LegCo Panel on Manpower

The Administration's Views on the "Proposal on minimum wage in Hong Kong" put forward by the Hong Kong Social Security Society

This paper sets out the Administration's views on the Hong Kong Social Security Society (HKSSS)'s "Proposal on minimum wage in Hong Kong"

HKSSS' proposal

2. HKSSS recommends that--

1. The Government should expeditiously follow Singapore's example by setting up a wages council, fixing the level of minimum wage, ratifying the International Labour Convention on Minimum Wage and establishing a system of minimum wages in Hong Kong; and
   
   
2. The Government should take the lead in implementing a system of minimum wages and require all suppliers and contractors who have concluded commercial agreements with the Government and semi-governmental organisations to undertake in writing to adopt minimum wages for their employees, or else, the Government and the organisation concerned should not enter into commercial contracts with them.

3. HKSSS has also put forward the following as merits of the system of minimum wages in its research paper:

1. It serves as a safety net for offering minimum acceptable protection for workers and ensuring a standard of living for them and their families for which a decent life is impossible;
   
   
2. It can offer protection to semi-skilled workers and those engaged in elementary occupations, new arrivals who are relatively advanced in age and female workers;
   
   
3. It can help to slightly narrow the gap between the rich and the poor;
   
   
4. It can help to cut down spending on CSSA and prevent low-income earners from falling below the poverty line;
   
   
5. It can help to promote the development of high-value added products in Hong Kong and ensure the proper use and safeguarding of human resources; and
   
   
6. It can help Hong Kong people to ride out the storm during a period of economic downturn or recession, and maintain social stability.

The existing market-driven pay mechanism

3. The existing market-driven pay mechanism is an essential component of Hong Kong as a free market and free enterprise economic system. Under this system, wage, which is the cost of labour, just like any other costs of production, as well as prices of goods and services, are determined by the forces of demand and supply in the labour market. Labour mobility is virtually unrestricted and labour market information is easily accessible in Hong Kong. The ultimate amount of wage for each individual worker is invariably the outcome of a complex combination of factors, which vary from one case to the other. Such factors include the rate of inflation, changes in the costs of production, productivity and performance of individual workers, the prevailing wage rates for comparable jobs as well as the outcome of negotiation between employers and employees, etc.

The Administration's views on HKSSS' proposal to set up a system of minimum wages in Hong Kong

4. The Administration has thoroughly studied HKSSS' proposal and does not consider it appropriate for the Government to set up any form of minimum wage in Hong Kong. In fact, any move to tamper with private sector decisions on wage setting is bound to be counter-productive. The major reasons are as follows:

1. As stated in paragraph 3 above, a market-driven wage mechanism in an efficient and responsive labour market is one of the factors underpinning the success of Hong Kong as a world-renowned free market economy. This is also crucial to ensuring that Hong Kong remains one of the world*s most attractive places to invest and to do business. Imposition of a minimum wage will not only distort the wage structure in our labour market, but also increase rigidity of wage adjustment, particularly during an economic downswing. As a result, it would impair the ability of the business sector and our economy as a whole to adjust to external shocks.
   
   
2. The existing system whereby wages are determined by market forces is essential to ensuring that Hong Kong has in place a highly motivated, dynamic and enterprising workforce--another vital component of Hong Kong's economic strength. As employers have all along been paying workers on the basis of their productivity, competencies and performance, as well as the business conditions of their enterprises, our workforce has a generally strong incentive to strive for ever increasing levels of effectiveness and efficiency through hard work, training and retraining. It is this element, together with the Government's continued investment in education, vocational training and employees retraining, which constitute the key forces to the overall improvement of our workforce. Adopting a minimum wage system will undermine the inherent incentive of our workforce, especially the less skilled and lower-paid workers to improve and upgrade their quality, which will not be beneficial to the development of our economy in the long term.
   
   
3. Any statutory minimum wage which deviates from the market-determined level in either direction (higher or lower) will not necessarily be beneficial to employees. On the contrary, it will have an adverse impact on their employment opportunities.
   
   If the minimum wage is set too low (i.e. below the market-determined level), employers will have no difficulty meeting the stipulated wage requirement. In a slackening labour market with high and rising unemployment, this may induce some employers to refuse paying higher than the minimum wage to employ workers with higher productivity or better performance. In such circumstances, the minimum wage may in effect become the maximum wage. If so, a statutory minimum wage will not only fail to increase the earnings of workers, but also stifle the incentive of workers to upgrade their qualifications and productivity, to the detriment of the overall quality and competitiveness of our labour force.
   
   If the minimum wage is set too high, (i.e. higher than the market-determined level), the labour cost may be too high for certain trades to remain competitive or viable, and as a result, some companies will have to scale down or even close down their operations. This will lead to an overall reduction in employment opportunities and an increase in unemployment. This is especially so at times of economic downturn or recession. In such circumstances, the less skilled and less qualified workers, especially the elderly, the disabled or marginally employable workers--the very group of workers which the HKSSS seeks to provide a minimum acceptable income protection through a minimum wage--will ironically stand the highest chance of being out-competed by other employees at the same minimum wage. Alternatively, it would induce employers to impose more stringent non-wage requirements or terms of employment on employees as an offset, so as to bring down the actual labour cost. In either case, the minimum wage so introduced will not be able to achieve its intended purpose of protecting the interest of workers.
   
