People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
06 Apr 2000
eISBN:
9781451816891
ISBN:
9781451816891
Language:
English
Keywords:
ISCR; CR; Mainland; Hong Kong SAR; P-AC margin; firm; B. labor-market adjustment; public expenditure; unemployment rate; labor force; efficiency wage; Unemployment rate
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This study estimates quantitative, industry-level measures of the intensity of competition and also discusses various methodologies and data used for measuring competition. The following data are also included in the study: gross fixed capital formation, selected price indicators, labor force, employment, and unemployment, property market development, public expenditure by function, monetary indicators, balance sheet of all authorized institutions, equity price developments, exchange fund balance sheet, wages, labor productivity, public expenditure by function, revenue, government expenditure under the general revenue account, and so on.

Abstract

This study estimates quantitative, industry-level measures of the intensity of competition and also discusses various methodologies and data used for measuring competition. The following data are also included in the study: gross fixed capital formation, selected price indicators, labor force, employment, and unemployment, property market development, public expenditure by function, monetary indicators, balance sheet of all authorized institutions, equity price developments, exchange fund balance sheet, wages, labor productivity, public expenditure by function, revenue, government expenditure under the general revenue account, and so on.

III. The Hong Kong SAR Labor Market: Key Characteristics, Recent Developments and Prospects1

A. Overall Labor-Market Performance

Some Stylized Facts

1. Hong Kong SAR’s labor-market performance over the last two decades has been characterized by rapid growth of both employment and labor productivity, a low unemployment rate, and a substantial shift in the sectoral composition of employment due to the extensive structural transformation of the economy:

  • employment grew by over 30 percent since 1980, while unemployment averaged around 2½ percent;

  • labor productivity doubled (between 1980 and 1997); and

  • employment in the services sector rose from 47 percent to 79 percent of total employment since 1980, while manufacturing employment fell from over 41 percent to under 12 percent (Figure III.1 and Table III.1).2

Figure III.1.
Figure III.1.

Hong Kong SAR: Aggregate Labor Market Performance, 1980–99

Citation: IMF Staff Country Reports 2000, 048; 10.5089/9781451816891.002.A003

Source: World Economic Outlook Database.(1) real GDP per employed person.* Staff projection.
Table III.1.

Hong Kong SAR: Sectoral Employment-Level, Structure and Growth

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Sources: Leung Chuen Chau, “Labour and labour market” (1961 to 1981); Census and Statistics Department, Hong Kong Annual Digest of Statistics 1998 (post 1990 date).[a] Included in “other employment.”

Wholesale and retail.

Including other business services.

Not elsewhere specified including agriculture, fishing, mining, quarrying, electricity, gas, water, and other, employment.

This combination of persistent low unemployment rates (till 1998) in the face of a rapidly growing labor force and large shifts in the sectoral composition of employment suggests great flexibility in Hong Kong SAR’s labor market and its ability to facilitate efficient resource allocation. And the combination of rapid growth in both employment and real wages implies a rapid growth in total factor productivity, without which such a combination would not be sustainable. In international comparison, Hong Kong SAR dominated the OECD countries with respect to employment and productivity growth, but fell somewhat short of the performance of other Newly Industrialized Economies (NIEs) in Asia (Figure III.2).3

Figure III.2.
Figure III.2.

Growth of Employment and Labor Productivity, 1980–97

(Percent)

Citation: IMF Staff Country Reports 2000, 048; 10.5089/9781451816891.002.A003

Source: World Economic Outlook database.

2. With Hong Kong SAR’s linked exchange rate system tying down the nominal exchange rate, the rapid growth in labor productivity induced a rise in the rate of inflation to achieve the needed real exchange rate appreciation.4 This process of “structural inflation” is the consequence of a relatively low-price and high-income elasticity of demand for the output of the sectors with low-productivity growth, compared with the sectors in which productivity is rising rapidly.5 As a result, relative unit labor costs (and thus relative prices) will tend to rise in the low productivity sectors, resulting in higher consumer prices.6 As productivity levels in Hong Kong SAR approach those of other industrialized countries, the “catch-up” component of the economy’s productivity growth will decline. As a result, productivity growth rates in Hong Kong SAR should become more similar to that in the United States, leading to a convergence of inflation rates among these countries under the linked exchange rate system.

