A lot of the concepts in macro-economics are relatively easy to define in broad, conceptual terms.  But when it comes to actually measuring them, things get very, very difficult.  Measurement requires precise, observable, countable definitions.  Inflation is one of the these concepts.  Conceptually it’s easy:  a general rise in all prices.  But it practice it’s very hard to measure.   Price indexes, even when done well with good input data are nothing but very rough guesstimates.  In emerging markets like China the data are even somewhat suspect.

One thing is clear though.  Inflation, a general rise in all prices, happens under similar circumstances to when a particular price increses.  In a particular single-product market, the price goes up if the demand keeps increasing beyond what the supply can produce.  A general rise in all prices then happens when the total or aggregate demand for goods grows or exceeds the ability of the society to produce (aggregate supply).  One way this happens is for aggregate demand to grow so much that one of the critical inputs to production hits capacity.  Usually, in more modern economies, this means full employment has been reached and there are no more workers to  be put to work producing more goods.  (another way it happens to suddenly restrict the supply of external oil to an economy, a la the 1970’s in the U.S.).   An early warning sign of that an economy is reaching full-capacity and cannot keep growing as fast is industrial wages.  When unemployment disappears and full employment is achieved, industrial workers become very valuable, scarce resources and the bidding begins (wage increases).

It appears that China may be reaching such a point.  We are starting to see significant increases in industrial worker wages. Or so it appears – we should always be careful about generalizations about an economy as large as China’s that produces weak and unreliable economic statistics.  If the great Chinese migration of rural agricultural population into new urban industrial workers is starting to run low on new workers, then the recent wage increases could be the early signs of significant inflation in China.  It will require policy changes.  Click to see more on what’s happening below the fold (thanks to Naked Capitalism):

Chinese Labor Markets Tight Since Last Year

The reaction in the Western media to the doubling of entry-level salaries at the Foxconn factories in Shenzhen was as if it was a change in the world order. Chinese workers treated as if they have bargaining power! Honda increasing wages 24%! Beijing increasing municipal pay 20%!

Increases like this do not come out of nowhere. We had pointed out, even by the notoriously poor quality of Chinese statistics, inflation is particularly difficult to guesstimate, and there was good reason to think it was running at a faster pace than most believed.

Chinese labor markets have been intermittently reported to be tight, but that factoid did not seem to penetrate the consciousness of many observers (and in fairness, it could, like the GDP figures, have been exaggerated for political purposes). The Sydney Morning Herald (hat tip reader Crocodile Chuck) provides some context:

The story of China’s rapidly rising wages and diminishing pool of surplus agricultural workers is well known among a small group of Chinese scholars centred on Professor Cai Fang, director of population and labour economics at the Chinese Academy of Social Sciences.

His colleagues, Du Yang and Wang Meiyan, have previewed the latest data in a coming paper. The paper cites results from three surveys, two of which have not yet been published.

The methodology and timing of each survey is opaque, the results vary widely, but the trend is abundantly clear.

A survey of 22,000 rural households by the Agriculture Ministry’s Research Centre for Rural Economy shows migrant wages surged about 15 per cent last year, after adjusting for consumer price deflation. A smaller survey of 4000 people by the People’s Bank of China – also yet to be released – shows real migrant wages increased about 10 per cent last year.

And a survey of 60,000 rural households by the National Bureau of Statistics showed real migrant wages in 2009 rose 7 per cent, with the lower number apparently reflecting an earlier survey date.

Separately, quarterly figures from the National Bureau of Statistics show nominal per head rural household wage income – which reflects job and wages growth – jumped 16 per cent in the March quarter of this year from a year earlier.

This series, watched closely by the World Bank, has risen 100 per cent in six years. Rural per head income grew faster still – 118 per cent – when non-wage income such as subsidies and tax cuts are included.

Whatever the credibility of each survey, the point is that most of China’s 150 million rural migrant workers in urban centres received big wage rises despite the global financial crisis delivering a negative shock to China’s export economy at the end of 2008 and start of 2009. And this year’s wage rises are likely to outstrip last year’s. The fact that China’s demand for labour is rising much faster than supply changes everything. Rich world consumers will have to start paying a little more for iPhones and iPads.

Yves here. This creates an interesting conundrum. China’s business model has long been based on its labor cost advantage. Manufacturers had already started moving production to Bangladesh and Vietnam, and that trend will accelerate (provided the deflationary suck of eurozone austerity does not put the world economy on hold, or worse).

Rising labor costs make a revaluation of the renminbi seem less likely; indeed, it raises the odds of what Marshall Auerback and I said was an outlier possibility, that of a devaluation. But if China can manage the transition, higher wages are an essential piece of a change from an export/investment led economy to one which has consumption as a strong driver, which in turn is essential for global rebalancing. The future may have arrived sooner than the Chinese officialdom wanted.