   
4. It is practically very difficult (if not impossible) to set either one single minimum wage across-the-board for all industries and trades, or a range of minimum wages for different industries and trades. The reason is that in the free and dynamic labour market of Hong Kong, wages vary amongst a vast number of sectors, industries, and individual job titles amongst different enterprises at different points in time. Moreover, this practical problem cannot be resolved even with the establishment of a wages council as suggested by HKSSS in its minimum wage proposal.

Results of the Administration's research

The impact of minimum wage on employment, poverty and income distribution

5. We have also examined the impact of statutory minimum wage on poverty, employment of particular groups, and income distribution, with reference to the major findings of a recent study conducted by the Organization for Economic Cooperation and Development (OECD)¹ . The results reinforce the Administration's view that it is not appropriate to impose a statutory minimum wage.

1. Statutory minimum wage has only minor effect in reducing poverty
   
   The OECD study indicates that minimum wages can help reduce poverty only if the low-wage workers are at the same time members of "poor households", which are defined as those with per capita household income less than one-half of the median. Yet the study reveals that in the United Kingdom, the Netherlands as well as the United States, only 5%, 13% and 33% respectively of the adult members in poor households are "low-wage workers" earning less than two-thirds of the overall median employment earnings. OECD therefore considers that minimum wages are far from an effective solution to the poverty problem in the economies concerned.
   
   Adopting OECD's definition of poor households and low-wage workers, it is estimated that in Hong Kong, only 18% of adult members in the poorer households are low-wage workers. 61% of the adult members in these households are economically inactive or even outside the population of working age, comprising mainly retirees, homemakers and students, while the remaining 21% are mostly higher-wage workers. Because of this, it is highly unlikely that the financial situation of the poorer families in Hong Kong will be much relieved upon the implementation of statutory minimum wage. This is particularly so, given the fact that the Government has already put in place a safety net through the existing Comprehensive Social Security Assistance (CSSA) Scheme which provides financial assistance to those persons suffering genuine financial hardship.
   
   
2. Statutory minimum wage could lead to a reduction in employment opportunities among the less skilled workers, e.g. teenagers
   
   The OECD study indicates that teenagers aged 16 - 19 will tend to suffer a greater loss in jobs than adults upon the implementation of statutory minimum wage. Since most of the teenage workers are less skilled and lower paid, minimum wages tend to impinge on such workers far more than the others who possess a relatively higher level of educational attainment, working experience and skills. In Hong Kong, statistics show that 72% of the teenage workers aged 15-19 are semi-skilled or even unskilled, hence with lower pay. Those who are receiving wages below the statutory minimum will thus be most vulnerable to job loss.
   
   
3. Statutory minimum wage has limited effect in evening out income distribution
   
   The wage level of those lower-paid workers who manage to retain their jobs would be raised upon the imposition of minimum wages. On the other hand, some of the lesser-skilled and lower-paid workers are liable to lose their jobs and hence income. It is therefore not entirely clear whether the overall income distribution will definitely improve or not. But it is conceivable that the higher the minimum wage is artificially raised, the more vulnerable the lesser-skilled workers will be to job loss. The result is that the less likely will the overall income distribution be evened out. On the contrary, the income distribution may well become more uneven.
   
   HKSSS proposes to impose a statutory minimum wage of HK$5,885 in the present economic situation. Statistics show that about 14% of the employed persons in Hong Kong are now earning less than $6,000 per month. If foreign domestic helpers are excluded, the proportion will be considerably smaller, at around 8%. Taking into account possible job loss with some of the lower-paid workers upon the implementation of statutory minimum wage system at the proposed level, the proportion of workers likely to benefit from the consequential wage rise will be even less. This, together with the fairly small proportion of low-wage workers in the poorer families, as indicated in the paragraph under (B) above, suggests that the net effect on income distribution in Hong Kong, if any, will be rather limited.

National Wages Council in Singapore

6. HKSSS suggests that a framework like the National Wages Council (NWC) in Singapore should be set up in Hong Kong. However, it should be noted that NWC was set up by the Singaporean Government in 1972 with a view to ensuring "orderly wage increase", against the background of a tightening labour market and rising wage expectations. The primary objective was therefore not to impose a minimum wage, but rather to contain wage increase. In fact, Professor LIM Chung-yah, Chairman of the NWC since 1972, wrote in an Article² in January 1998 that NWC is against wage indexation and minimum wage as both measures introduce inflexibility into the wage system. In recent years, NWC has ceased to produce quantitative wage increase guidelines. Instead it tends to issue qualitative guidelines, which emphasize the relationship between wage increase and productivity. The objective is to ensure Singapore remains economically competitive. It is therefore not appropriate to apply this model for the purpose of determining minimum wage in Hong Kong.

Conclusion

7. Whilst the HKSSS' proposal to set up a system of minimum wages in Hong Kong may apparently have some limited immediate benefits of reducing poverty and improving income distribution, these will be more than offset by the very heavy costs it has to incur. Such costs will lie mainly in the consequential reduction of employment opportunities, especially for the less skilled and lower-paid workers, and the distortion of our well-tried and time-tested system of market-determined wages which underpin Hong Kong's success as one of the world's most open and flexible free market economies. Taken together, this is too high a price in terms of the overall long-term public interests for Hong Kong to pay. To conclude, it is not at all worthwhile to tinker with the market-determined wage mechanism--a cornerstone of a free market economy--by setting up any form of minimum wage system in Hong Kong.

Education and Manpower Bureau
October 1998

¹ Employment Outlook, June 1998, OECD Chapter 2: Making the most of the minimum: statutory minimum wages, employment and poverty

² Accounting and Business Review, Vol 5 No.1 1/98