Considerations on the statutory minimum wage uprate in 2021

September 05, 2020 06:00
Photo: Reuters

In addition to wearing facemasks, washing hands, and staying home, keeping people in employment and businesses afloat also catch much of the mood of the city today. As a matter of fact, the Covid-19 pandemic has driven Hong Kong’s economy into a deep and damaging recession. The unemployment rate has soared to an almost ten-year high. More layoffs are expected to come. Amid this mood, asking for a pay rise would appear very inopportune. Similarly, proposing a statutory minimum wage (SMW) uprate in 2021 stands to look equally untimely.

It has been suggested that because of the pandemic, “2020 is the dawning of the age of the employer”, that the coronavirus “has flipped the employment market” and “has given employers the upper hand”. It is therefore not surprising that some employers are arguing that, as Hong Kong sinks into recession, now is not the time for SMW adjustment and are pushing for a 2021 freeze. Even labour unionists and low-income workers appear to subscribe to the view that SMW should not be uprated in times of economic downturns; they make their case for a SMW uprate only on the expectation that Hong Kong’s economy will have moved out of recession in 2021, thereby justifying an uprate. Should the economy remain sluggish next year, it seems that workers may not necessarily object to a minimum wage freeze.

Nonetheless, if the minimum wage is a policy tool to counteract asymmetrical wage bargaining powers between employers and workers in order to protect worker wages, then do not workers precisely need protection now, in this “age of the employer”, more than at any other time?

Moreover, do low-pay workers, who are usually on the forefront of the battle against Covid-19, not deserve a pay rise as a recognition of their contribution toward keeping the city running? In Britain, the General Secretary of the British Trades Union Congress, when making a case for a national living wage uprate this year, said: “Britain is indebted to its army of minimum wage heroes. Many – including care workers and supermarket staff – are currently on the frontline of the battle against coronavirus. They deserve every penny of this increase, and more.”

Indeed, we must not overlook the pandemic’s burden on low-pay workers. In the context of Britain, a recent research report published in June makes this observation: “This [pandemic] crisis is shared, but its burden is not. From health risks to job losses, it is the UK’s 4.2 million low-paid workers on whom this pandemic has imposed the greatest cost, and of whom the efforts to combat it have required the greatest sacrifice. Lower earners are three times as likely to have lost their job or been furloughed as high earners, and are more than twice as likely to do jobs exposing them to health risks.” The report calls for an improvement of the circumstances of low-pay labour, which “is not just about a higher price tag for that labour, but about showing respect to and providing dignity for the people doing it.”

We share the report’s spirit when proposing a SMW uprate next year. Uprating SMW next year is not only a wage protection measure, but also a first necessary step to show our respect to and provide dignity for people working the low pay sectors in this pandemic crisis.

Despite good intentions, however, low-pay workers may worry that increasing the minimum wage during economic downturns will only do them more harm than good. While some workers may get a pay rise, a lot more others are likely to get laid off! The risk of being laid off in times of recession is high enough, a minimum wage uprate in such times render the risk even higher. Even though low-paid workers should get a pay rise these days, whether they can actually get it rather than get laid off is another issue. “Ought” does not imply “can”.

Does a minimum wage cause more job losses in times of economic contraction than otherwise? Experience from Britain may help ease worries in this regard. Specifically, Britain’s experience shows that a “cautiously” set minimum wage uprate will not exacerbate a recession nor worsen unemployment.

In 2008, Britain was hit by the worst recession since the 1930s. The recession lasted for five quarters (2008q2–2009q2), causing the economy to shrink by 7%. After a brief and weak recovery, the economy entered yet another recession in late 2011, which lasted for a further three quarters (2011q4–2012q2). Britain’s economy only started to recover in the third quarter of 2012. As of the end of 2011, almost 2.7 million people were out of work. The quarterly unemployment rate reached 8.4%, a record high since 1995.

At the time, there were numerous previous studies about the effects of Britain’s National Minimum Wage (NMW) on employment and working hours. There was little evidence that NMW introduction or its upratings had any adverse effect on employment. But those studies were conducted in the context of the NMW operating in a buoyant economy, before the onset of the 2008 recession. Little was known about the effects of a minimum wage in a recession.