Institutional Features of the Labor Market

3. A conventional explanation for Hong Kong SAR’s impressive labor-market performance is the “laissez faire” character of labor relations and labor-market institutions in general. As described in a recent World Bank publication:

“The industrial labor market in Hong Kong SAR is the closest embodiment of a neo-classical competitive market found anywhere. Constraints to market forces, like labor laws, government intervention, unionism, monopsonistic employers, and inertia, are conspicuous by their absence.” 7

4. However, a characterization of Hong Kong SAR’s labor market as being entirely unfettered by government intervention would be exaggerated. Hong Kong SAR authorities have recognized for some time that various labor-market imperfections require government intervention and regulation to improve resource allocation, and this has led to a significant body of labor-market legislation, which has been steadily amended and expanded since at least 1968, when the first major piece of pertinent legislation was introduced.8 However, despite the expansion of labor-market related legislation, when compared with other industrialized countries, especially in Europe, regulations and related manifestations of the welfare state in Hong Kong SAR are significantly more limited. Hong Kong SAR’s labor-market legislation, as embodied in a number of pertinent “ordinances,” focuses on job safety, employment standards and employment protection, and compensation in case of occupational injuries (Table III.2). In contrast to most industrialized countries, there is no public unemployment insurance scheme and no minimum-wage legislation for the domestic labor force.9 Support for the unemployed, provided through the Comprehensive Social Security Assistance scheme (CSSA), is rigorously means tested,10 while labor-market-related public expenditure is concentrated on retraining and job placement assistance. This reflects the authorities’ objective to provide assistance to the truly needy without impairing the flexibility of the labor market, which is central to adjustment under the link.

Table III.2.

Hong Kong SAR: Key Labor Market Legislation

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Source: Hong Kong SAR authorities.

5. In comparison to OECD countries, labor-market institutions in Hong Kong SAR allow for greater flexibility. In Table III.3, a large number of pertinent institutional aspects of labor markets are aggregated into eight indicators. The first four of these summarize the treatment of unemployed workers and the tax burden on labor. The most obvious contrast with the OECD countries is the absence of a formal and obligatory public unemployment insurance scheme. Another contrast with OECD countries is the much smaller tax wedge: about half the labor force is not subject to income tax, and the remainder pays a maximum flat income tax rate of 15 percent of taxable income. Indirect taxes—most of which are stamp duties and lottery taxes—amount to less than 5 percent of household consumption (or 3 percent of GDP). Employment protection is limited in scope (such as statutory severance payment and unlawful dismissal, etc.),11 in contrast to a variety of additional administrative barriers to dismissal in many European OECD countries. On the other hand, like most OECD countries, Hong Kong SAR tries to facilitate the reemployment of displaced workers by providing free placement services and retraining facilities (“active labor-market policies,” ALMP), although budgetary resources allocated to this purpose are relatively modest compared with such expenditures in the OECD area (see below).

Table III.3.

Hong Kong SAR Labour Market Institutions—An International Comparison

(Status: Post-1990 Average)

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Sources: Author’s estimates for Hong Kong (preliminary); data for all other countries are from: Olivier Blanchard and Justin Wolfers: The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence; accessable at: http://web.mit.edu/blanchar/www/.

Note that rising “active labor market policies” and “coordination” tend to reduce unemployment; all other characteristics tend to increase it.

Author’s evaluation, based on detailed communications from Hong Kong authorities and following methodology detailed in Blanchard and Wolfers; see text for a detailed discussion.

Excluding Luxembourg and Greece.

Public expenditure on active labor market measures per unemployed, in percent of output per employed person.

The indicator for employment protection is the country’s rank order in ranking 20 OECD countries from least to most severe employment protection; for Hong Kong SAR, which is not part of the original ordering, employment protection was judged to be similar to that in New Zealand (rank 2 among OECD countries.); see main text for more detail.

Average tax share in compensation of employees, including income tax, social security contributions and indirect taxes on general consumption.

Index ranging from 1 to 3according to share of wages determined by union bargaining: 1=<25 percent; 2=25-70 percent; 3=>70 percent.

Share of union members in dependent employment

Degree of coordination of wage negotiations at national level, ranging from 2 (little coordination) to 6 (intensive coordination at national level).

