1

Ka-fu WongUniversity of Hong Kong

Ka-fu WongUniversity of Hong Kong

Why hasn’t Hong Kong ever passed a legislation of minimum wage?

2

The need of minimum wage legislation?

“We need to ponder whether wages can be driven too low. Can we see a situation emerge in Hong Kong where decent men and women trying to eke out a living simply give up working? Can we see a situation where wages are so low that a more attractive option is to rely on welfare payments?”(Donald Tsang, Hong Kong’s Chief Executive)

“In Hong Kong, instead of raising living standards, a statutory minimum wage is likely to lead to a deterioration in working conditions, the export of more jobs to the mainland and, ultimately, higher unemployment”(“Minimum wage will simply do more harm than good”, South China Morning Post, Apr 18, 2006 )

3

The absence of a regulation on minimum wage

Hong Kong unlike many developed economies had no minimum wage although an ordinance signed in 1932 (the Minimum Wage Ordinance) made it theoretically possible. This ordinance gave the Chief Executive the right to set up a Trade Board composed of employer and employee representatives in order to implement minimum wages in some economic sectors. But this possibility has never been used.

4

The presence of a regulation on minimum wage

Domestic helpers have already benefited from a regulation on minimum wage. Domestic helpers were coming from developing countries around Hong Kong, mainly from Philippines, Indonesia or Thailand. Their salary could not be lower than HK$3,320 per month. Even though this level was very low, these jobs continued to attract people as the salary was higher than what people received in their country of origin and they could send funds to their countries of origin. This level had even been cut in 2003 (HK$3,670), officially due to the economic crisis that hit Hong Kong at that time.

The aim of the minimum wage for domestic workers was to allow them to live in decent conditions. If there was no minimum wage, there was a high risk of having foreign people going to HK and merely “surviving”. But the law was not observed everywhere. According to a survey, 40% of Indonesian maids employed in Hong Kong earned less than the official minimum while they worked during very long hours.

5

Who benefit and who lose?

Labor Supply

Labor Demand

Wage

Quantity

A

C

D

Usually at this regulated wage, there will be excess supply (i.e., quantity demanded < quantity supplied). Suppliers will compete for buyers, offering additional attractions.

Minimum Wage(floor)

Excess supply

Firms’ response: Hire less workers. Keep those workers who are more able. Fire workers who are less able. Use more machines.

6

Impact on other markets that hire minimum-wage workers

Supply

Demand

Price

Quantity

A

C

D

Supply with minimum wage legislation

People who consume this kind of good lose. Who are they?

7

Agreement and disagreement among academics

The academic argument—and there has been plenty of it in recent years—has focused on the employment effects. Elementary economics would suggest that if you raise the cost of employing the lowest-skilled workers by increasing the minimum wage, employers will demand fewer of them. This used to be the consensus view. But a series of studies in the 1990s—including a famous analysis of fast-food restaurants in New Jersey and Pennsylvania by David Card at Berkeley and Alan Krueger of Princeton University—challenged that consensus, finding evidence that employment in fast-food restaurants actually rose after a minimum-wage hike. Other studies though, particularly those by David Neumark of the University of California at Irvine and William Wascher at the Federal Reserve, consistently found the opposite. Today's consensus, insofar as there is one, seems to be that raising minimum wages has minor negative effects at worst. Lawrence Katz, an economist at Harvard University and signatory of the EPI's letter, agrees that “most reasonably well-done estimates show small negative effects on employment among teenagers”.

(The Economist Oct 26th 2006)

8

Agreement and disagreement among academics

A better tool exists for helping the working poor: the earned-income tax credit (EITC). This tax subsidy, a “negative income tax” that tops up the earnings of the low-paid, was introduced in the 1970s and has been expanded four times since. Its benefits are currently focused on families with children. Single men get little from the EITC. Some left-leaning economists argue that it is important both to raise the minimum wage and expand the EITC. But a big EITC expansion is politically hard (unlike raising the minimum wage, it involves spending taxpayers' money). So others support a higher minimum wage as a second-best solution. If it were up to the economists though, fatter tax subsidies would be top of the list for helping the working poor.

(The Economist Oct 26th 2006)

9

Moderate minimum wage

Minimum wage legislation, if passed, has to be moderate. Slightly above the equilibrium wage. Why?

10

End