People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues

This Selected Issues paper examines the economic integration between Hong Kong Special Administrative Region (SAR) and the Mainland of China. Hong Kong SAR’s economic links with the Mainland expanded rapidly in the 1980s and in the first part of the 1990s, with Hong Kong SAR becoming the most important trade and international fundraising center for the Mainland. Since Hong Kong SAR’s return to China’s sovereignty, integration between the two economies has deepened, notwithstanding the Asian crisis.

Abstract

This Selected Issues paper examines the economic integration between Hong Kong Special Administrative Region (SAR) and the Mainland of China. Hong Kong SAR’s economic links with the Mainland expanded rapidly in the 1980s and in the first part of the 1990s, with Hong Kong SAR becoming the most important trade and international fundraising center for the Mainland. Since Hong Kong SAR’s return to China’s sovereignty, integration between the two economies has deepened, notwithstanding the Asian crisis.

II. Trends in Wage Inequality in Hong Kong SAR, 1981–20011

A. Introduction

1. Income inequality in Hong Kong SAR has increased rapidly over the last twenty years(Chart 1). Today Hong Kong SAR ranks among the economies with the most uneven distribution of income in the world, even though income disparity has also widened sharply in many other high-income economies over the last thirty years.2 The rise in income inequality has increasingly become a focus of attention for the public, academics, and policy makers in Hong Kong SAR.

Chart II.1.
Chart II.1.

Gini Coefficients for Household Income

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Sources: Deininger, K. and L. Squire (1996), “A New Data Set Measuring Income Inequality”, The World Bank Economic Review 10: pp. 565–591; Census and Statistics Department, Hong Kong SAR. The Gini coefficient for Hong Kong SAR is estimated for unadjusted household income.

2. Rising income disparity may be a byproduct of increased economic efficiency. Structural shifts and rapid technological change, which have been engines of growth in many advanced economies, have often been associated with rising income inequality. There is evidence that pervasive skill-biased technological change has lead to increase in the relative demand for skilled labor3. Demand for skilled labor would also increase if there is an outsourcing of the less-skill-intensive stages of production to low-wage economies. As a result, the relative price of skilled labor increases which, in turn, creates incentives for more people to acquire better skills, contributing to further economic growth. In contrast, in the presence of labor market rigidities (such as minimum wages, strong unions, constraining labor laws, or heavy taxation of income), returns to skills may not rise as rapidly in response to higher demand, which can be detrimental to growth. In addition, if institutional constraints prevent relative wage changes, adjustment to structural shifts may take the form of high unemployment and/or discouragement from the labor force. In economies with flexible wages, like Hong Kong SAR or the United States, adjustments are likely to take place mostly through changes in relative wages.

3. However, high income disparity may be undesirable from a social and economic perspective, and could signal weaknesses in the education system. Although Hong Kong SAR does not publish official poverty statistics, there are indications that poverty may have increased. In the last three years, real income of households in the bottom quartile of the income distribution has fallen, and the number of low-earned-income recipients of social benefits has more than doubled. Some political economists argue that high inequality may be detrimental to growth since there could be a greater tendency to vote for politicians who support increased redistribution and other policies that distort the labor market.4 It may also make it more difficult to reach a broad consensus for certain economic reforms. Political economy considerations apart, increasing income polarization and rising poverty could affect long-run fiscal sustainability, as the share of social spending in public expenditure increases. High income inequality may also signal lack of equal opportunities or deficiencies in the education system, restraining the supply of skilled labor.

4. This paper reviews the evolution of wage inequality in Hong Kong SAR; discusses possible explanations of the rise in inequality; and evaluates policy options. The next section describes the evolution of cross-sectional wage inequality in Hong Kong SAR during the period 1981–2001. Section III examines the impact of structural shifts on wage inequality, and in particular the effect of structural change on the relative demand for skilled labor. Section IV summarizes current policies in Hong Kong SAR to support the socially vulnerable. Policy options based on the analysis in the paper are also discussed.

The main findings of the paper are as follows:

  • Real wages have increased substantially at all points of the income distribution between 1981 and 2001, while at the same time wage disparity has also risen.

  • Wage inequality within industry groups has increased as the economy has shifted towards higher value-added services, which resulted in high demand for skilled workers and a rise in the return to skills.

  • The wage premia for higher education are large and have generally increased over the period.

