Supply Chain Innovation

Assessing the Impact of the New China Labor Contract Law (Part III)

Tuesday, January 15, 2008

In a nutshell
The bottom line is that the China labor contract law will formalize protections for workers that were more or less intended ever since the 1995 Labor Law but which have never been implemented or enforced. Employers will now have to honor the minimum wage, overtime and holiday premiums, rest days and leave periods, and social security provisions that have been largely ignored to date. Unfair dismissals will be less likely and employers will have to pay severance in all cases. Will it improve wages and working conditions? Yes, but mainly in those companies that are able to raise their level of human resource management. What will the rest do? It is true that the law has been introduced very quickly and many will simply not have the time to ramp up their management systems. Some will move to Bangladesh, Vietnam or Cambodia. Some will hire labor lawyers to teach them all the loopholes, including the use of labor brokers and sub-contracting, both of which are tactics widely used in other countries with high social charges and inflexible labor contracts (such as Turkey, for example). Some employers will continue business as usual and hope that workers do not sue.

Cost impact
How will companies absorb the additional costs? It is likely that the low-margin, labor-intensive companies will move inland to cheaper parts of the country, or offshore. Most companies will think twice before adding workers and this is a major concern to the Chinese government for whom employment growth remains a major priority. The Chinese economy is expected to slow somewhat this year in line with the U.S. and EU and so the new law comes at a bad time for employment. Interestingly, both trade and labor officials expressed this concern to me and privately felt that the law went too far, given the state of the Chinese economy. This further demonstrates the extent to which the NPC drove this law, despite reservations by government and business.

For better or for worse?
It may turn out that a law which was designed to promote greater social harmony and cohesion, may (in the short term at least) generate unemployment and conflict over labor contracts. In the longer term, however, the law should lead to a more stable workforce and greater retention of workers. Employers will be able to invest in training and human resource development and move up the value chain, something the Chinese authorities have been urging them to do. This law may well prove to be the catalyst for a shift into more modern methods of management and a leap forward for the Chinese economy.

Auret van Heerden


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