Table of contents.
This dissertation critically analyses the disadvantages of introducing minimum wage in Hong Kong. Hong Kong is free market economy driven by the mechanisms of demand and supply. This has been so since the days of Sir Phillip Haddon Cave (Secretary of Finance 1971-1981) who advanced the theory of positive non intervention.
The first section discusses the theory of labor supply and demand for labor. The relationship between the two is used to explain the concept of minimum wage. In the theory section the different methods of determining the level of minimum wage are also discussed.
The body section discusses the impact of minimum wage on the Hong Kong economy. As mentioned above Hong Kong is a free market economy. The wage rate like any other cost of production in a free market economy is determined by the forces of demand for labor and supply of labor.
With increasing unemployment rates in Hong Kong, there has been a lot of talk on the introduction of minimum wage to reduce unemployment. However those advocating for the introduction of minimum wage have failed to prove beyond reasonable doubt that the increase in unemployment is as a result of the failure by the administration to introduce minimum wage.
Studies have shown that the introduction of minimum may wage may result in the reduction of employment rates. Though this may be marginal, it may have a significant effect on the economy in the long term.
There are also concerns of the widening gap between the rich and the poor which the labor bodies as well as the legislators believe cannot be fully addressed by the free market mechanisms that drive the Hong Kong economy. They believe that the government has to intervene for the issue of unequal wealth distribution to be solved. However, this may be a solution in the short term but not the long term. Questions have also been raised as to whether a controlled labor market can adjust accordingly in times of recession or economic boom.
The issue of minimum wage has been highly politicized and is not being looked at objectively. The administration has always operated on the principle of big market, small government. This has been done to make Hong Kong the chosen destination of foreign direct investment. The government rarely interferes with the policies laid out by the private sector as this may upset the measures that have been put in place to balance the economy.
The private sector has introduced minimum wage for cleaners and security guards. This is a program undertaken in collaboration with the Labor Advisory Board. This is because the wage in these two occupations was below the entry level of the Comprehensive Social Security Assistance (CSSA). This is a show of great responsibility by the private sector and any interference by the government will be counterproductive. If the private sector can handle such issues own its own then how can we justify interference. Hong Kong is the world’s best free market economy and this should be enhanced rather than destroyed.
Key Words: Minimum wage, free-market economy, demand for and supply of labor, unequal distribution of wealth and positive non intervention.
Minimum wage is defined as the lowest hourly, daily or monthly wage that employees are legally paid by their employers. The minimum wage law was first enacted in Australia in 1894 and New Zealand in 1896 where wages councils were established to protect low income workers. Currently the minimum wage law is applied in over 90% of the countries worldwide.
The level of the statutory minimum in 20% of the least developed countries is $57 per month. On the other hand, minimum wage in 20% of the most developed countries is $1185 per month which translates to about $40 per day. This gives a ratio of 1:21 between the lowest and the highest minimum wage paid by these countries.
On average, minimum wage is usually two thirds of the GDP per capita. The world’s median minimum is $ 213 per month or $7 per day. Fifty percent of the countries which subscribe to minimum wage have their minimum wage below this level.
The statutory minimum wage is set for the whole country and is determined by the state mostly. In 21% of the countries, the minimum wage is set by the government while 8% of the countries set the minimum wage after consultations with the employers and the employees. 11% use a combination of both of the above method.
The Hong Kong administration currently does not support the introduction of the statutory minimum wages law.
To better understand the minimum wages law as put forward by various economists, we need to study the supply of labor and the demand for labor curves and the relationship between the two.
Supply of Labor Curve:
The amount of labor supplied is generally considered to be positively related to the nominal wage. This is represented on a graph with the wage on the vertical axis and the quantity of labor supplied on the horizontal axis. McConnell C. R. & S. L. Brue (1995) The supply of labor curve is then upward sloping and is shown as straight line moving upwards to the right.
The upward sloping labor supply curve is as a result of the fact that as wages rise, the labor force has less time to engage in leisure activities as they spend most of their time at work. This leaves them with more money to spend. This can also be explained by the fact that as wages rise the cost of leisure increases and the labor force is less likely to engage in leisure activities. The cost of being a participant of the labor force also rises as wages increase. This means higher living costs for those in the labor force and therefore they are less likely to engage in leisure activities.
