Following the Australian profit-reporting season, it was apparent that the majority of companies are reporting continued downward pressure on margins and continued upward pressure on costs, a deadly combination for a CEO to manage.

13D, our most trusted and accurate source of international research and strategic thinking, last week made the following comments regarding the potential for inflation.

Will China spread inflation to the rest of the world or will it manage a slowdown? Over the course of the last five years or so, it has become increasingly common to read of labor shortages immediately after the Chinese New Year holiday, and this year has been no exception.

Anecdotal stories suggest that wages in traditionally low-end job segments are rising at an alarming rate. Consider the following – in Xiamen, the coastal business hub of Fujian province, construction workers can now earn wages of nearly 10,000 Yuan ($1525) per month if their overtime payments are included, well above the city’s average wages.

Wages of babysitters and nannies – once the sort of professions characterized by the lowest entry barriers often filled by poorly-educated rural citizens – have climbed to a level that matches what white-collar workers were earning ten years ago, according to Global Times, a local English-language newspaper. In Shanghai, the average wage for nannies now approximates 2500 Yuan ($380) per month, only 30 per cent less than the city’s average wage for all of 2009.

In Beijing, the shortage of labor in the delivery/logistics area has become acute as most companies have had to contend with warehouses brimming with undelivered goods accumulated during the long holiday. Operations managers have reportedly been asking recruiters to “give me one [man] that moves”. In Shenzhen, a new recruit reportedly told the South China Morning Post (SCMP) that “you can walk into any factory and get a job. The factories welcome everyone and don’t ask for educational qualifications or work experience, and don’t specify any gender or age. Workers just choose the place with better pay and conditions”.

Labor shortages are not limited to the coastal regions, but have been spreading across the country, even to regions that have been traditional sources of migrant workers. In Anhui province (central/eastern China) – an inland province with a total population of nearly 70 million, including an estimated 13 million migrant workers at year-end 2010 – recruiters struggled to find enough people following the first job fairs after the holiday. According to statistics from the Department of Human Resources and Social Security of the province, the shortfall of workers was estimated at 245,000 at year-end 2010.

In Linying county of Henan province, which has a farming-dependent economy, 7.7 billion Yuan had been invested to develop a 16.25 square-kilometre industrial zone to lure coastal manufacturers inland. Wang Guogan, head of Linying county, recently told the SCMP: “We’ve called on all local laborers to stay home and not venture outside the county…Officials at all levels of 15 townships in my county have mobilized their people to work for local manufacturer. During the Chinese New Year holiday, our television station and newspapers ran free job ads for local factories. Our government set up stalls at the train and bus stations last week to encourage migrant workers to stay home. Last year, more than 150,000 people left Linying in search of work.This year, the figure has dropped to only about 90,000. Linying residents can now easily find a job right near their homes with a good salary of 1500 to 2000 Yuan a month.”

Official statistics reveal similar trends. According to the National Statistics Bureau, the average income of rural areas last year approximated 5919 Yuan per capita, up 14.9 per cent from the previous year, exceeding the growth of average urban per capita income for the first time since 1998. When rural residents can achieve higher income growth in their hometowns, while also taking care of their families, they might have less motivation to leave their homes for jobs some distance away in major cities.

According to Stephen Green, chief China economist at Standard Chartered Bank, China’s industrial and service sectors created roughly 20 to 25 million jobs in 2010 – twice as many jobs as the official estimate. Green wrote in his research note, “We should expect only three million new labor market entrants a year from 2011 to 2015, compared with approximately 10 million a year in recent decades”.

In other words, the Chinese economy is or has been growing at much higher speeds than its labor supply can support. This also indicates that Beijing should reconsider its pro-growth policies. A slowdown of the Chinese economy may not be a bad thing at current circumstances given high inflation and shortages of labor.

China’s population growth rate (birth rate minus death rate) peaked in 1987 at 16.61 per thousand and has since declined to as low as 5.08 per thousand in 2008. This implies new labor supply likely peaked 20 years after the birth rate peak, or around 2007.

Moreover, the age structure of the migrant workers is changing. According to a report by the All-China Federation of Trade Unions, young workers born between 1980 and 1995 now total at about 100 million, or as much as 43 per cent of the total migrant workforce. They are also better educated than the first generation migrant workers – 67 per cent of them have a secondary education or above, 18 percentage points higher than the first generation.

A young and better-educated workforce carries many positive implications for employers and the society at-large. Being young and often the only children of their families, these so-called second generation migrant workers are unlikely to be satisfied with the “eat bitterness” mantra of their parents’ generation, most of whom were born between 1960 and 1975, when the entire country was poor and almost all materials were in short supply. Their turnover ratio, that is, the number of times they change their jobs in a given year, is much higher than the first generation’s: 0.26 times per year versus 0.09 times per year. In a sense, the second-generation migrant workers can probably be compared to the baby-boomers, whose parents had to endure the Great Depression and World War II.

Second-generation migrant workers also have high aspirations for their future, 42 per cent of those surveyed cite ‘looking for opportunities’ as their major purpose to work in big cities, while 55 per cent of the first generation migrant workers cite ‘making money to support family’ as their main purpose. Rising living costs and home prices increasingly force younger people to delay marriage, which in turn implies little population growth in the immediate future.

In China, the male is traditionally responsible for purchasing a home before marriage, with or without a bank loan. Given the recent sharp increase in home prices, most average families have been priced out of the housing market, which could cause birth rates to fall even further, unless the Chinese government can provide enough public housing. Therefore, it looks as if China is about to lose one of its most important competitive advantages: a well-trained workforce at reasonable cost, though this will occur gradually over several decades.

However, given the sheer size of China’s population and its important function in the global supply chain, the world needs to find many more regions and countries to fill the ultimate void.

Vietnam, for example, has a population of only 88 million, which is less than the population of Shandong, China’s second-most populous province. More than a dozen countries the size of Vietnam are needed to replace China. The investments in infrastructure and human resources are so gargantuan that no single country could replace China in a short period. Those smaller countries are also not immune to labor shortages and rising costs, as Vietnam has already encountered in the footwear and garment industries.

Former US Federal Reserve chairman, Alan Greenspan, recently commented on this as follows: “We’re in the early stages of Chinese wage growth beginning to mount, and that should lift inflation rates in China and add to pending inflationary pressures in the US … It’s a long-term process in train.” As China’s inflation begins to proliferate, US interest rates will have to rise.