Estimated increase in structural unemployment resulting from a standardized shock.

1994-98 average for output and unemployment; 1993/94-1997/98 average for government expenditures.

See footnote 5 above.

6. The role of labor unions in Hong Kong SAR is limited: less than 22 percent of employees are union members, and since there is no legal obligation for employers to engage in collective bargaining, the coverage of union wage contracts is significantly below this number. Only a few companies engage in collective bargaining with the unions, while the majority of work contracts are concluded on an individual bilateral basis between the employer and the employee.12 While there are four main unions, there is little if any coordination between them in the wage-formation process. On the other hand, the major employers’ organization (The Hong Kong General Chamber of Commerce) does issue nonbinding guidelines to its members for wage negotiations. The Labour Advisory Board (LAB), a tripartite commission with representatives of employers, unions and the government, has the mandate to advise the government on labor-market-related issues, but does not get involved in wage negotiations.

7. An additional element of labor-market conventions in Hong Kong SAR is the extensive use of performance-related pay systems and bonus payments in addition to contractual wages and salaries. The former are, in practice, easier to adjust downward during periods of cyclical weakness than the latter. On the supply side of the labor market, imported labor has played an important role in relieving temporary supply bottlenecks at various skill levels (see below), thereby helping to remove obstacles to economic growth.

Labor-Market Flexibility

8. Labor-market flexibility is a major determinant of overall economic efficiency. At the aggregate level, there are two relevant aspects of the concept of labor-market flexibility: the rate of unemployment required to deter an acceleration in nominal wages irrespective of productivity trends, and the wage response to disequilibrium in the labor markets.

  • The first determines the output cost of labor-market rigidities in equilibrium and is conventionally measured by the structural (equilibrium) unemployment rate (SUR).

  • The second determines the speed of market-driven adjustment in response to economic shocks, which is critical to the smooth functioning of the linked exchange rate system—the centerpiece of the rules-based approach to policymaking adopted in Hong Kong SAR. One measure of the speed of adjustment to shocks is the impact that a deviation of unemployment from its structural level has on the change in the rate of inflation (through its effect on the growth of wages).13

9. An additional aspect of labor-market flexibility is the degree of unemployment hysteresis—the tendency of cyclical unemployment to turn into structural unemployment.14 Studies on labor-market performance in OECD countries has shown that—like the level of structural unemployment—unemployment hysteresis is closely linked to institutional features that interact to render the labor market inflexible.15 The degree of labor-market hysteresis can be measured by the response of nominal wage growth to the rate of change in the unemployment rate (rather than its level). Cross-country comparison along these three measures over the last two decades is consistent with the conventional wisdom that Hong Kong SAR’s labor market is relatively more flexible (Table III.4).

Table III.4.

Hong Kong SAR: Indicators of Labor Market Flexibility

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For Hong Kong SAR, the equilibrium (strucural rate of unemployment is proxied by the average rate of unemployment over the last decade. For all other countries, the estimates given are from the World Economic Outlook databank.

Change in the rate of inflation for a one percentage point decrease in the unemployment rate, keeping expected inflation constant (i.e., the slope of the short-run Phillips curve).

For Hong Kong SAR, the estimated change in the equilibirum rate of unemployment is the difference between the average unemployment rates in the 1980 and the 1990s; for the outer countries, it is the change in the estimates for the equilibrium rate between 1980 and 1998.

Migration Policies

10. An important aspect of Hong Kong SAR’s labor market is migration and the recruitment of foreign labor. Unlike the limited regulation of the operation of the domestic labor market, the government has sought to control the flow of immigrant labor and regulate its pay. Employers wishing to take in foreign workers have to demonstrate they have unsuccessfully tried to recruit employees from the local labor market. This is designed to safeguard employment opportunities of local workers, while at the same time relieve acute labor shortages of local businesses. In addition, wages offered to foreign workers must be no less than those offered to a local worker in a comparable position.16

11. As living standards (and real wages) in Hong Kong SAR increased rapidly, the SAR has become increasingly attractive for mobile labor in the region. A major component of imported labor consists of domestic helpers, providing labor input for a largely isolated segment of the domestic labor market, which has difficulties finding domestic supply at the going wage. To protect domestic employees from exploitation, a minimum allowable wage is imposed on this market segment. There are no significant government obstacles for companies wanting to hire highly qualified professional staff from abroad (permits are granted routinely if the request is supported by local employers), and in the past the employment of highly skilled foreign experts has been an important facilitating aspect in the rapid rise of Hong Kong SAR’s financial service industry.

