Rising Costs and Wage Inflation

Rising costs globally have had detrimental effects on company profits and a fundamental cause of this has been wage inflation particularly in emerging markets.

As Asia contributes to a large proportion of global manufacturing, company profits are being squeezed as it becomes more costly to produce in these countries.  Costs have been further amplified by the rising currencies.  Emerging markets have seen their currencies rise as investors seek to capitalise on high GDP growth.

Asia has seen soaring wages and average pay has almost doubled over the past 10 years compared to 5% increase per annum in developed countries.  China led the way almost tripling over this period, and as the country develops from an emerging market, workers began to demand minimum wage levels.

This rising wage inflation is not isolated to Asia, South America has also seen similar rises, and as workers demand higher pay, their demands then mature for better consumer products, food and standard of living.  This is the common path from an emerging market country to a developed.  However there are many obstacles to overcome, read more on this in Rural Expansion and the Control of Urbanisation.  

For companies based in the US or other developed nations it may become more economical to bring manufacturing and production back to their country.  As wages become closer between the countries, after eradicating shipping costs, the difference is not that high.  With energy prices reducing in the US this is becoming more common, and reshoring may gather further pace.

Whilst wages have increased significantly, one must remember it started from a lower base, Asia is still a very cheap place to produce, and many have shifted from China, to South East Asian countries such as Indonesia, Vietnam and Thailand, where the minimum wage in Thailand is 300 Baht a day, a little over $10.

There will undoubtedly be a lot of change in emerging market economies over the next 10 years, however as a large proportion of growth is derived from manufacturing and production of goods for overseas companies, one must remember to maintain the competitive edge otherwise growth may evaporate.