We examine HK legislators' calls for a statutory minimum wage and maximum working hours, and the Government's move to put public bodies on this path resulting from a pact between Donald Tsang and the unions during his nomination campaign. He was making promises with your money. We also look at the proposed "1+1" labour importation scheme - a sop to politically-connected textile families, the job-for-life labour contracts of the civil service, statutory Severance and Long Service Payments, and the Protection of Wages on Insolvency Fund.

Intervention in the Labour Market
7 October 2005

Recently, there have been calls from various legislators, including pro-Beijing Federation of Trade Unions representative Chan Yuen Han, pro-democracy Confederation of Trade Unions representative Lee Cheuk Yan, and Democratic Party legislator Andrew Cheng Kar Foo, for a statutory minimum working wage, minimum and maximum working hours and minimum 125% overtime payments. Whilst such simple proposals may be populist, well-intended and attractive to those on low-paying jobs, the proposals would not be in the long-term interests of anyone, because they would reduce economic efficiency and increase inflation and unemployment, particularly for the young and low-skilled.

The relationship between an employer and an employee is a private contract, reached between a willing employer and a willing employee in a free market for employment. We do not have slave labour in Hong Kong. Government interference in such contracts should be kept to the minimum necessary to protect the public interest, such as health and safety. It would not, for example, be in the public interest to risk bus drivers or airline pilots falling asleep at the controls, so it is reasonable to impose statutory maximum continuous working hours and minimum rest periods between shifts for safety reasons. The same could be said of doctors in whose hands we place our lives.

The minimum wage

However, if Governments take that interference too far, and impose minimum wages, then they are interfering in the operation of the free market, and preventing a willing employee and employer from agreeing on a lower wage that would be acceptable to both sides. What does this mean for jobs? In some cases, where technology allows it, the jobs migrate overseas, where wages are lower. For example, a call centre does not have to be placed in the country it services. Indeed, many HK firms already place their call centres in mainland China.

In other cases, a minimum wage would raise the cost of doing business and reduce the number of jobs in the sector. Restaurants, for example, have to employ waiters and cooks, and these jobs cannot be outsourced overseas, but if forced to raise wages, then restaurants have two choices in order to stay in business - either raise the price of meals, or employ fewer people, and probably both, because raising prices drives away some marginal business, and as a result restaurants serve fewer meals and employ fewer waiters. Likewise, the effect of raising minimum wages in the hotel sector would be to either cut jobs or raise room rates, and probably both, making HK less attractive as a tourist and conference destination. Other areas affected by higher labour costs could include public transport - ironically, many of the legislators who call for minimum wages also call for lower bus fares. How is that possible if we increase the cost of bus drivers? And are the poorer and hungry customers willing to pay more for a hamburger or lunch box so that the fast food joint can pay a minimum wage to its staff?

For low-skilled youths who are seeking their first jobs, or for low-skilled workers seeking to change careers, a minimum wage simply makes them unattractive - if an employer has a choice between someone with experience, and someone with no experience, and if both are willing to work for the minimum wage, then of course he will choose the experienced person and save money on training. But if he is free to negotiate, he may pay a lower wage to a trainee and then train him or her. With a minimum wage, the only way to resolve that conundrum would be for Government to throw taxpayers' money at it by paying employers to train people (or equivalently, giving tax breaks).

A minimum wage would also disincentivise low-skilled workers from pursuing further education, because at least initially, they wouldn't see any monetary reward for it. For example, if an employer would pay them $20 in a free market, but is forced to pay them a minimum of $30, then the worker will have to lift his economic value by at least $10 before receiving any further reward.

If a minimum wage is imposed, then fewer jobs will be available overall, and the financial burden on taxpayers of supporting the unemployed will increase. The logic of this argument is clear if you consider what would happen if the minimum wage was say, $100,000 per month - many jobs would disappear, we would have hyper-inflation of wages and prices, the currency peg would break, and the economy would shrink dramatically as people and business left for cheaper places.

Domestic Helpers

The only employees in Hong Kong who currently have a statutory minimum wage are Foreign Domestic Helpers. This provides a case study. It is clear that some helpers are willing to work for less than the minimum, and some employers cannot afford to pay the minimum. As a result, they either break the law by agreeing to a lower wage, or more likely, the would-be employer does not get a domestic helper and the would-be helper does not get a job. That in turn can prevent a HK parent from taking a job due to the need to look after their children; indeed, it may deter them from having children in the first place. The parent makes a simple calculation - can I afford to work for the salary available, and employ a helper? As you can see, there is a domino effect - the helper doesn't get a job, the parent may not get a job, and the parent's would-be employer may have to pay more to get someone to do the job. Meanwhile, due to the willingness of foreign helpers to come to Hong Kong for less than the minimum wage, overseas employment agencies can arbitrage this by charging exorbitant fees to the helper to arrange for the job. It is quite clear that the minimum wage for foreign domestic helpers impedes economic efficiency, not just in Hong Kong, but in the poorer countries of Asia where people are willing to take overseas jobs which offer higher wages than those available at home.

It's your money

In a bargain struck in Jun-05 with trade unionists, in return for their support of his nomination campaign, Chief Executive Donald Tsang reportedly agreed to introduce a minimum wage and standard working hours for employees at public bodies by the end of 2005. As a result, the Government will pay more than necessary for some of its employees (including those outsourced to private contractors) and the public will end up paying for it through direct and indirect taxation. The money does not come out of thin air. Mr Tsang was spending your money by making this promise. He also agreed to consider extending this to the private sector through legislation or by leaning on employers over which the Government has influence, such as the power monopolies, who will ultimately recover the increased cost through their tariffs under the Scheme of Control.