  • Earnings inequality is greater within more educated groups, suggesting that returns to unobserved skills also increase with education.

  • The most effective policy in addressing growing income inequality is to increase the skills of the labor force.

B. Wage Inequality, Employment, and Education

5. This section reviews trends in industry employment, education attainment, and wage inequality over the past two decades.5 Date sources are described in the Appendix 1 and summary statistics are presented in Table 1.

Table II.1.

Summary Wage Statistics for Employed Men and Women, 1981–2001

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

Employment and Wages by Sector

6. There has been a significant shift of employment toward the service industries as manufacturing production was gradually outsourced to the Mainland. The last two decades witnessed rapid structural change in Hong Kong SAR. As the Mainland of China opened to foreign investment from the late 1970s, manufacturing production was gradually outsourced from Hong Kong SAR to the Mainland. As a result, the share of manufacturing employment declined from 40 percent to 12 percent, while the that of services increased from 48 percent to 72 percent (Chart A and Table 2). While an increasing employment share of services has been observed in most advanced countries in recent years, the shift is typically of much smaller magnitude. The share of manufacturing in Hong Kong SAR’s total output has also declined sharply, from 23 percent to 5 percent.

Chart A.
Chart A.

Employment Shares

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Table II.2.

Employment and Earnings by Industry

(Male and Female)

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

7. Average real wages have increased in all industry sectors, although at different rates, possibly reflecting the extent of skill-upgrading within sectors. Wage increases in manufacturing have been larger than in any other sector, implying that the downsizing of labor in that sector was mostly among the low-skilled (Table 2). This is consistent with anecdotal evidence suggesting that the stages of manufacturing remaining in Hong Kong SAR are increasingly concentrated in sophisticated, high-value added managerial and administrative functions. Wage gains are the lowest in construction, wholesale and retail trade, transport, storage and communication sectors. The relative share of low-skilled occupations in these sectors is high, implying that wage rises have been more moderate among low-skilled workers. Wage differentials based on observable skills are analyzed in more detail in Section III.

Education

8. The average educational level has risen rapidly, accompanied by rising wage premia for the higher skilled. The share of workers with primary education or less declined from 47 to 16 percent of all employees, while the share of people with university education quadrupled (Table 3). The average educational level for employed women has risen faster than that for men. Average wage increases have been highest for people with upper secondary and post-secondary education. Finance, insurance, real estate, and business services is the most skill-intensive sector, and the share of skilled workers in that sector has remained broadly constant over time (Table 4). Among the major sectors, skill-upgrading has been most significant in manufacturing, also supporting the hypothesis that predominantly high-value added, human capital intensive stages of manufacturing have remained in Hong Kong SAR. The wage premium for skilled workers has increased the fastest in the tradable goods sectors - finance and insurance, transportation and storage, and manufacturing, suggesting that international trade specialization has benefited the those with higher skills in Hong Kong SAR.

Table II.3.

Employment and Log Wages by Education

(Employed Men and Women)

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.
Table II.4.

Education Attainment and Education Wage Premiumby Industry

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

The estimated skilled wage premium is the coefficient on years of education in a regression of log wages on years of education, gender, experience, experience squared, and recent immigrant status.

Evolution of Wage Inequality

9. Wage inequality has risen substantially over the period, largely due to rapid increases at the highest deciles of the income distribution. All measures of wage dispersion show a steady increase in every sub-period (Table 1 andChart 2).6 However, relative wages below the median (50/10 percentile) have remained unchanged for men, and have risen for women only in the second half of the sample period. The increase in the 75/25 percentile is also very modest for men. These data suggest that the increase in overall wage inequality has come from rising wages at the top of the distribution, while relative wages in the lower half of the distribution have remained largely unchanged. By these measures, wage inequality in Hong Kong SAR has grown much faster than, for example, in the United Kingdom.7

Table A.

Change in Log Wages by Percentile

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Source for UK data: Prasad (2002)

Log hourly wages

Chart II.2.
Chart II.2.

Hong Kong SAR: Percentile Differentials for Log Wages, 1981–2001

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

10. The widening of income disparity in Hong Kong SAR has been accompanied by rising real wages at all deciles of the distribution (Chart 3). Although wage growth has been higher at the top percentiles, cumulative real wage growth has been quite substantial even at the bottom half of the distribution (an exception is the real wage growth for women at the bottom 25 percent in the low-growth period 1996–2001). This is in contrast to the U.S., where male real wage growth in the lower deciles has been negative in the 1980s and early 1990s.8

Chart II.3.
Chart II.3.