12. While the number of foreign workers entering the SAR has fallen off significantly from its peak in 1992, the net migration of Hong Kong SAR citizens has turned positive in 1993 and increased rapidly thereafter (Table III.5). Similarly, the number of “new arrivals” (mainland citizens being authorized by their government to settle permanently in Hong Kong SAR) has tended to increase since the early 1990s.17 All three of these categories have contributed to the continuing rapid rise in Hong Kong SAR’s labor force, which receives little impetus from natural domestic population growth.18

Table III.5.

Hong Kong SAR: Selected Components of Migration, 1988–98

(In 1,000 persons)

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Source: Larry Chuen-ho Chow and Yiu-kwan Fan (editors), The Other Hong Kong Report 1998, (Hong Kong: The Chinese University Press, 1999), pp. 205/6.

Holders of permanent Hong Kong SAR identity cards/travel documents.

B. Labor-Market Adjustment in the Recent Crisis

Employment

13. As the effects of the Asian crisis spread to Hong Kong SAR’s real sector from early 1998 onward, the rate of unemployment began to rise steadily. The employment rate rose to 5¾ percent by end-1998 from 2½ percent at end-1997, and then increased further in 1999 before stabilizing at 6 percent. Surprisingly, however, total employment has continued to rise steadily; between 1997: Q2 and 1999: Q2 employment rose by 4¾ percent. However, the labor force increased even faster—by 9¼ percent over the same period—reflecting a positive net migration balance and a slight increase in the participation rate.19

14. The aggregate statistic showever, masks significant differences in employment growth across different segments of the economy. While the larger enterprises tended to downsize and reduce their employment significantly, many of the dismissed workers found employment in informal sectors, in the Mainland, or became self-employed. This is revealed in the different pictures of the labor market painted by the two main surveys in Hong Kong SAR.

15. The Quarterly Employment Survey of Employment and Vacancies (SEV) reports a decline in employment by 8 percent over the two years to end-1998, while the General Household Survey (GHS) showed an increase by 5½ percent over this period (Figure III.3).20 The SEV is an establishment survey—employment figures in this survey are collected from registered private Hong Kong SAR businesses, while the GHS covers all forms of employment. Comparisons between the surveys can be difficult, in part because the sectoral definitions in each are not the same. However, it appears that layoffs in the private enterprises covered by the SEV have been offset by rising employment in the public sector; higher self-employment;21 and an increase in Hong Kong SAR residents working in the Mainland22 (all included in the GHS). This is also broadly consistent with anecdotal evidence.

Figure III.3.
Figure III.3.

Hong Kong SAR: Alternative Employment Surveys, 1982–98

Citation: IMF Staff Country Reports 2000, 048; 10.5089/9781451816891.002.A003

16. A comparison of the age and gender composition of unemployment shows that the burden of unemployment falls disproportionally on young people, whose unemployment rate in 1998 had risen to above 20 percent—more than four times higher than that of overall unemployment (Table III.6); it reached 29⅓ percent in June-August 1999. High youth unemployment is, however, largely a structural characteristic of the Hong Kong SAR (and most) other economies.23 In contrast, the difference of unemployment rates between gender groups is much smaller, and it, too, has varied little during the cycle.

Table III.6:

Hong Kong SAR: Gender and Age Specific Labor Market Slack

(Percent of labor force)

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Source: Census and Statistics Department.

As percent of the group-specific labor force.

Persons working less than 35 hours per week but would like to work more hours.

