27 October 2016
Workers at the bottom of the pay scale shouldn't be made to shoulder the burden of economic adjustments. Photo:
Workers at the bottom of the pay scale shouldn't be made to shoulder the burden of economic adjustments. Photo:

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

Amid the debate on worker wages, we believe that refusing to introduce a minimum wage or to uprate it in an oligopsonistic labor market is tantamount to requiring low-wage workers to give up a portion of their wages to subsidize their employers’ businesses.

If low-wage workers’ wages are insufficient for subsistence, various third parties will also be required to subsidize the employers’ businesses as someone has to top-up the workers’ subsistence costs. The various third parties may include families and friends of low-wage earners, taxpayers (who fund welfare benefits) and charities. In effect, therefore, when low-pay businesses do not pay subsistence wages, they are actually receiving subsidies from society at large for their earnings.

Along this line of analysis, when setting the rate of a minimum wage, the choice is actually between
1. keeping the wage low to maintain employment and providing subsidies to low-wage businesses, and 2. setting a higher wage at the risk of causing unemployment and the possible consequence of providing unemployment assistance to the unemployed.

This understanding of the choice option reveals the Hong Kong General Chamber of Commerce’s demand for a “freeze” on the minimum wage to be a demand for the continuation of subsidies to low-wage businesses.

But what are the grounds for this demand? Why should low-wage workers, already less well-off, be forced to provide the subsidies? In the case of low-wage workers’ wages being below a subsistence wage, an additional question asks why families of low-wage earners, taxpayers or charities should also be required to pay the subsidies, albeit indirectly?

Why should not taxpayers’ and charities’ subsidies provided to employers be used to fund unemployment assistance instead? Why should the survival needs of low-wage businesses have priority over those of wage earners? Why should employers enjoy the privilege over wage-earners of an alternative means of protecting their livelihood, namely, a subsidy for their businesses?

If a higher minimum wage makes some employers jobless due to the closure of their business, should they not only be treated in the same way as other unemployed and be provided with unemployment benefits?

The Chamber may argue that the preferential treatment of low-wage businesses is based on the grounds of maintaining Hong Kong’s competitiveness. It in fact warns that an upward adjustment of the minimum wage will inevitably damage Hong Kong’s business environment and competitiveness which, in turn, will ultimately hurt everybody, employers and employees alike.

This reply however begs some important questions. Would competitiveness not be better achieved through innovation, good management, well-targeted capital investment and work skill development than on prices? Why are low-wage workers required to bear the burden of maintaining Hong Kong’s competitiveness?

Britain’s Low Pay Commission pointed out long ago that if businesses compete solely on the basis of low pay, this “can lead to a damaging downward spiral of low wages and poor standards, which is detrimental to both businesses and workers”. Moreover, businesses competing on the basis of enhancing productivity would be unfairly undermined by competitors relying on low wages only.

We agree with the Commission’s view that a minimum wage is at the same time a labor policy protecting low-wage workers as well as an economic policy having the following functions:
– “protect reputable firms from being undercut by competitors solely on the basis of depressed wages”
– “encourage competitiveness based on a better-skilled workforce and better quality products and services”, all being key factors in a modern, dynamic economy”

Whether a convincing case for the proposition of “time for a pause” can be made remains to be seen. Our analysis so far has nonetheless provided a strong case for the contrary – instead of a “pause”, “salvage” is required. The Minimum Wage Ordinance has to be salvaged because it has been suspended for a number of years. As a first step towards salvage, low-wage workers must at least be compensated for the underrated minimum wages in the last two rounds of uprates.

Since the raison d’être of a minimum wage is to lift wages of low-paid workers above the market rate of the low wage labor market, as a general principle, the uprate rate of a minimum wage should not be lower than the general market wage growth.

Based on this principle, to compensate our low-paid workers for the previous underrated minimum wages, the next uprate must be able to at least make up the gap between average wage growth and minimum wage growth in the period between 2011 and 2015. For the period between 2015 and 2017, the next uprate must also at least be in line with average wage growth in the same period.

Using projected GDP growth as a proxy for average growth in 2016 and 2017, we suggest that the next minimum wage should not be less than HK$37 per hour.

Compared to the current HK$32.5 per hour rate, there is no denying that the suggested rate will be a considerable increase. But the HK$37 per hour rate could well be the going rate if the Minimum Wage Ordinance had not been effectively suspended.

Moreover, it has to be emphasized that even this proposed rate remains a miserable wage. It is far from making ends meet – to make ends meet, as of 2015, the hourly wage for a three-person household has to be at least HK$40. Workers earning HK$37 per hour are in poverty even according to the official definition – the official poverty line threshold of a three-person household in terms of hourly wage rate in 2014 was HK$39.

There may be signs of an economic downturn, but we need to ask ourselves why workers already at the bottom of the pay scale should be required to share the burden of economic adjustments.

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

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

– Contact us at [email protected]


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