Hong Hong SAR: Real Log Wage Growth by Percentile, 1981–2001

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

Within and Between-Group Changes in Inequality

11. The increase in inequality in Hong Kong SAR reflects mostly growing wage dispersion within education and industry groups. The rise in the overall wage inequality may reflect change in the average wages received by different groups in society (between-group), or increase in the dispersion of wages within those groups (within-group). Inequality within industry and education groups has risen (Chart 4 andChart 5). The fact that inequality within the more educated groups is larger suggests that returns to unobserved skills rise with education. To examine changes in within-group inequality, while controlling for between-group variation in observable skills, the residuals of wage regressions are examined (Table 5 )9. This analysis indicates that within-group inequality accounts for more than three-quarters of total inequality. The change in residual (within-group) inequality also accounts for close to three-quarters of the change in overall inequality.10 One interpretation of the large increase in inequality, after accounting for the effect of formal education, is that the transformation of the economy from manufacturing to a trade intermediary and financial center created an environment of change and uncertainty that rewarded those with entrepreneurial ability. The rise in inequality within education groups is also consistent with rising returns to ability.

Chart II.4.
Chart II.4.

90/10 Percentile Differential by Educational Attainment: 1981–2001

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.
Chart II.5.
Chart II.5.

90/10 Percentile Differential by Industry

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.
Table II.5.

Measures of Inequality, Percentile Differentials: All Employed

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

Wage residuals are from regressions of log wages on dummies for education, experience, experience squared, marital status, and gender.

12. The increase in within-industry inequality is likely caused by increased outsourcing and skill-biased technological change. In the U.S. and U.K., increase in within-industry inequality has also accounted for most of the increase in the overall inequality. The typical interpretation is that this is an evidence of skill-biased technological change.11 A complementary explanation is that within-industry skill upgrading is due to the ongoing process of outsourcing. If the less skill-intensive stages of the production process are outsourced, there will be rapid skill upgrading within industries. For the U.S., the magnitude of measurable outsourcing appears to be too small to account for a significant portion of the within-industry skill upgrading. For Hong Kong SAR, however, outsourcing has been very significant, and has likely played an important role in the rapid increase in inequality.

Gender Effects on the Wage Distribution

13. The male and part of the female wage distributions have converged significantly over time. The share of women in total employment has increased and the gender gap has narrowed (the median wage differential between men and women has declined from 35 percent in 1981 to 29 percent in 2001,Table 1). The increase in wage inequality among women is somewhat greater than among men. This is partially due to the fact that the distribution for women has become bi-modal in 2001 (Chart 5)12 Women in the lower part of the distribution are mostly employed in elementary occupations (about 80 percent are domestic helpers and saleswomen)13 In contrast, the upper part of the female wage distribution has converged markedly with the male distribution since 1981.

C. Accounting for the Evolution of Wage Inequality

Effects of sectoral shifts

14. Shifts in employment between groups can affect inequality even if there is no change in the underlying wage distribution within groups. Relocation of workers from one sector to another could change inequality through two channels - a between-group composition effect (if average wages in the two sectors are different), and a within-group composition effect (if within-group inequality is different in the two sectors). In addition, the variance of the wage distribution may change within industry groups, and/or the mean wage may diverge between industries even in the absence of labor shifts.

15. To examine the effect of sectoral shifts on the wage structure, a variance decomposition framework is used. The total variance of wages in yeart can be decomposed into within- and between-industry components as follows:

σt2=jsjtσjt2+jsjt(ωjtω¯t)2

where σt2

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is the cross-sectional variance of log hourly wages, sjt is the employment share of sector j, σjt2
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is the within-industry variance of wages, ωjt
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is the mean wage in sector j, andω¯t is the mean wage in the sample size. With this formula, the change in variance over timecan be decomposed into changes in within- and between-industry variance and composition changes within and between industries.14

16. The increase in the variance of wages is attributable mainly to the change in within-industry variance (Table 6, bottom panel). The rise in the variance of wages within industry groups and the increase in the employment share of industries with high earnings inequality account for most of the change in the total variance. The variance of wages has increased the most within the export-related sectors (manufacturing, transport, storage, communication, financing, insurance, and business services). This further supports the hypothesis that the increase in inequality is related to the process of cross-border vertical integration in the tradable goods production. More generally, structural shifts of economies towards service industries could lead to greater inequality since there is a greater heterogeneity of skills and productivity within the service sectors.15

Table II.6.

