Minimum Wage in Hong Kong

Part 1: Introduction

Hong Kong was a country which adopted free market economy for a long time ago. After the prosperous development, just like other western country, the demand for the government intervention on welfare and social development has been increasingly, and then Hong Kong become the so-called “positive non-intervention” government.

Although the wish for establishing a Minimum Wage (MW) had a long-time discussion in the society, HKSAR government was reluctant to it and advocated Wage Protection Movement instead. The pledge was signed among the public sector, e.g. Hospital Authority, and a lot for reputed corporate joined with it for the sake of corporate social responsibility. However, the situation for the low-paid sector has not much improved. Finally, the government announced the setup of MW with effective from May 2011.

In this assignment, we will outline some public opinion for the benefit and disadvantage of MW, and then give out my viewpoint for it. Finally, there will be some suggestions for the current MW and the related social welfare policy.

Part 2: Main Purpose of the Minimum Wage

From the article of “Fixing Minimum Wage Levels in Developing Countries, author Catherine Saget”, we learn that there can be a and for serving different political, social and economic purpose. In Hong Kong, the income inequality has worsened in last decade, and the Gini-coefficient for households rose from 0.429 in 1976 to 0.537 in 2011.

I may define the MW in HK is a policy, because the purpose of it is to counter poverty, and achieve an appropriate balance in the prevention of low wages and the loss of low paying jobs. It is set to the level for providing the basic protection for the grassroots employee.

Part 3: Benefit of the Minimum Wage

Guaranteed Employee Salary: As the market is not a perfect competition for all the country and the information uneven between the employers and employees, employees usually do not have the ability to negotiate for the wage. When the employer is likely to take the opportunity to lower the wages of workers less than a basic living needs of the salary, the MW will help the low-income workers to earn salary to meet basic living needs

Increase Labour Supply: Under the law of supply, when the price rises, the quantity supply will rise. When the effective MW is setting above the equilibrium wage, it is simply that there is a Ripple Effect for the pay rise in all the low-paid sector and drive the quantity supply to rise. The MW will cause the wage level become more informative and the friction unemployment will decrease.

        Besides, expectation is one of the determinant to supply. Some of the housewife, low-educated youth, elderly and disabled person have abandoned job searching because the salary is too low for their livelihood. Effective MW will drive them to participate in labour market again.

Narrow Income Inequity: MW can weaken the effect of "hereditary poverty" because the low-paid worker will have more resources for studying and improve their living standard.

Maintain Employee Dignity: There are a lot of low-skilled employees who have been exploited by employers for long working hours and very low wages. Some people call this phenomenon "working poor", and these people usually have low self-esteem problem and make them less willing to interact with the community.

Promote Economic Development: With the pay rise, the purchasing power of workers will increase and improve the private consumption. As the pressure for labour cost increase, it encourages industrial automation and forces workers to receive training for moving to higher working standard.

Maintain Social Stability: As the living standard for low-income worker can be improved, the social unrest and problems, e.g. strike, crime, suicide, will be reduced.

Part 4: Disadvantage of the Minimum Wage

Unemployment: The equilibrium of labour is the intersect of the supply and demand curve, that mean the marginal revenue will be the same as the marginal cost. As the effective MW will lead to pay rise, some small and medium-sized enterprises may not be able to afford the rising labor cost, and may lead to lay-off staff or substitute the workforce by machine. [pic 2]

Distorting Market Mechanism: Each industry has its own wage level, and the standard MW will make the resources mismatch. Also, the labour cost for each industry is great different and the impact for them cannot be predicted easily. The MW is like a tax for the employer, which is unfair for low-paid company’s entrepreneur.

Weaken Economic Competitiveness: MW is a clear government intervention in the operation of the market a behavior, and virtually increase the operating costs of employers, and weaken their competitiveness which is not conducive to economic development. Hong Kong as the most liberal economy, the minimum wage is actually detrimental to Hong Kong's economic freedom.

Damage the Employment for Youth and Vulnerable Groups: After the increase in wage, it will certainly attract some people who have already left the labor market. As the employers will have more choices for worker, it will be the disadvantage for the employed vulnerable groups to lose their job and the young workers completely lose their job opportunities to gain the working experience.

No Help for Income Inequity: Many social vulnerable groups may not participate in the labour market, e.g. the homemaker need to take care the child and disabled person may be already unemployed previously. They will not benefit to pay rise but suffer from the inflation caused by the increase of private consumption.

Part 5: Our Viewpoint

To analysis each policy, we need to analyze whether the purpose can be achieved or not, and the cost of it. MW will has the benefit to the society, but in the same time there are some shortcomings. We would suggest some method to improve the shortcomings for the MW policy in HK in next part. For this part, we will focus on the following aspect for MW:

• The effect of the MW on the unemployment rate
• The MW level
• The effect of the MW on the overall economy, including the salaries level, GDP and economic benefits.
• The effect for the low-paid sector and vulnerable groups in the society.

[pic 3]

One of the most arguable point for the MW is the leading of unemployment rate. However, we cannot see this effect after the launching of it. From the graph on the right, we can see clearly that the unemployment rate is keeping downslope and near full employment in past 3 to 4 years.