26 October 2016
The HK$32.5 minimum wage introduced by Hong Kong last year covered only 1.4 percent of local employees. Photo: CNSA
The HK$32.5 minimum wage introduced by Hong Kong last year covered only 1.4 percent of local employees. Photo: CNSA

Minimum wage: Time for a pause or time for salvage?

“Time for a Pause” is the title of one of two articles that the Hong Kong General Chamber of Commerce devoted to minimum wage in the June issue of its bulletin. The title bespeaks the Chamber’s position on the upcoming minimum wage increase in 2017, namely, that “a freeze is more appropriate”. We find this position blind to economic figures, oblivious of economic theories and devoid of good rationales.

In the article, the Chamber says that “since the 2011 debut of the Statutory Minimum Wage in Hong Kong, the wage rate has assumed an upward trajectory for the last two reviews respectively in 2013 and 2015″.

These uprates were “tolerable” to business, in the Chamber’s view, only because Hong Kong’s strong economy in the past few years allowed businesses in the city to absorb the costs of the uprates. Now that the local economy has started to turn sluggish, the costs of minimum wage would be “particularly damaging”, it warns.

On the basis of economic figures, we see a different picture however. The minimum wage has in fact become less and less relevant to low-paid workers on all counts. It is so low that it provides almost no protection to low-paid workers despite its existence and uprates. Saying that the costs of the previous minimum wage uprates to business were only “tolerable” is not only far from true but is gross exaggeration.

If the Chamber bothers to take a look at inflation figures, it would see that the minimum wage uprates so far have failed to catch up with inflation. The initial minimum wage was set at HK$28 per hour in May 2011. After two bi-annual uprates, it was subsequently uprated to HK$32.5 per hour in May 2015, a total increase of 16.1 percent since 2011.

In comparison, the corresponding inflation rate (measured by changes in the consumer price index (A), which reflects the impact of price changes on relatively low-income households) in the same period was 17.3 percent.

Apparently, the minimum wage uprates not only have not brought any real minimum wage increase but have failed to protect the purchasing power of the initial HK$28 minimum wage. After discounting for inflation, the real purchasing power of the HK$32.5 minimum wage implemented in May 2015 was only HK$27.7, 30 cents less than the initial minimum wage set in 2011!

With a look at minimum wage coverage figures, the Chamber should also see that the minimum wage has benefited fewer and fewer workers over the years. The initial HK$28 minimum wage introduced in 2011 covered 6.4 percent of employees; the second HK$30 minimum wage of 2013 covered 3.4 percent of employees, a drop by 46.9 percent; the third HK$32.5 minimum wage of 2015 covered 1.4 percent of employees, a further drop by 58.8 percent. The total drop in worker coverage was 78.1 percent. Such a drop in coverage must be very noticeable by any standard!

A further look at general wage growth figures reveals that the minimum wage uprates have so far lagged behind general wage growth. The fact that the minimum wage has benefited fewer and fewer workers over the years is an indication that market wages have grown faster than the minimum wage.

We notice that the Chamber attributes part of the wage growth of the low income groups to the impacts of the minimum wage uprates through ripple effects rather than to market forces. The Chamber writes: “The wage increases in the lowest income echelon have already caused a ripple effect, forcing employers to increase wages in the upper echelons.” This attribution is against economic rationality and without factual support.

One important mechanism of ripple effects for pushing up wages above the minimum is preserving wage differentials in the pay hierarchy. To maintain employee morale, employers have to raise the wages of employees earning above the minimum rate so that a reasonable wage rank order can be preserved. Yet, it is irrational for a profit-maximizing employer to raise wages above the minimum at rates that are higher than the minimum wage increase rate. Thus, the higher growth rates of wages above the minimum must have been caused by market factors rather than the minimum wage uprates.

As regards factual support, one prima facie evidence for the presence of ripple effects is a reduction in wage gaps between low-paid workers and median workers after the introduction of a minimum wage and its subsequent uprates. But changes in the ratios and hence wage gaps have been insignificant if not negligible. In other words, this is little evidence to support the Chamber’s observation that increases in the minimum wage have forced “employers to increase wages in the upper echelons”.

The economic figures we have presented so far show that the previous minimum wage uprates were so low that they had rendered the minimum wage irrelevant to low-paid workers. If the previous uprates were so insignificant to workers, how could they be significant burdens to employers? In fact, quite the contrary, as the uprates have failed to catch up with inflation, benefited fewer and fewer workers and lagged behind general wage growth, the minimum wage law has in effect been suspended!

Apart from decrying the “imaginary burdens” of the minimum wage on employers, the Chamber also warns that “the act of artificially raising the statutory wage rate can bring about market disequilibrium and have the unintended knock-on effect of destroying jobs”. Again, we have to point out that the Chamber’s warning is based on mistaking labor markets as perfectly competitive.

Labor markets are more often than not dominated by employers and characterized by unequal bargaining power between employers and employees. They are therefore often oligopsonistically or monopsonistically competitive rather than perfectly competitive.

In oligopsonistic labor markets, owing to the unequal bargaining power between employers and employees, the equilibrium market wage level tends to be lower than it would otherwise be in perfectly competitive labor markets. Meanwhile, employers’ profit level also tends to be higher than it would otherwise be in perfectly competitive markets.

Thus, in oligopsonistic labor markets, there is actually a possibility for raising wages above the market wage without necessarily putting workers out of work. Under certain circumstances, raising wages may even cause more employment. Most importantly, even if raising wages does cause job fall, the fall will not be as much as it will be when the market is perfectly competitive.

Similar to introducing a price ceiling in a monopolistic market, the purpose of which is to lower the price to a level closer to the competitive level and to protect consumers from being ripped off by monopolies, the purpose of introducing a wage floor – i.e., a minimum wage – in an oligopsonistic labor market is to lift the wage to a level closer to the competitive level and to protect workers from being exploited by employers. Both the price ceiling and the wage floor are economic measures for improving the efficiency of an imperfect market!

Moreover, the likelihood of job fall may also be reduced by consumption-led growth. A minimum wage uprate in effect redistributes incomes from profits to wages. Since the marginal propensity to spend out of wages is higher than that out of profits, increasing the minimum wage will have the effect of increasing aggregate consumption demand. An increase in aggregate demand will then lead to an increase in labor demand.

Even in the case of a higher minimum wage causing unemployment, the Chamber has to explain why the choice is necessarily between “bankruptcies and unemployment” and “keeping low-pay businesses afloat and maintaining a miserably low wage” only. Can there not be alternative understanding of the choice situation?

This is the first in a two-part series on issues related to minimum wages in Hong Kong.

Part II: Why the next minimum wage must be at least HK$37/hour

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