12/23/2013

How global wage growth will reshape business

Author: Dennis Nally, Chairman, PwC International Ltd.

Dennis Nally photoWhen will a haircut cost the same in Beijing as it does in London? That might seem a concern more for Chinese hairdressers than for your business - yet when the day comes that a Beijing ‘short back and sides’ reaches London prices, it will have a profound effect, not just on your company, but the world in general.

An increasing parity in the price of a haircut is just one indicator in our recent report: Global Wage Projections to 2030.  It shows how wage levels in emerging economies are set to catch up significantly with those in the developed economies - reflecting both higher labour productivity growth in emerging economies and the expected long-term appreciation of those currencies over the period to 2030.

Take the United States, where wages are currently 7.5 times greater than in Mexico. That gap could close to a factor of less than 4 times by 2030. Equally as striking, the average monthly Chinese wage could rise to around half that of Spain in the same period.

The shrinking of the wage gap between developed and emerging economies will challenge many business norms of globalisation. Offshoring is one such example. US companies are increasingly choosing to ‘reshore’ their production and service operations. Others are relocating to countries closer to home that have higher wage costs than traditional offshore hubs, but offer more control and flexibility over supply chains.

That trend is set to grow. According to a new survey by the UK government’s Manufacturing Advisory Service, 15% of firms reported they're bringing production back from overseas, up from just 4% last year. And they’re doing so even though they believe domestic labour costs remain the biggest barrier for producing in the UK.

As wage levels rise in middle income emerging economies such as China, Poland and South Africa, these nations will be viewed less as low cost production locations and more as desirable new consumer markets. Countries like India and the Philippines, meanwhile, are set to grow in importance as offshore manufacturing hubs because wages in those countries will remain at the lower end of wage projection in relative terms. Even then, average wages in India could more than quadruple by 2030 in real dollar terms and more than triple in the Philippines. 

Greater global wage parity means that millions more people will have the purchasing power to demand and command a middle class lifestyle. That’s good news in terms of opening up new markets, but raises concerns about resource scarcity. Already the growth of the middle class in China and other fast-emerging economies has increased demand for natural resource-intensive products like beef, apparel, automobiles and consumer technology. Meeting that demand will be one of the main challenges faced by companies: one recent Yale University study suggests we’ve already reached a tipping point in terms of sourcing rare metals for our smart phones and other tech devices.

Ultimately the price of that Beijing haircut – and the wage costs it reflects - may not only determine where your company locates its production and service operations; it could influence the entire shape and style of your business.


Dennis Nally leads the global network of PwC firms. He has extensive experience serving large multinational clients in a variety of industries, principally focusing on technology and life sciences. Dennis is also a frequent speaker and guest lecturer on issues affecting the professional services profession and the global capital markets. Read Dennis' full biography.


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