Rural Wages vs. Urban Pay: Time for Dorothy to Head Back to Kansas?

When I was in college there was a popular t-shirt that read: “Dear Aunt Em, Hate you, hate Kansas, taking the dog. Love, Dorothy.

The obvious reference to Wizard of Oz aside, it captured the sense of adventure people feel as they leave boring, ho-hum lives in rural or suburban areas to seek their fame and fortune.

It makes sense that college kids were drawn to the sentiment, but I imagine it would resonate much more with the sort of young adults who, like Dorothy, grew up on a farm.

Especially in emerging nations.

This is the breeding ground of the manufacturing class of the world — the same kids who probably made said t-shirt.

The allure of the city leads the peasant farmers of today to become the factory workers of tomorrow.

That, in turn, drives a manufacturing boom, and as more of them search for jobs, labor costs remain low and products remain cheap. It’s why those college kids in the U.S. can buy electronic gadgets, clothes, and other consumer goods at such low prices.

But it doesn’t last forever. Eventually everyone figures out that the yellow brick road doesn’t lead to a pot of gold.

As rural wages move up to compete with urban pay, and the cost of city living shoots higher, the draw of factory work fades, the migration wave subsides, and productivity gains slow to a crawl.

It hurts the companies, too. As factory workers demand more pay, they drive up costs and cut into profits. At this point, the economic gains of getting those people to migrate to cities are mostly null.

It’s exactly what we’re seeing in China.

As Chinese leaders struggle to create growth, keep the property bubble intact, and maintain order in a population unhappy with work conditions and pay, I’d imagine they long for the days when more peasant farmers were available for factory work.

Even with roughly 278 million such workers punching the clock every day, it’s not enough… and there aren’t any more workers to be had.

Roughly 20% of all workers in China are still involved in agriculture, but they aren’t likely to migrate to cities anytime soon. The remaining farmers aren’t strapping 25 to 30-year olds, either — they’re mostly just old.

The young adults who were going to leave for the city have already left, and thanks to China’s one child policy, there are fewer children to take the place of aging workers.

This will exacerbate the shortage that appears to be in place. The number of people considered prime working age, from 15 to 64-years old, peaked in 2013 and will continue to decline for many years.

As the process of rebalancing the workforce of China from rural farms to industrial cities comes to an end, the productivity gains that washed up on foreign shores in the form of cheaper goods will also drop.

But someone will pick up the slack and continue to send us cheap goods, right? Not likely. It’s hard to see how such a confluence of events — spending booms in Western nations, ultra-cheap credit, a hungry new workforce unshackled from its rural roots — will repeat in other nations.

The only nation with even some of the qualities of China is India, but they’re not ready for prime time just yet. So far that country hasn’t shown that its population can handle the sort of manufacturing that led to China’s success, and its rule of law is… complicated.

Other, smaller Asian nations like Vietnam, Thailand, and Cambodia are doing their best to attract manufacturers put off by rising costs in China. But there’s no way to quickly replace the full supply chain that developed in the Middle Kingdom. Recreating this in another place would take years, if it ever happens.

This leaves consumers in the developed world searching for the next driving force that will improve our standards of living, without exacting higher costs. It could be a long wait for all of us, and the hard landing of the Chinese economy could be a terrible shock for both us and them.

For now, enjoy cheap products while we have them, before Dorothy heads back to Kansas.

Rodney

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.