Other Articles, Article | January 15th, 2010 |

*A balance of payments*
Britain’s experience in setting a minimum wage offers valuable lessons for Hong Kong
George Cautherley
Jan 14, 2010

The Provisional Minimum Wage Commission recently indicated that the British model is relevant to Hong Kong’s deliberations on a minimum wage. Britain’s Low Pay Commission, set up in 1998, adopted a prudent approach and Britain’s initial minimum wage was set at 46 per cent of the median wage.

Citing experience from the Organisation for Economic Co-operation and Development, the Hong Kong business sector has pointed to 40 per cent of the local median wage, or about HK$5,000, as an appropriate benchmark for our minimum wage level.

Such views warrant an examination of the thoughts behind the Low Pay Commission’s prudent approach, as well as a better understanding of Britain’s initial minimum wage rate and the minimum-wage to median-wage ratio.

In its first report, the Low Pay Commission listed rising inequality, a substantial degree of in-work poverty and gross exploitation as its top concerns. It undertook to make a difference for low-pay workers and remove gross exploitation through the minimum wage.

At the time, Britain was also concerned about the impact of the minimum wage on the country’s competitiveness. But the commission took the minimum wage and competitiveness to be complementary rather than in conflict. It considered competitiveness to be dependent on a range of factors, such as innovation and good management, rather than on labour costs alone. If firms competed simply on the basis of low pay, this could “lead to a damaging downward spiral of low wages and poor standards, which is detrimental to both businesses and workers”, it said. Firms pursuing high productivity would also be unfairly undermined by competitors relying on low-wage employment.

Further, the commission was aware that, because of the social welfare system, some firms might be able to depress wages, knowing that the government would eventually provide supplements to keep workers above the breadline. The consequences would be taxpayers being called on to subsidise wage exploitation.

To the commission, therefore, the minimum wage – as well as being a labour policy – also had to be an economic policy, protecting reputable firms from being undercut by competitors relying on low pay, preventing taxpayer subsidisation of wage exploitation, and encouraging competitiveness based on product and workforce quality. Thus, the commission chose a prudent approach to allow time for industrial adjustments and to avoid putting too much risk on firms trying to upgrade their productivity and jobs. To make a difference for low-pay workers, the approach was “to find the balance between improving low pay and avoiding damage to efficient businesses and to employment opportunities”.

The commission was also aware of the complexity involved in comparisons of minimum wage rates across countries. It considered the minimum-wage to median-wage ratio “an imperfect comparative measure as differences in earnings distributions mean that the same ratio may have a different effect on the labour market in different countries”. This should serve as a caution against looking at a minimum wage level outside the context of a country’s structure of income distribution.

For example, Hong Kong’s UN Gini index – where a value of 0 represents absolute equality, and a value of 100 absolute inequality – was 43.4 in 2007-2008 while Britain’s was 36. This means that Hong Kong’s income distribution is significantly more unequal than Britain’s. Thus, Britain’s median wage is located at a higher level in its structure of income distribution. This in turn means that the median wage is closer, relatively, to the top wage, compared to the median wage in a place with unequal income distribution.

In fact, Britain’s initial minimum wage level, in 1999, was in the top half when compared with that of 11 other European Union and OECD countries, in terms of purchasing power parity.

>From another angle, Britain’s minimum wage, in 2008, was about 23 per cent of the median earning of the top 10 per cent in the earnings distribution. If the suggested HK$5,000 minimum wage rate is similarly expressed as a proportion of the median earning of the top 10 per cent (about HK$45,000 in 2006), it is only about 11 per cent. In this light, isn’t HK$5,000 too low?

Whether Britain’s minimum wage level is relevant to Hong Kong, the Low Pay Commission’s thoughts on minimum-wage issues should broaden local discourse. Exclusive emphasis on the negative impact of minimum wages, and mechanical interpretations of other countries’ wage levels, are not conducive to helping Hong Kong find a balanced – albeit prudent – approach to this important issue.

George Cautherley is vice-chairman of the Hong Kong Democratic Foundation

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