Worker Compensation

17. Earnings per employee—which is only available for enterprises covered by the Labour Earnings Survey (LES)—kept rising well into the recession. Only in 1999: Q2 did year-on-year growth turn negative at -1¼ percent—a rate still well above the rate of deflation in consumer prices, implying an increase in real wages. Compared with 1997: Q3 (the quarter in which output peaked), compensation per employee was 1¼ percent higher in 1999: Q2. Unfortunately, there is no data on labor productivity for the enterprises covered by the LES sector, so that it is not possible to calculate developments in unit labor costs.24

18. This rise in real compensation per employee may be somewhat exaggerated by the statistics;25 in addition, survey data also suggest that experience varies widely across firms. The 1999: Q1 LES, for example, suggests that 40 percent of companies reduced payroll per capita on a year-on-year basis; 15 percent kept it constant; and the remainder increased it. Nevertheless, this suggests that—at least in some sectors—there may be some downward rigidity in nominal compensation.

19. In Hong Kong SAR’s labor market, the choice between adjustment to economic shocks through either labor shedding or wage adjustment is, of course, entirely a private sector decision. The existence of downward nominal wage rigidity is consistent with “efficiency wage” theory,26 which predicts that for a variety of reasons (costly monitoring, labor morale, etc.) employers will prefer to dismiss workers rather than to lower nominal wages if the latter entail an offsetting decline in labor production among remaining employees. An implication of this is that while the competitive wage rate will vary with cyclical conditions, the efficiency wage rate can be acyclical or even countercyclical, and that employers will keep costs down in a recession largely by shedding labor. As a result, cyclical variations in employment dominate that in wages.

C. The Government’s Role in the Adjustment Process

20. The official policy view is that allowing markets to operate freely is the best way to facilitate adjustment to structural shocks as well as to cyclical fluctuations, and that government activity in this area should focus on strengthening market-based adjustment, rather than to oppose or retard it. In conformity with this view, the government decided to increase its expenditures on job counseling and placement services for the unemployed, and to provide pertinent training for workers who had lost their job to help them find employment in those sectors of the economy where vacancies indicated persistent employment opportunities.

21. A special Youth Pre-employment Training Program targeted to improve the employability of school leavers and thus reduce the high youth unemployment rate was introduced in September 1999. Table III.7 shows that public expenditure on the various components of ALMP, as well as the number of beneficiaries, have increased significantly since 1993. However, as a percentage of output per employed person, Hong Kong SAR’s expenditure on ALMP per unemployed person remains well below the levels observed in OECD countries. Additional support to stabilize the labor market was provided by the increase in public sector employment in 1998, contrasting with a declining trend in the first half of the 1990s, and from the advancement of some infrastructure projects, leading to renewed growth of infrastructure investment following the decline underway since 1995/96 (as the new airport neared completion—Table III.8).

Table III.7.

Hong Kong SAR: Active Labor Market Policies

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Besides services provided by the Employment Services Division and the Selective Placement Division, expenditure on employment services also covers services provided by: (i) the Careers Advisory Services (CAS). The CAS provides career guidance to young people through the dissemination of career information through its two centers. It also organizes a wide range of activities for young people, such as the Education and Careers Expo, Careers Talks, visits to commercial and industrial establishment, etc.; and (ii) the Employment Information and Promotion Programme Office (EIPP Office). The office reaches out to employers and employees through a wide range of promotional activities so as to enhance their awareness of the employment services provided by the Labour Department. A main task of the EIPP Office is to strengthen rapport with employers so as to canvass more job vacancies.

This figure includes all able-bodies job-seekers registered with the Local Employment Service (LES) under the Employment Services Division of the Labour Department, and all disabled job-seekers registered with the Selective Placement Division of the Department.

Estimates.

Table III.8.

Hong Kong SAR: Number of Civil Servants and Infrastructure Investment

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Source: Annual Digest of Statistics, 1999.

22. As mentioned, the social welfare net in Hong Kong SAR is restricted to rigorously means-tested welfare payments for needy persons. As a consequence, only about 13 percent of all unemployed persons received income support under the CSSA in the second quarter of 1999.27 In line with increasing unemployment, the number of unemployed CSSA clients has risen rapidly (Table III.9). There are also a (small) number of low-income recipients whose income is supplemented by welfare payments based on strict means testing. Overall, expenditure on CSSA has increased rapidly during the 1990s, though, with only 1 percent of GDP in 1998, it still remains a very small percentage of total output.

Table III.9.

Hong Kong SAR: Welfare Payments to the Unemployed and Low Income Individuals

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Sources: Annual Digest of Statistics, 1999 and Monthly Digest of Statistics, October 1999.

Comprehensive Social Security Assistance.