When the recession hit, there were concerns about whether introducing a minimum wage increase would worsen the economy, and whether the NMW could survive a recession. Before the recession, over the period 2001-2007, NMW uprate rates had been more “ambitious”. The NMW in the period rose faster than both average earnings and inflation. In view of the uncertainty and changing economic conditions in 2008, Britain’s Low Pay Commission (LPC) adopted a more “cautious” approach to setting NMW uprates. But despite the said “cautious” approach, it is important to note that not only did not the LPC recommend minimum wage freezes during the severe economic downturn between 2008 and 2012, it actually recommended not a few NMW uprate rates that were higher than the growth rates of average weekly earnings (AWE) over the same period. Indeed, related statistics show that almost all adult NMW uprates from 2008 to 2011 exceeded AWE growth, the only minor exception being the 2010 uprate when the NMW increase was 0.01% points less than AWE growth.

Most importantly, however, what needs to be stressed is that the minimum wage uprates had not destroyed jobs, even in the then severe recessionary environment. The chief economist of LPC made the following review in 2012 about the NMW in Britain’s deepest recession since the 1930s:

“The minimum wage has managed to withstand the deepest recession since the 1930s. Throughout the recession, the Commission has been sensitive to the impact of the minimum wage on the low-paying sectors and has made recommendations that have taken account of the economic uncertainty and have been more cautious. There is not yet any research to suggest any significant and consistent adverse impact on employment as a whole.”

Following this review, there have been not a few independent research studies reaching a similar conclusion. For example, a research published in 2013 tries to estimate the impacts of the NMW during the recession years (2008-2011) and compares them with impacts estimated for the preceding years beginning in 1999 (or 2000). It concludes that:

“We do not find robust evidence that the NMW upratings had an adverse effect on the employment retention of adults in either the pre-recession or recession periods taken as a whole. …For young people, there is some evidence that the NMW may have reduced employment retention in the pre-recession years, especially for workers whose wages were raised most by NMW upratings, but not in the recession period (sample sizes prevent us from obtaining year-specific results).”

In addition to protecting wages at the time, the British experience further indicates that a minimum wage uprate in times of economic contraction can serve an “extended” function of protecting low-pay workers’ wages in the long run. When reflecting on NMW impacts on the earnings of low-pay workers in Britain on the 20th anniversary of NMW’s introduction in 2019, the LPC shared its insight on the “extended” function:

“During the recession the LPC responded to changing economic conditions by recommending more cautious increases in order to protect jobs.

The financial crisis was followed by one of the longest reductions in real wages in recorded history, with the 10 years since the financial crisis began described as a ‘lost decade’ for pay by the Bank of England. …

However, the NMW limited workers’ exposure to falls in real wages. The real hourly pay of NMW workers began to recover before the median worker (2013) … .”

For Hong Kong’s SMW uprate next year, in view of the discussion above, the policy issue is not about whether it is to be uprated but about by how much it is to be uprated. Nonetheless, Hong Kong’s highly uncertain economic outlook makes estimating the possible impacts of different SMW uprate rate levels and deciding on an uprate level difficult. Current data on the operating characteristics of enterprises and the data on the estimated changes in wage bills due to different SMW uprate levels, the two main sets of data for estimating different SMW uprate levels’ impacts on businesses, are respectively from the 2018 Annual Survey of Economic Activities and the 2019 Annual Earnings and Hours Survey. In other words, the data were collected before the onset of the pandemic crisis and have therefore become irrelevant. Indeed, given the extreme economic volatility we are faced with, any so-called up-to-date data is bound to become obsolete very soon.

Notwithstanding the volatility, we are of the view that Britain’s research evidence and experience can provide a yardstick for Hong Kong’s decision-making on the uprate. In light of Britain’s minimum wage uprates over the period 2008-2011 mentioned above, we propose that the 2021 SMW uprate rate be set in accordance with the growth rate of the median wage at the time:
− If the median wage growth is positive at the time, the SMW is to be increased by the same growth rate as the median wage.
− If the median wage growth is stagnant or negative at the time, the SMW is to be frozen.

For the growth rate of the median wage at the time, we suggest making reference to the change in the median monthly employment earnings of employed persons (excluding foreign domestic helpers) between the first quarter of 2020 and the first quarter of 2021.

In addition to Britain’s research evidence and experience, our proposed SMW uprate rate is also based on our understanding that the rate will not be beyond the reach of employers. If the economic condition in 2021 allows employers to raise the pay of the median worker, they should also be able to absorb the additional wage bills resulting from the proposed SMW uprate rate.

This last remark brings out the overall approach of our recommendation in setting the 2021 SMW rate under severe economic uncertainties: let the market decide while trying to protect the jobs and earnings of the lowest paid workers. To decide on the SMW uprate, let us count on market signals; to protect the lowest paid workers, let us count not on kneejerk reactions but on evidence and experience from abroad.

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