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compensation in China’s manufacturing sector. As shown in table 8, these 101 million Chinese manufacturing employees received an average of approximately U.S.$1,252 in labor compensation in 2002, a figure that works out to about U.S.$104 in monthly labor compensation and implies an hourly labor compensation of around U.S.$0.57 for China’s manufacturing employees. 129

How does that U.S.$0.57 compare internationally? Chart 4 shows manufacturing hourly compensation costs in China in relation to the same costs in several other countries. Chinese costs are 3 percent of those in the United States, according to data from the BLS series. Even compared with some of the lower cost countries in the series, Chinese costs are low: a quarter of the cost level in Brazil and Mexico and less than a tenth of the average of Hong Kong, Korea, Singapore, and Taiwan. 130

Purchasing power of take-home earnings for manufacturing workers

Prices of goods and services vary greatly among countries, and the official exchange rate is not a reliable indicator of the relative difference in prices between China and other countries. Prices for most purchases in China are low, so the dollar figure of U.S.$0.57 in hourly labor compensation does not adequately capture the purchasing power of the incomes of China’s manufacturing workers. To more closely approximate the purchasing power of Chinese manufacturing worker incomes in U.S. dollars, some type of purchasing power parity (that is, the amount of yuan required to purchase the equivalent of $1 of goods and services in China) is needed. One way to better account for different purchasing power of different currencies is to utilize the “purchasing power parity” (PPP) exchange rate as estimated by the World Bank based on the cost of a comparable “basket” of goods in the two currencies, yuan in China and dollars in the U.S. “PPP rates allow a standard comparison of real price levels between countries.” 131

Although purchasing power parities provide a better measure of differences in relative price levels than do commercial exchange rates, there are still important limitations in using them to construct comparisons of worker income. For example, the purchasing power parities used may not accurately reflect the actual purchasing patterns of manufacturing workers, and the price data used to construct the parities may not correctly approximate the relative prices of many goods and services. (For further information see Glossary and Definitions: Currency; PPP.)

In theory, use of market or commercial exchange rates is most appropriate for some purposes, and use of PPP exchange rates is the best method for other purposes:

PPP is not appropriate for everything. Trade and capital flows, unlike the bulk of GDP, are actually transacted at market exchange rates, and should be converted into dollars at those rates. PPP is useful in showing how much a country’s money is worth in its home market, but it does not measure effective purchasing power across borders. What matters for businesses that trade internationally is China’s buying power in current-dollar terms. 132

This article gives manufacturing earnings and total labor compensation in Chinese domestic currency and in dollars at commercial exchange rates. The cash portion of


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