The only true private-sector employers who are likely to agree, without regulatory pressure, to a proposed "Code of Practice" on minimum wages are those who already pay all their staff more than the minimum in the code.

If Mr Tsang wants to preserve HK's free-market reputation, and more importantly, our economic efficiency, then he should stop this nonsense and make it clear that the Government and public bodies will pay free-market rates for labour, getting maximum value for taxpayers' money, and that everyone else is free to do the same.

The 1+1 Scheme

It is ironic that at the same time as he is entertaining calls for a minimum wage, he is also entertaining calls for the "1+1" scheme of allowing Hong Kong factories to import 1 mainland manufacturing worker for each local employee, to regenerate an economic sector that is no longer viable. So which do you want, Mr Tsang, cheap labour, or minimum wages?

The truth is that even if the 1+1 scheme gets off the ground, it will only be viable if it involves short-lived quota-dodging by textile firms. That game, finishing mainland garments in HK and sticking our labels on them, is almost over, because under the WTO agreement, the EU and US can only impose anti-surge quotas on mainland textiles for another two years. For other industries, 2 mainland workers will still be cheaper than 1 mainlander and 1 HK worker, so they will stay in China. The fact that this is even being considered is a testament to the textile background of certain HK politicians. And where are these workers all going to sleep - on the factory floor?

In principle, we have no objection to the import of labour, as long as new arrivals do not rely on the state for housing - one way is simply to commute from Shenzhen. But if we are going to allow it, let's allow it for all sectors and behave like a true free market. Let's drop labour protectionism and allow anyone who can cover their living costs to come here and work. The rental cost of housing and transport would naturally limit the inflow to higher earners, so those on lower-incomes who are already resident in state-subsidised housing would not feel any competition for work. At present, even the spouses of expatriate workers are not entitled to work here, which is a major deterrent to families moving here in the first place.

The Civil Service

Of course, the Government itself has some of the most inflexible employment contracts in the market, as most civil servants are virtually guaranteed lifetime employment at remuneration way above market rates, including untaxed benefits. An employee of the civil service has to be involved in a fiasco the size of the Harbourfest to put his contract in jeopardy. Tsang could go further by reforming the civil service on free-market lines by putting everyone on standard employment contracts with the right of the employer to terminate them on 1-3 months' notice - but he won't, because civil servants would then claim that they were entitled to jobs for life under Article 100 of the Basic Law, resulting in another court battle. But he could at least ensure that no more job-for-life contracts are signed, and that all new recruits get standard notice clauses in their contracts, no different to the private sector. Otherwise, he is committing the taxpayer to employ people in the civil service who may not in future be needed.

Working hours

As regards minimum or maximum work hours and overtime payments, this should be a matter of private contract. Individual employees, or if they so choose, Unions who represent them, should be free to negotiate with employers for whatever contract terms they like. And employers should be free to choose whom they negotiate with (the union or the worker) and whom they employ. It is true that HK workers are some of the hardest-working in the world - but so what? The hours a person agrees to work should not be dictated by Government, save where it involves safety issues.

Severance and Long Service Payments

The Government already interferes too much in private contract by means of the Employment Ordinance. For example, it imposes minimum lump sums to be paid by employers when contracts are terminated, known as "Severance Payments" and "Long Service Payments". If an employer terminates the employment after 2 years through reason of redundancy or lay-off, then a Severance Payment is required. If he terminates after 5 years for any other reason, or if an employee resigns after 5 years and is 65 or over or is medically permanently unfit for the job, then a Long Service Payment is required. Instead of all this, the Government should stand back and allow employers and employees to negotiate freely before the employment begins.

As a result of these impositions, some employers of low-skilled workers terminate their employment contracts after 4 years for no real reason other than to avoid incurring a liability for future Long Service Payments. They then hire other staff from the market. So the law actually undermines employment stability. In a free market, most employers would probably cease to agree to such terms, and employees may obtain slightly higher wages in return for taking the risk of job loss without severance payments, but perhaps negotiating minimum notice periods. However if employees were interested in insuring against job-loss, then insurers would undoubtedly sell insurance to cover it, as they do in other markets, thereby creating economic growth and jobs in the insurance sector. As things stand, such unemployment insurance products are rare in HK because they are "crowded out" by the Government-imposed Severance and Long Service Payments.


Of course, the obligation to pay severance payments isn't worth much if the employer is bankrupt, so another consequence of this law is that the Government established the Protection of Wages on Insolvency Fund and its accompanying bureaucracy to cover unpaid wages and Severance Payments. This is financed by a tax on businesses - HK$600 on each annual business registration certificate, whether or not the business (which might just be a property or trademark-holding vehicle) has any employees itself. Like all such schemes, it is open to abuse, and some restaurant operators have acted on this by incorporating each restaurant separately, then shutting them down (often just before Chinese New Year "13th month" bonuses are due), claiming insolvency and leaving the employees to claim from the fund. Meanwhile, the shareholders and management establish a new operation elsewhere, or even in the same premises a few weeks later under a new lease. The Government then has to spend more public money investigating and prosecuting the abusers of the fund. Restaurants are not alone in this.

In line with the free market philosophy of HK, the fund should be abolished, and employees and employers should be allowed to reach whatever arrangements they choose in relation to the protection of wages. This could involve the employer or the employee buying insurance to guarantee the payment of wages in the event of insolvency, or the employee simply agreeing to accept the risk of non-payment, just as a supplier of any other services does when he provides those services to a customer. As a middle-ground, if the Government wished to retain any interventionist role, then it could require employers to purchase such wages insurance, just as it requires them to purchase Employees Compensation Insurance to cover work-related injuries.

© Webb-site.com, 2005

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