Demand for labor curve:
The amount of labor demanded by firms is generally assumed to be negatively related to the nominal wage. As wages increase there is less demand for labor by firms. This is represented on a graph with wages on the vertical axis and the quantity of labor demanded on the horizontal axis.
The demand for labor curve is downward sloping and is shown as a downward sloping line and to the right on the graph.
A firm’s cost is a function of the wage rate. As the wage rate rises, it becomes more expensive to hire workers and this makes firms to hire fewer workers.
The relationship between the Supply and the Demand for labor:
Combining the demand and supply curves for labor helps to understand the effect of minimum wage. The point at which the demand for labor curve and the supply of labor curve intersect is the labor market equilibrium. At equilibrium, the number of people looking for jobs (quantity of labor supplied) equals the number of available jobs (quantity of labor demanded). McConnell C. R. & S. L. Brue (1995)
If the wage rate rises above the equilibrium wage as shown on the chart below, then the number of people looking for jobs exceeds the number of number of jobs available. This means that fewer jobs would be available for this people eventually leading to unemployment. What this means is that in the absence of the intervention of the government, competition among workers for the limited jobs available would result in a fall of wages until the wages reaches equilibrium. A minimum wage therefore prevents wages from falling.
Approaches to determining levels of pay variation:
There are two approaches in determining the levels of pay variation. These two approaches involve analyzing the various factors to be considered in determining the appropriate minimum wage.
1. Cost Compensation:
This approach tries to measure the cost of disadvantages that is the expenditures that consume most of the disposable income. These may include high transport costs, high housing costs or high costs of food stuffs. What this method tries to do is to calculate the amount of pay that is sufficient for the employees based on the areas of cost disadvantage. (McConnell C. R. & S. L. Brue 1995). This is by identifying the level of compensation that needs to be added to pay to compensate workers for these higher costs so that they can receive the same real pay level for the same work throughout the country.
The cost compensation approach attempts to estimate the addition to some average or base level of pay that would compensate for differing local conditions. It does this by valuing the relative advantages and disadvantages in each area compared to some specific base area. In reality many factors cannot be valued and most assessments using this approach focus on a few key measures, such as the cost of housing. Whilst simple and relatively transparent, this approach runs the risk of seriously over or under-shooting the level of necessary compensation.
2. Labor Market Approach:
In this approach, the minimum wage is determined by observing what the rates are in different areas. Some regions may have a wage rate that is higher or lower than others. The statutory minimum wage may therefore be said to a national average of the different wages in different regions.
Cost compensation formed the basis of calculating London Weighting in the Payboard’s Report and organizations such as Incomes Data Services and the Labor Research Department. (Office for National Statistics, Britain 1999: The Official Yearbook of the United Kingdom, 1999).
The first stage of this dissertation is a literature review on minimum wages mainly focused on three areas. First is that the minimum wage system does not really help the low income group as it is expected. Secondly, minimum wage boosts the company made structural reform, cost distribution and resource reallocation at the expense of the employees. Finally minimum wage puts the low income earners into a risk of unemployment which eventually has a strain on the country’s resources as the government has to increase spending on welfare for the unemployed.
The primary methodology involves a detailed questionnaire randomly distributed to the public in Hong Kong. This was done between March 2008 and June 2008. During this period a total of 2265 self administered questionnaires were distributed in the working district s of Kung Tong, Yau mei tau and Mongkok.
At the end of June, 1689 copies of the questionnaires were collected representing a response rate of 74.57% which after sorting out the complete and incomplete as a final sample 1336 was arrived at.
The questionnaire is as shown below.
The following survey seeks to know more about the depth effectiveness of minimum wage and what the low income group’s necessities are.
Please tick where appropriate.
|High School Certificate Diploma Undergraduate Post Graduate|
|5. Does your current salary satisfy you?||Yes No|
|6. What minimum salary do you expect from your current job?|
|7. Is it important for your current job to have promotion to senior grade?||Yes No|
|8. Do other employees in your job category have the same job performance with you?||Yes No|
|9. Is your job performance equal to requirements of the organization?||Yes No|
|10. Which of the following factors should be taken into account when determining the minimum wage||– Housing Costs
– Transport costs
|11. What can you comment about the current system of wage increment appraisal in your organization.|
The Hong Kong government has over the years been of the opinion that the minimum wage is not practical and beneficial to the economy. The government believes that the self adjusting mechanisms of a free market are the solution of the unequal distribution of wealth.
