FOR a few weeks starting in May, Tan Zhiqing, a 24-year-old migrant worker from Hunan Province in central China, did something that not so long ago would have been unimaginable - he joined coworkers in a protest at the gates of his factory.

Having worked at Honda's auto-parts factory in Foshan, Guangdong Province, for more than three years and earning less than 1,200 yuan (US$175) every month, Tan had had enough.

After several rounds of negotiation with its employees, the Japanese auto maker agreed on June 4 to increase monthly salaries by about 35 percent, to 1,620 yuan.

The strikes followed the shocking news earlier this year of the suicides of 12 workers, all in their 20s, at the Shenzhen complex of Taiwan-based Foxconn Technology. In response, the company - one of the world's biggest OEM companies, manufacturing, among other well-known products, Apple iPhones - announced on June 6 that it would raise monthly salaries at its Shenzhen factories from 900 to 2,000 yuan.

These incidents, combined with the government's drive to reduce the country's dependence on exports, are drawing attention to China's role as the world's low-cost factory.

One consequence of the heightened attention, say many economists and scholars, is that more blue-collar wages will rise. Does that mean China's competitiveness as a low-cost production base is under threat?

While those answers are open to debate, it is widely agreed that rising wages are a natural progression for China's economy.

"With the current pressure on labor costs, some prices will have to rise and the costs will have to be passed on to customers in low-margin industries, like clothing and inexpensive household appliances, where profit margins are very thin," says Marshall Meyer, a management professor at the Wharton Business School. "China will be less competitive in those sectors, but higher wages will help China become a more 'normal' economy."

Shane Oliver, head of investment strategy and chief economist at Australia-based AMP Capital, commented on June 11 that concerns about a wage boom in China are misplaced.

"First, the wage increases so far mostly relate to minimum wages, which have been boosted by around 20 percent in some cities," he said. "However, average wage increases are more likely to be around 15 percent this year. Second, the recent resurgence in wages reflects a catch up, as minimum wages were frozen last year in many cities."

Oliver said the 15 percent wage growth is not that high when the economy's breakneck growth is taken into consideration. The economy expanded 12 percent over the year to the first quarter of 2010 so that rising wages are largely being paid for by productivity growth.

What's more, double-digit wage growth had been the norm in China up until 2008. Finally, according to Oliver, Chinese wages remain relatively very low: the hourly minimum wage is about one-eighth of that in the US.

Dropping income

The proportion of China's GDP that goes to labor income has dropped for 22 consecutive years from 56 percent in 1983 to 37 percent in 2005, according to recent research by the All China Federation of Trade Unions (ACFTU).

Zhang Jianguo, an official at the ACFTU, told journalists in May that raising workers' wages so that they represent a larger proportion of national income than they currently do is imperative for the sustainability of the country's growth. The research found that 23 percent of blue-collar workers have not had a salary increase in the past five years.

Rising labor costs and an appreciating currency - the government announced in mid-June that it will gradually let the renminbi or yuan float against other currencies rather than maintain the current peg against the US dollar - have similar effects on trade: they raise the price of some exports.

But they have different effects on wealth distribution, says Meyer. The average worker would benefit more from rising wages, which would boost consumption, playing well into the aims of a number of China's policy makers concerned about the increasingly uneven distribution of wealth in their country.

"Everyone in the world expects China's economy to move from a reliance on exports to domestic consumption," says Meyer. A multinational such as Wal-Mart "will either charge more (for the goods that it buys from China and sells around the world) or source elsewhere."

Other countries that multinational retailers and manufacturers can turn to include Vietnam and Indonesia - "but the former has poor infrastructure and the latter has political uncertainties." Undoubtedly, companies inside and outside China will need to be weighing these trade-offs more carefully in the near term.

Shrinking labor

Meanwhile, a perfect storm of demographic trends in China is also increasing the upward pressure on wages. The shrinking labor force is perhaps the most meaningful.

"By 2015, the total labor force will shrink - it is already aging rapidly," says Meyer. "Young workers are already in short supply. The factories in southern China, which usually only hire younger workers, are now taking on older ones."

In addition to the population changes, there's a new generation of migrant workers who, unlike their parents, are much less willing to work for extremely low wages under grim conditions. Andy Xie, director of London-based Rosetta Stone Advisors, wrote in a recent column in New Century magazine that the younger generation of workers has been raised in a fast-growing economy with life in rural areas improving dramatically compared with what their parents experienced.

At the same time, the once-endless supply of labor, thanks to unemployed farm workers, who moved to the coasts and work in factories and on construction sites, is drying up.

Many rural workers, while willing to work in factories close to home, are refusing to move to the coasts, where it's more expensive, the jobs are often temporary and their families are far away.

The number of workers hired last year in eastern China fell by 8.8 million, while the number rose in central China by 6.2 million and in western China by 7.8 million. Meanwhile the pay gap between eastern and inland China is now just 5 percent, according to official data.

By shifting large number of farmers into non-agricultural jobs every year, China was once able to achieve extraordinary productivity growth, while keeping inflation under control, write Huang Yi Ping, a professor at Peking University, and Jiang Ting Song, a professor at the Center for International Economics in Australia, in a recent paper.

But now, they say, it is heading toward what's known as a "Lewis turning point" - a concept named after W. Arthur Lewis, the Nobel Prize-winning economist in the 1970s, who studied the development process of countries from subsistence to modern economies. Lewis found that as economies develop and move workers from rural to urban jobs, the supply of surplus labor is reduced, driving up wages, consumption and inflation.

In their paper titled, "What Does the Lewis Turning Point Mean for China?" the two professors assert that after 30 years of economic reform, China is now at such a critical juncture. Against this backdrop, they write, the government must carry out policies that maintain economic stability and develop a stronger culture of innovation throughout the country.

It will be a tough transition, says Meyer of Wharton, because of the shift from rapid economic growth underpinned by low-cost manufacturing for exports and low domestic consumption to more moderate growth based on higher domestic consumption.

A country must give up some current growth if it invests in raising the quality of its labor force today to reap the rewards tomorrow. As Meyer notes, the problem is that no one wants to give up current GDP growth.

(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Shanghai Daily condensed the article.)