Calendar year figures for total unemployment and GDP.

D. Conclusion

23. In the last two decades, Hong Kong SAR’s labor market has proved to be highly flexible both in terms of adjusting to cyclical changes as well as to the rapid structural transformation of the economy. This justifies optimism among many observers that the labor market will be able to reverse the large cyclical increase in unemployment experienced in the recent recession, and rise to the challenges of adjusting swiftly to further structural transformation in the economy in the medium term. Unemployment in the short run, however, will decline only gradually as the labor force continues to rise and high real wages adjust with a lag, thereby slowing down the recovery in profitability. This underscores the importance of assistance in job search and retraining, already a key element of existing labor-market policies. Were unemployment to continue to remain high, consideration could be given to further increasing retraining, as well as labor subsidies or other employment conditional transfer schemes (such as the earned income tax credit and family credit in the United States and the United Kingdom, respectively). Over the medium term, improvements in general education—where Hong Kong SAR’s expenditure is low by international standards (Table III.10)28—remain a central priority.

Table III.10.

Hong Kong SAR: International Comparison of Education and Technology: Selected Indicators

(Latest Post-1990 Years Available)

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Sources: The World Bank and Hong Kong SAR authorities.

Average of junior and senior secondary education.

Including engineers.

STATISTICAL APPENDIX

Table 1.

Hong Kong SAR: Gross Domestic Product by Expenditure Component at Current Market Prices, 1994–99

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Sources: Census and Statistics Department, Estimates of Gross Domestic Product; Quarterly Report of GDP Estimates; and CEIC database.
Table 2.

Hong Kong SAR: Gross Domestic Product by Sector at Current Prices, 1994–98

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Sources: Census and Statistics Department, Quarterly Report of Gross Domestic Product Estimates; and CEIC database.

An imputed rental charge for owner-occupied premises.

An imputed service charge, equal to net interest receipts for the banking sector.

Difference between production-based GDP and expenditure-based GDP estimates reflects statistical discrepancy.

Measured relative to production-based GDP at factor cost.

Table 3.

Hong Kong SAR: Gross Fixed Capital Formation, 1994–99

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Sources: Census and Statistics Department, Annual Digest of Statistics, Estimates of Gross Domestic Product, Quarterly Report of GDP Estimates; and CEIC database.
Table 4.

Hong Kong SAR: Estimates of External Factor Income Flows by Income Component and by Business Sector, 1994–99 Q1

(At current market prices, in millions of Hong Kong dollars)

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Source: Census and Statistics Department, Monthly Digest of Statistics.

Preliminary figures.

Table 5.

Hong Kong SAR: Selected Price Indicators, 1994–99

(Percentage changes)

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Sources: Census and Statistics Department, Consumer Price Index Report, Hong Kong Monthly Digest of Statistics, Quarterly Report of GDP Estimates; and CEIC database.

Data are on a national accounts basis.

Table 6.

Hong Kong SAR: Labor Force, Employment, and Unemployment, 1994–99

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Sources: Census and Statistics Department, Hong Kong Monthly Digest of Statistics, Oct. 1999; Quarterly Report on General Household Survey, April to June 1999.

Preliminary data.

General Household Survey.

Based on data on persons engaged by industry sector, Quarterly Survey of Employment and Vacancies.

Wholesale, retail, import and export trade, restaurants, and hotels.

Refers to manual workers at construction sites only.

Table 7.

Hong Kong SAR: Wages, Labor Productivity, and Unit Labor Costs, 1994–99

(Percentage change)

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Sources: Census and Statistics Department, Hong Kong Annual Digest of Statistics; Hong Kong Monthly Digest of Statistics; Estimates of Gross Domestic Product, 1961 to 1995; Quarterly Report of GDP Estimates, Second Quarter 1996; Quarterly Report of Wage Statistics, June 1999 Tables 1 and 2; and staff estimates.

Data on productivity are based on data for the first half of 1999; data on unit labor costs are for the first quarter of 1999. Percentage changes are calculated over corresponding year-earlier periods.

Based on September data.

Includes wholesale, retail, import and export trades, restaurants, and hotels.

Includes financing, insurance, real estate, and business services.

Based on expenditure based real GDP and GHS employment data; data on person-hours are unavailable.