Members of the legislative council have always held a different opinion on the issue of minimum wage since was first brought to parliament in 1998. According to them, the issue of minimum wage cannot be ignored if the widening gap between the rich and the poor is to be fully addressed.
They have argued that the free market adjusting mechanisms cannot be relied upon to correct issues concerning social justice. The government therefore has to intervene in such instances. In fact the liberal economies operating on the principal of free market economy notably the United States of America introduced minimum wage in 1936 and is still in operation.
The opponents of the free market system believe that the imbalance in the labor market which is as result of the quantity labor supplied in the market exceeding the quantity of labor demanded by the market cannot be corrected by the forces of the free market. In support of the introduction of minimum wage, Mr. Leung Yu a member of the Council argued that the introduction of minimum wage will have no effect on the employment rate. However they have not proved this beyond reasonable doubt.
In reality an increase of the minimum wage say by 10% would lead to decline in the rate of employment of between 1%- 2%.(Card D. & A. B. Krueger 1995). If this was to go on for five years at a constant rate of 10%, at the end of five years the cumulative increment would be 50% and rate of employment would decline at a rate of between 5%-10% in the same period. This might be insignificant in the short term but we cannot continue losing jobs at this rate in the long term.
The philosophy behind the enviable Hong Kong sound financial management over the last 30 years has not changed. The Heritage foundation and the Fraser Institute, which are known to be reputable public policy institutions, have ranked Hong Kong as long having been, continue to be and is the world’s freest economy. This is proof that our economic policies have not changed. However it is the new developments like the advent of Information Technology, globalization, the rapid economic growth in China, the rise in oil and food prices globally as a result of the Middle East Crisis that are the catalysts of change not only the Hong Kong economy as well as the global economy. This is what the Hong Kong government should be dealing with as a matter of priority.
Sir Phillip Haddon Cave (Secretary of Finance 1971-1981) developed the theory of positive non intervention. This was founded on the belief that it is to the disadvantage of the overall economic growth, especially for an open economy, for the government not to interfere with the planning and allocation of resources available to the private sector.
The market has been the driving force of the Hong Kong economy since the days of Sir Phillip Haddon Cave and should continue as such. Government intervention has always been the exception rather than the rule. The government operates on the principal of big market, small government where the government responds to the needs of the market and does its best to support and promote economic developments within the boundaries of a small government. The policy of the government is therefore not to intervene in any sector of the market which the private sector can handle on its own. Therefore issues like labor relations have largely been left to the private sector with no government interference.
It is in respect of this trust and high regard accorded to it by the government, the private sector has come up with Wage Protection Movement for cleaners and security guards. This is because wages in these two occupations were below the level for which Comprehensive Social Security Assistance becomes payable. In addition to this the private sector has committed itself to ensuring that the movement succeeds. For this to be achieved, members of the private sector have been given the task of ensuring that their subcontractors for cleaning and security jobs pay their workers minimum wage under written contracts. The Labor Advisory Board is monitoring the program and should there be no success achieved after two years, it will recommend to the government the introduction of minimum wage.
The Keynesian economic theory of a large government, welfare, nationalization of key industries and government intervention are rapidly being replaced by ideas of free trade, liberalization of the market and open competition which are more widely accepted as the factors of the success of any economy worldwide.
The commonly held view in Hong Kong is that the role of the government is to provide an enabling environment for the market to operate effectively. Therefore it is only in situations beyond the control of the market that the government can consider intervention after wide consultations. The spirit of positive non intervention which allows for markets to operate without intervention has guided Hong Kong for thirty years must be left to continue. Passing the legislation on minimum wage may trigger a series of legislations aimed at interfering with the operation of the free market.
Hong Kong has for long been held as the International finance centre. This has been as a result of the strong institutions in Hong Kong, upholding of the rule of law by the government, a level playing field for all players in the market, successive corruption free governments, the free flow of information and low and simple taxes which provide an environment which is suitable for both local and foreign investors. (England, 1989 Industrial Relations and Law in Hong Kong, Oxford University Press,).
