Ka-fu Wong University of Hong Kong

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Ka-fu WongUniversity of Hong Kong
Why hasnt Hong Kong ever passed a legislation of
minimum wage?
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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 Kongs 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 )

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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.

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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
  HK3,320 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 (HK3,670),
  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.

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Who benefit and who lose?
Usually at this regulated wage, there will be
excess supply (i.e., quantity demanded lt
quantity supplied). Suppliers will compete for
buyers, offering additional attractions.
A
Wage
Labor Supply
Minimum Wage (floor)
Firms response Hire less workers. Keep those
workers who are more able. Fire workers who are
less able. Use more machines.
C
Labor Demand
D
Quantity
Excess supply
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Impact on other markets that hire minimum-wage
workers
A
Price
Supply with minimum wage legislation
Supply
People who consume this kind of good lose. Who
are they?
C
Demand
D
Quantity
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Agreement and disagreement among academics

• The academic argumentand there has been plenty
  of it in recent yearshas 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 1990sincluding a famous
  analysis of fast-food restaurants in New Jersey
  and Pennsylvania by David Card at Berkeley and
  Alan Krueger of Princeton Universitychallenged
  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)

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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)

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Moderate minimum wage

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

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End