Effects of Sectoral Shifts on Changes in Wage Inequalit.

(Variance Decomposition)1/

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.

The change in variance is multiplied by 100.

17. The wage decomposition based on education groups reveal that about two-thirds of the total change in variance in the period 1981–1996 is accounted for by an increase in the share of people with higher education (Table 6, top panel). As the share of people in the higher education categories increases, ceteris paribus, wage disparity increases because wage variance is higher within the more educated groups (within-group composition effect). Between 1996 and 2001, there has been a large increase in the variance within groups, possibly related to the cyclical downturn.

Changes in Returns to Skills

18. The joint evolution of skill prices and relative supply of skilled labor is an important indicator of changes in the labor market. A human capital regression framework is employed to study the evolution of skill prices for employed men, controlling for other personal characteristics.

19. Higher education is rewarded with increasingly higher relative returns over time, despite the rising relative supply of more educated workers. Table B summarizes the results of the analysis, with more detailed results reported inTable 7. The wage premium for upper secondary education relative to lower secondary has risen from 17 percent in 1981 to 36 percent in 2001. For post-secondary and tertiary education, the premia were significantly higher and have increased faster over the period. The levels of the premia are at the upper range of those typically found in other advanced economies, although differences in the definition of education variables make cross-country comparisons difficult. The increase in the premia has also been very rapid. This happened despite the significant increase in the average education level of workers noted above, which implies that the increase in demand for skilled labor outpaced the increase in supply.

Table B.

Education Premium Based on Human Capital Regressions, Men1/

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The premia are relative to lower secondary education (exponent of the OLS coefficients, Table 7).

Table II. 7.

Human Capital Equations, Employed Men

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Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.Note: t-stadstics arc in parenthesis (based on robust standard errors).

The omitted variable is lower secondary educatrion.

Change in relative wages versus change in unemployment

20. The low level of unemployment, sustained despite significant demand shifts favoring skilled labor, is evidence of the flexibility of Hong Kong SAR’s labor market. Until the 1998 recession, unemployment was very low for both skilled and unskilled workers.16 It is often argued that labor market rigidities in Europe have constrained relative wage changes, and adjustment to structural shifts has taken place through higher unemployment for the unskilled17. In the U.S. and U.K., which have relatively flexible labor markets, the adjustment has been accomplished mostly through a change in relative wages and less so through differential unemployment rates. Hong Kong SAR’s labor market is considered highly flexible - there are no minimum wages, no unemployment insurance, less than two percent of the labor force is unionized, income taxes are low, and labor legislation is very limited. Therefore, one would expect adjustments to structural changes to take place mostly through changes in relative wages. This seems to have been largely the case prior to the Asian crisis.18

uA02fig01

Unemployment Rate

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source Census and statistics Department, and staff calculations.

D. Policy Implications

21. The rise in income inequality has attracted increased attention from the public and policymakers in Hong Kong SAR. The above analysis has highlighted the role of structural changes in raising income inequality. To a large extent, the increase in inequality over the 1981–2001 period has been a byproduct of an efficient and dynamic economy. Fast growth has led to better standards of living for all income groups, even though relative wages have changed. Nonetheless, rising income disparity and especially the possibility of rising poverty are undesirable from a social perspective. More worrisome, the continuous rise in the price of skilled labor may signal deficiencies in the education system which prevent the supply of skilled labor from catching up with the rise in demand.19 This not only has negative distributional consequences, but may also reduce economic growth.

Current Policies

22. Traditionally, the Hong Kong SAR authorities have emphasized policies that support economic efficiency and long-term growth, taking into account the structure of the economy. Hong Kong SAR has a very open economy, highly dependent on international trade in goods and services. It maintains a rules-based economic policy framework, including a currency board, which has served it well in its role as an intermediating economy and a financial center. In this framework, flexible prices and a well-functioning labor market are crucial to facilitate adjustment to shocks and ensure sustained economic growth. The authorities have also made efforts to avoid excessive growth of public expenditure to avoid introducing distortions in the economy and maintain macroeconomic balance. They have refrained from regulatory and redistributive policies diat distort the labor market, such as minimum wages, that could reduce the flexibility of the economy and its long-run growth potential.