The introduction of policies such as minimum wage without careful consideration can only be termed as negative intervention and will only reverse the gains that have so far been achieved over the years. Sir Piers Jacobs (Secretary of Finance 1986-1991) stated that the economy will normally be most efficient if market forces are relied on and the government intervention in the private sector is kept to a bare minimum.
The Administration has held its position that the current market driven cost of labor is important for Hong Kong as a free market and free enterprise system. It has further been argued that labor like any other cost of production should be determined by the forces of demand and supply.
The cost of labor in Hong Kong as earlier stated is market driven. On the other hand the labor market is efficient and responsive. These two combined have made Hong Kong a model free market economy. If Hong Kong is to continue being the world’s favorite investment destination, there must not be any interference with the mechanisms operating the labor market. Minimum wage will not only interfere with the wage structure but also make it difficult for wages to be adjusted in times of economic recession. This would make it difficult for the business community as well as the government to adjust to external forces. (England, 1989 Industrial Relations and Law in Hong Kong, Oxford University Press,).
The current wage system is necessary if Hong Kong is to keep its workforce motivated, competent and enterprising. This is necessary for economic growth. The private sector in Hong Kong has always paid wages based on the job performance and level of qualification with the state of the business environment in mind. This has always motivated the employees to work hard and increase the qualifications. As a result, Hong Kong has one of the most competent skilled labor in the world. This is a great incentive to foreign investors who do not have to import labor from their base of operation when establishing business in Hong Kong. Statutory minimum wage will mean a uniform pay for the low paid workers and therefore kill this incentive.
If the statutory minimum wage is set higher or lower than the level determined by the market, this will have a negative impact on the rate of employment .(Card D. & A. B. Kruegar 1995). In the first scenario where minimum wage is set above the level determined by the market, the result will be a closure of business by industries as the cost of labor will be too high for them to continue operating profitably. This will lead to massive unemployment especially when the economy is shrinking. The people who will be most affected by this are the less skilled and less qualified workers. This will make them unproductive and therefore hurt the economy in the long term.
If the minimum wage is set below the market rate, employers will have an easy time paying their workers. In case of an economic boom, workers will be paid the minimum wage rather than the rate which will be result from the economic boom. The working force will not grow with the economy and as a result their living standards will go down instead of improving. .Card D. & A. B. Kruegar (1995). In order for the economy to grow significantly, the working force must be able to contribute a significant proportion of the middle income earners. The economic success of countries like the United States has been as a result of this. The U.S. has the largest middle class in the world. If we introduce minimum wage, it will be difficult for us to achieve this as the lifestyles of the working class will not improve as the economy grows.
It is not easy to determine a minimum wage for all the various sectors of the economy that is agreeable to both the employers and the employees. With a free and dynamic labor market such as the one in Hong Kong, the different sectors of the economy have different methods of setting their wages. Statutory minimum wage may therefore work to the advantage of some sectors and to the disadvantage of other sectors.
The impact of minimum wage on employment, poverty and income distribution
It is also useful to examine the impact of statutory minimum wage on poverty, unemployment rates and income distribution according to the findings of a study conducted by the Organization for Economic Cooperation and Development (OECD).The conclusion of this study is that statutory minimum wage has only minor effect in reducing poverty.
The study indicates that minimum wages can help reduce poverty only if the low-wage workers are at the same time members of poor households. Poor households are defined as those with per capita household income less than one-half of the median. The study shows that in the United Kingdom, the Netherlands as well as the United States, only 5%, 13% and 33% respectively of the adult members in poor households earn less than two-thirds of the overall median employment earnings. Therefore minimum wages cannot be a solution to the poverty problem. (Organization for Economic Co-operation and Development, 1997 Making Work Pay: Taxation, Benefits, Employment and Unemployment,).
In Hong Kong it is estimated that only 18% of adult members in the poorer households are low-wage workers. 61% of the adult members in these households do not work or are past the working age, comprising mainly retirees, homemakers and students, while the remaining 21% are mostly higher-wage workers.( Hong Kong Social Security Society, 1998 A Proposal for a Minimum Wage in Hong Kong,).
With these facts in mind, it is highly unlikely that the introduction of minimum wage will improve the living conditions of the poorer families in Hong Kong. In fact the Government has already put in place the Comprehensive Social Security Assistance (CSSA) Scheme which provides financial assistance to those who are not able to sustain themselves financially.
