Emerging-Market Wage Gap Projected to Narrow

The wage gap between advanced economies and emerging economies, such as China, India and the Philippines is expected to decline significantly by 2030, according to a recent analysis by PricewaterhouseCoopers (PwC).

India and the Philippines remain at the lower end of wage projection in relative terms, but average wages in India could more than quadruple over the period in real dollar terms and more than triple in the Philippines, according to a Sept. 26th PwC press release. Real wages in the United Kingdom and the United States are projected to rise by only one-third over the same period, remaining at similar levels to each other.

PwC projects that the wage gap could close significantly by 2030. For example, India’s current average monthly wage is approximately 25 times smaller than that of the UK. By 2030, that wage gap will still exist, but will be only 7.5 times smaller. Average wages in US are currently 7.5 times greater than in Mexico, but the gap could close to a factor of less than four times by 2030. Over the same time period, the average monthly Chinese wage could rise to around half that of Spain, according to PwC.

In looking further at projected average monthly wage levels relative to the US, PwC further outlines the narrowing gap. For example, monthly wage rates in China in 2011 represented 15% of monthly wage levels in the US, but by 2020, China's average montly wage levels rises to 29%o of that of US wages and to 45% by 2030. Monthly wage rates in India in 2011 represented 4% of monthly wage levels in the US, but by 2020, India's average monthly wage levels rises to 8%o of that of US wages and to 13% by 2030.

“While any such projections are subject to significant uncertainties, the direction of change is clear. The large wage advantages enjoyed today by many emerging economies will shrink as their productivity levels catch up with those in advanced economies and their real exchange rates rise as a consequence," said John Hawksworth, chief economist at PwC. "Places like Turkey, Poland, China and Mexico will therefore become more valuable as consumer markets while low-cost production could shift to other locations such as the Philippines. India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.”

PwC suggests that this narrowing wage gap have several important strategic implications. First, companies may re-shore their manufacturing or service operations, as some US companies have already started to do, or move them to cheaper locations. Moreover, as current large cost advantages decline, companies may move to locations that are initially more expensive but that closer to home, thereby gaining more control over supply chains to respond to customers’ changing needs. In addition, middle-income economies, such as Turkey, Poland, and China may begin offshoring to relatively cheaper economies, such as Vietnam, India and the Philippines, according to the PwC report. Lastly, current Western offshorers (to India and China, for instance) will reorient their operations to sell their goods and services to increasingly affluent local populations.

"It's inevitable that the manufacturing and services industries in countries will transform as the cost base evolves, and also that there will be winners and losers," said Michael Rendell, PwC partner and Global Human Resource Services leader, in the release. "Governments, regulators and business communities need to be ready for that shift."