23. Policies to improve economic efficiency have been supplemented by measures to support the most needy. Targeted support to the poor is channeled through the social security system. Lower income groups also benefit from public housing, subsidized health care, and free education. The rise in unemployment in recent years also prompted increases in the budget for training and job matching programs.

24. The social security system in Hong Kong SAR is strictly means-tested. Social spending as a share of government expenditure is smaller than in most other advanced economies, although the number of cases and amount of spending have been rising rapidly in recent years. The Comprehensive Social Security Assistance (CSSA) Scheme is a means-tested, non-contributory system which provides assistance for the elderly, disabled, unemployed, and the very poor. About three quarters of CSSA expenditures went to elderly people in 2000. Low-earned-income recipients accounted for only 3.7 percent of all cases in 2001, although their share has been increasing. Only 14 percent of all unemployed received support from the CSSA, since the system is strictly means-tested and does not provide unemployment insurance. Limited social benefits are generally viewed as a part of an implicit social contract, according to which the government provides a low-tax environment to limit distortions in the labor market and increase incentives to work. Tax exemptions are very generous, and only about 40 percent of all employees are subject to income tax.

Table C.

Comprehensive Social Security Assistance Recipients by Category

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Source: CSSA, Hong Kong SAR. The numbers are as of September of each year.

25. Assistance to the lower-income groups is also provided through subsidized public housing, education, and health care. Although very few people meet the stringent means-tested criteria for direct welfare payments, a large share of the population effectively receives transfers from the government. The first nine years of education are free and compulsory, and higher education is also subsidized in the form of loans and grants. About 50 percent of all households live in government-provided or subsidized housing at costs much below market. Health care is heavily subsidized by the government and available at nominal cost. If these implicit transfers are taken into account, income distribution could be more even.

Looking Forward

26. The analysis in this chapter suggests that the most effective policy for addressing growing income inequality in Hong Kong SAR is to increase the skill levels of the labor force. Structural changes in the last twenty years have led to growing demand for skilled labor and faster obsolesce of skills. The empirical analysis shows that people with higher education enjoy large and rising earnings premia over those with primary and lower secondary education. Higher education also enhances the returns to other individual skills. An increase in the education level of the labor force, by itself, may not make the distribution of income more equal, but it will increase the equality of opportunity and contribute to sustainable economic growth, which historically has lead to improvement of the living standards even for the poorest.

27. Continuing economic integration with the Mainland will likely result in a further increase in skill premia as Hong Kong SAR undergoes further structural shift into higher-end services. According to government projections (see Table 5 in Chapter 1), job growth in the next decade will be fastest in financing, insurance, and business services, which have the highest concentration of high-skilled employment. The Hong Kong SAR manpower survey predicts that a shortage of people with higher education will emerge, while unemployment among those with secondary education or less may increase further.

28. Therefore, the emphasis of policies should continue to be on upgrading the quality of education. Education spending as a share of GDP has been low in Hong Kong SAR relative to most OECD countries, although it has increased in recent years.20 The government has intensified efforts to increase enrollment in post-secondary education, as well as to improve the quality of the education. Adapting immigration policy to allow the entry of more high-skilled workers could also be used to help alleviate their shortage.21 As the supply of skilled labor increases relative to demand, its relative price could decline, thus bringing greater social equality.

Table D.

Distribution of the labor force by level of educational attainment (1996)

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Data for Hong Kong SAR are for employed men

Source: OECD Education Database, Hong Kong Census.

29. Retraining programs could be introduced to help those already in the labor force acquire new skills. The Hong Kong SAR government is already experimenting with such programs for the unemployed, The programs could be expanded, for example, by giving employers incentives to provide continuing education for their workers. To have long-term success, retraining programs should be geared more towards the needs of the expanding sectors (e.g. provision of basic computer skills). The experience of other advanced economies suggest that such programs are more efficient if run by the private sector (OECD, Employment Outlook, June 1998).

Chart II.6.
Chart II.6.

