Minimum Wage in Hong Kong

1. Part 1: Minimum Wage law in Hong Kong

2. Introduction

The Hong Kong Government introduced of a Minimum Wage in Hong Kong in May 2011, in response to increased incomes disparity in the territory. It uses economic theory to predict certain impacts such as level of employment, profits of firms, inflation effect and potential positive effects on the economy in general.

3. Minimum Wage – Economic Theory

Economic theory tells us that when artificial price floors are introduced in the market, they force prices to remain above the level that balances supply and demand. The same is true with minimum wage; it raises the quantity of labor supplied and reduces the quantity of labor demanded, it creates a surplus of labor that translates into unemployment (see figure 1).

Figure 1: Price floor created by minimum wage

In summary the minimum wage causes the following:

? Minimum wage act as a price floor

? Unemployment is proportional to the difference between minimum wage price and the natural employment price equilibrium

? Reduces the demand for workers due to increased wage

? Encourages more workers to join the workforce due to higher minimum wage

? Net result is surplus = unemployment

Economists are generally in agreement with the theory, the reality is however that minimum wage laws have been implemented in more than 90% of all countries according to the International Labor Organization.

4. Introduction in Hong Kong – May 2010

After many years of debate, the Hong Kong government introduced a minimum wage law in May 2010. For several months the debate raged between supporters and opponents of the law. The supporters generally pointed to the increased inequality in wages in the city. In fact Hong Kong is now having a Gini coefficient of 53.5. This about the same as Thailand, it should be noted that Western European countries and the US have a Gini coefficient between 30-35. The opponents have pointed the theoretical impact of a minimum wage, and have tried to explain that a minimum wage law would not solve alone the income disparity. They argued that the peg of the Hong Kong Dollar to the US Dollar caused inflation and property bubbles and distorted even more income disparity.

A minimum wage commission was set up to make recommendation for the implementation of a minimum wage law. Under the Minimum Wage Ordinance, the wages to the employees should be no less than the statutory minimum wage rate of HKD 28 per hour in any wage period.

The design of Hong Kong Minimum wage

The Hong Kong minimum wage is designed to have the minimal impact on the economy. While economic theory still holds true, the main reason for the minimum wage to be a non-event economically is the level of the wage floor. As seen in figure 2, the wage floor is set at a very low level of 47% of the median hourly wage and affects only about 10% of the working population.

According to data from the Annual wages and Earnings survey quoted by the Minimum Wage commission, about 314,600 workers benefit from the law. They represent the bottom 10% percentile on the wage distribution scale. The introduction of a minimum wave represented an increase of 18.6% for the average employee in the bottom 10 percentile of the workforce.

Figure 2: Wage floor set at 47% of the Median Hourly rate to minimize surplus

The largest percentage wage increases happened in estate management, security and cleaning services sector followed by other low paying sectors, restaurants and retail trade (see Appendix 1 figure 1).

There are other external factors that contributed to the low impact of the minimum wage law. First the level of unemployment in Hong Kong has been at record low levels of 3.5% as seen in figure 2. Being on the recovery/boom business cycle increases demand for labor, which counters the surplus effect of the minimum wage law. In recent years, more and more Chinese mainland residents have been allowed to visit Hong Kong; as a result the retail and service industries have been booming.

5. Impacts – 15 months later

A year plus later, we are now looking at the impacts. It must be noted that the full impact of the minimum wage law can only be fully appreciated over a complete business cycle. Hong Kong, from a business cycle standpoint is still