The study further indicates that teenagers aged 16 – 19 suffer a greater loss in jobs than adults upon the implementation of statutory minimum wage. Most of the teenage workers are less skilled and lower paid workers. As stated earlier minimum wages significantly affects such workers far more than other members who possess a relatively higher level of educational attainment, working experience and skills. (Organization for Economic Co-operation and Development, 1997 Making Work Pay: Taxation, Benefits, Employment and Unemployment,).
In Hong Kong, Statistics show that 72% of the teenage workers aged 15-19 is semi-skilled or even unskilled, hence with lower pay. Those in the workforce whose wages fall below the statutory minimum wage will lose their jobs.
Statutory minimum wage has minimal effect in ensuring that there is even distribution of income. Those lower-paid workers who manage to retain their jobs would be paid more if minimum wage is imposed on the labor force. On the contrary some of the lesser-skilled and lower-paid workers are likely to lose their job and source of income. (Organization for Economic Co-operation and Development, June 1998 Employment Outlook,).
Therefore it cannot be determined whether the overall income distribution will improve or not with the introduction of minimum wage. However since the low skilled workers are likely to lose their jobs, then naturally the introduction of minimum wage cannot result in better distribution of income. This will in fact widen the gap between the rich and the poor. ( Lal, 1995 The Minimum Wage: No Way to Help the Poor, The Institute of Economic Affairs,).
Hong Kong Social Security Services proposed a statutory minimum wage of HK$5,885 in 1998. According to statistics at the time, 14% of the employed persons in Hong Kong were earning less than $6,000 per month. (Hong Kong Social Security Society, A Proposal for a Minimum Wage in HongKong, 1998).
This is inclusive foreign domestic helpers who constitute around 8% of the total workforce. In such a scenario, the implementation of statutory minimum wage will beat its purpose as only a small number of the workforce will benefit. This combined with the small proportion of low-wage workers in the poorer families means that net effect on income distribution in Hong Kong upon the introduction of minimum will be minimal.
Minimum wage is aimed at improving the living standards of the workers who are said to be exploited by corporations as they are a source of cheap labor. It has been successfully implemented in some countries especially the developing countries. In these countries fifty to eighty percent of the population lives below the poverty line of one dollar a day. Introducing minimum wage in this country is without any doubt beneficial to these economies.
A good majority of the Hong Kong is well paid and can sustain a good lifestyle. Statutory minimum wage is a social welfare program that seeks to reduce the gap between the rich and the poor. As of 1998, only 14% of the population was earning less than $6,000 per month which translates to about $ 200 a day. This is way above the International Labor Organization’s daily minimum of $2 a day. Introducing the proposed minimum wage of $5880 will only lead to unemployment as majority of the population earn more than this.
The Comprehensive Social Security Assistance (CSSA) was introduced to cater for those members of society whose level of qualification does not enable them to engage in meaningful employment. The CSSA program has forced the business community in Hong Kong to introduce a minimum wage for cleaners and security guards as their minimum wage was below that of CSSA. This means that the administration has already put in place measures to ensure that minimum wage in any sector does not fall below a certain level.
Hong Kong is the world’s freest market economy. The government does not interfere with the business of the private sector. On the other hand, as much as the private sector is not regulated, it has always acted responsibly and in the interests of enhancing the free market economy. It is therefore unnecessary to introduce regulatory policies such as minimum wage which may off set the balance already achieved by the policies of the free market economy.
Finally the economy has always guided itself over the years and a lot of economic gains have been achieved over the years. The economy should therefore continue to run without interference from the government or any other body.
A lot has been said and written about the issue of minimum wage in Hong Kong. There have been arguments both for and against the introduction of minimum wage in Hong Kong. In this thesis the argument is against the introduction of minimum wage in Hong Kong, I have given my reasons which I believe are valid.
Introduction of a standard minimum wage in all the sectors of the economy is meaningless and is not practical in Hong Kong. What I can recommend is for the various sectors to examine the basic needs of their employees based on the environment and then adjust their minimum wage accordingly. This will ensure that the workers receive a fair wage both in times of economic boom and recession.
This can be done in collaboration with the Labor Advisory Board whose main task will be to give advice as to when and by how much the minimum wage should be adjusted. Should this fail then the Labor Advisory Board can recommend the introduction of a minimum wage in all the sectors. In other words the example of the cleaning jobs and security guards should be followed.
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