Kernel Density Estimates of Log Wages, 1981 and 2001

Citation: IMF Staff Country Reports 2002, 099; 10.5089/9781451816839.002.A002

Source: Data provided by Hong Kong SAR Census; and IMF staff estimates.Note: An Epanechnikov kernel with a bandwidth of 0.1 was used for the estimation.

Summary: Returns to Education and Experience for Men

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Note: The premia are relative to lower secondary education (exponent of the OLS coefficients).

Returns to experience are evaluated at particular experience levels.

Data Appendix

30. The data set used in this paper is constructed from a one percent sample of individuals and households from the Hong Kong SAR Population and by-Population Censuses conducted in 1981, 1986, 1991, 1996, and 2001. The data includes monthly earnings, industry sector of employment, occupation, and educational, demographic, and household characteristics for every individual.

31. The wage variable examined is real monthly earnings from main employment (the composite consumer price index, 1996=100, is used as the price deflator). The analysis is restricted to employed people, between 18 and 65 years of age. Hours worked are not reported and part-time workers are included in the sample. In addition, the data is top-coded at different real incomes for the different years. To adjust partially for these problems and to exclude outliers, individuals in the lowest 1.5 percent and the top 0.5 percent of the wage distribution have been dropped from the sample for the purpose of the analysis. An approximation of the upper tail of the distribution by fitting Pareto distribution was also attempted - it only makes a difference for the size of the aggregate inequality indexes, and not for the rest of the analysis.

32. The Census reports level of education attained. Five education groups were constructed based on this variable, and the approximate years of education corresponding to each level were computed. Approximate years of potential experience is also estimated based on age and years of education.

References

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1

Prepared by Dora Iakova. I wish to thank the Hong Kong Census and Statistics Department for providing the data.

2

The Gini coefficient, a commonly used summary measure of household income inequality, has risen from 0.451 in 1981 to 0.525 in 2001. The World Development Report 1995, World Bank, ranks Hong Kong SAR as having the highest rate of income inequality among high-income economies.

5

The wage variable examined is real monthly wages from main employment.

6

The measures of wage inequality that show increased disparity are the standard deviation, the coefficient of variation, Gini coefficient, and different percentile ratios.

7

As well documented in the literature, 1980–1998 was a period of rapid increase in wage inequality in the U.K.

9

Log wages are regressed on years of experience, and dummies for education, experience, gender, and marital status.

10

We also run separate regressions of wages on a group of education dummies; industry dummies; and gender dummies. The regression on education dummies reduced the residual inequality the most, indicating that inequality between education categories is the largest contributor to between-group inequality.

11

The argument is that according to the Stolper-Samuelson theorem, import competition reduces the relative wage of the unskilled and the result should be a substitution towards unskilled workers. Therefore, the observed increase in both the relative wage and relative employment of skilled workers within industries can not be due to import competition.

12

Epanechnikov kernel with a bandwidth of 0.1 was used to approximate the distributions.

13

If people in elementary services occupations (which are affected by a rising share of imported labor) are dropped from the sample, the change in wage inequality for women does not differ significantly from that of men.

14

Holding the employment shares constant, one can calculate: (1) the change in within-industry wage variance; and (2) the change in between-group variance, attributable to change in the industry average wage relative to the average wage in the economy. The composition effects give the change in variance due to changes in industry employment shares.

15

In Korea and Taiwan POC, which specialize in manufacturing, wage inequality is very low and has declined over the last twenty years (Fields and Yoo,2000). The reverse is true for advanced countries which have increasingly specialized in services.

16

Peng, Wensheng, Cheung, Lillian, and Kelvin Fan,2001, “Sources of Unemployment: Recent Developments and Prospects,” Quarterly Bulletin 11/2001 (Hong Kong SAR: Hong Kong Monetary Authority), pp. 33–48.

17

See Prasad (2000) for a review of the literature and a case-study of the German labor market.

18

In the recent protracted downturn, which was accompanied by significant deflation, unemployment seems to have increased disproportionally among the low-skilled. This could either be due to short term frictions in the labor market, or signal partial downward rigidity in nominal wages which delays adjustment through the price of labor.

19

Baraka (1999) attributes the fall in relative skill prices in Taiwan over the last two decades to a rapid increase in the proportion of workers with higher education.

21

Lam, K. and Liu, P. (1998) discuss the effect of immigrants on income distribution.

People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues
Author: International Monetary Fund