 2000 to 35% in 2008. Since the mid-1990s, Chinese wages have grown fast, but not as fast as GDP. But as labor becomes scarcer, wages will have to be bid up until they match or exceed the rate of productivity growth. This is what is now happening all along China’s coast, where a lot of foreign manufacturers have set up shop.

All in all, companies linked to China’s infrastructure build-up, such as those in steel and machinery, are going to have a harder time making money, if economists are right, and will no longer be low-cost producers. Such companies were the engine of the past decade’s Asian boom. They will not be in the driver’s seat for the next decade.

Leland Teschler, Editor

It seems like the challengers at World’s Smartest Design Engineer really know their stuff. While they have been answering away, we have been tracking some of the easiest and most-challenging questions. See where you stack up against your fellow coworkers. Plus, let us congratulate our July winner, Robert Strobel (aka DADIO) from Arcelor Mittal, whose top score of the month earned him a $250 Dick Sporting Goods Gift Card. Way to go Robert!

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