China: The year of the layoff

Although 2013 was the year of the snake in China, perhaps it should have been someone standing in an unemployment line. The country has lately seen a serious increase in worker layoffs from both domestic and international employers. The shift owes both to a general slowdown in China's economy and a change in conditions that once made the country the first choice for corporations outsourcing their manufacturing.

For example, thousands of state bank former employees protested in October over severance pay. In July, the country's largest shipbuilder, China Rongsheng Heavy Industries, suspended stock trading after revealing having quietly laid off 8,000 employees, driven by the industry's over-capacity.

A report by the Beijing's Economic Observer suggested that global companies were laying off significant numbers of workers in China, often because the companies found the workers to be too specialized and inflexible, so unable to transition to new roles. The country's Ministry of Human Resources and Social Security said in the summer that it expected more layoffs and "unpaid wages" as a continued result of slower economic growth.

"The reason why multinationals are laying workers off is that Chinese workers are no longer cheap," said George Haley, director of the Center for International Industry Competitiveness at the University of New Haven, in an interview with CBS MoneyWatch. "The average wage per hour is 20 percent higher than Mexico, and Mexico is a lot closer to the U.S. and Mexico."

According to Haley, minimum wages have jumped "dramatically" in many Chinese provinces. In addition, subsidies in the form of low-cost loans and underwriting of land and utilities are quickly disappearing. Without them, labor costs alone don't provide enough incentive for companies to continue expansion. Then there is the economy.

Even as disappointing growth still likely topped 7.5 percent in 2013, a number that would delight most countries, investors and companies have reacted in a number of ways. Chinese stocks hit a five-month low as the HSBC/Markit Economics services Purchasing Managers' Index, or PMI -- a survey of private sector manufacturing companies -- dropped in December to its lowest point in more than two years. The PMI of 50.9 indicates flat business conditions. (Below 50 is considered an industry contraction.)

Service businesses are not much better off, as China's National Bureau of Statistics indicated service-sector growth has slowed over the last few months.

China's phenomenal growth for decades was built on easy credit and exports. But the combination has made China's economy prioritize foreign needs over domestic and face the potential problems of oversupply and the sudden impact that can have on industries. The result has been "ghost" cities that artificially boosted provincial economies and inventory buildup while only temporarily masking problems. Haley said that 2013 saw so much excess production in the automotive industry that parts and even fleets of cars were simply stockpiled.

For Chinese workers, the scary part is the amount of growth needed to keep things on an even keel. According to China's Premier Li Keqiang, the country needs minimum annual growth of 7.2 percent just to keep unemployment from rising.

The implications for China are significant. Despite its enormous growth over the last three decades, China remains poor. Average family income in 2012 was $2,100, according to research from Peking University. But significant income inequality leaves nearly a quarter of household income in the hands of 5 percent of the population, which means most Chinese families makes even less. That hinders the kind of broad personal consumption that China needs to thrive over the long term.

The Chinese government is keenly aware of the social and political discord that could result from a failure to keep the country's economy chugging while also reducing income inequality. 

"Usually when emperors were overthrown [in China], it came from the peasantry or outsiders like the Mongols," Haley said. "They're very scared of the workers banding together and either overthrowing or forcing out the government."

  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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