Other Articles, Article | January 18th, 2010 |

Published in SCMP on 14 January 2010.

Britain’s minimum wage experience: lessons for Hong Kong

According to the United Nations’ 2009 Human Development Report, Hong Kong has scored the highest Gini Index of 43.4 among the world’s 38 “very high human development” economies. Hong Kong’s income inequality is, to date, the most serious among such economies. Shortly after the UN finding was released, our Provisional Minimum Wage Commission which has been studying the issue of a minimum wage for Hong Kong indicated that the British model might be more suitable than others for Hong Kong.

The reference to the British model might be purely incidental, but it might also be intended by the Commission as the British national minimum wage legislation was also introduced in a context of rising income inequality and poverty. The introduction of the British national minimum wage was sometimes paraded as evidence of the former Blair government’s commitment to reversing glaring inequity.

Britain’s Low Pay Commission (hereafter the Commission) adopted a prudent approach on the minimum wage issue. The initial minimum wage rate it decided on in 1999 was about 46% of the median wage rate. Britain’s prudent approach and initial minimum wage rate have been very much the foci of local media reporting. Citing OECD experience, the local business sector has also pointed to 40% of median wage or about HK$5,000 as an appropriate benchmark for setting Hong Kong’s minimum wage level.

Given severe income inequality in Hong Kong, it would be useful to examine the thoughts that had informed the Commission in its prudent approach as well as to see how Britain’s initial minimum wage rate and the minimum-wage-to-median-wage ratio can be understood.

In its first report, the Commission listed rising inequality, a substantial degree of in-work poverty, and gross exploitation as its top concerns. It stated explicitly that the minimum wage had to make a difference for low-pay workers and remove gross exploitation. On this, the Commission wrote in its report: “The National Minimum Wage must protect the most vulnerable from exploitation and be a critical factor in a package of measures to address social exclusion and make work pay.”

Like any other country with a minimum wage, however, Britain was concerned about the impact of the minimum wage on the country’s economic competitiveness. The Commission agreed that the minimum wage must support a competitive economy. Notwithstanding, it took the minimum wage and economic competitiveness to be complementary rather than conflicting. It considered economic competitiveness and growth to be dependent on a range of factors other than costs of labor. Competitiveness could be achieved through innovation, good management, well-targeted capital investment, and the development of work skills. If firms competed simply on the basis of low pay, this “can lead to a damaging downward spiral of low wages and poor standards, which is detrimental to both businesses and workers.” Firms pursuing a high productivity strategy would also be unfairly undermined by competitors relying on low-wage employment.

Moreover, the Commission was aware that social welfare could make it possible for some firms to depress wages and thereby transfer operational costs to taxpayers. Such firms would know that despite their wages being below subsistence level, unless workers were left to starve, the government would eventually step in to provide the necessary supplement. The consequences would be taxpayers being called upon to subsidize wage exploitation and efficient firms having to compete unfairly with inefficient ones.

To the Commission, therefore, the minimum wage in addition to being a labor policy had also to be an economic policy serving the following functions: it “should protect reputable firms from being undercut by competitors solely on the basis of depressed wages. It should also protect the taxpayer from subsidising wage exploitation. It has the potential to encourage competitiveness based on a better skilled workforce and better quality products and services.”

It was with such considerations that the Commission decided on a prudent approach to make time for industrial adjustment and not to put firms trying to upgrade productivity and jobs at unbearable risk. With a commitment to making a difference for low-pay workers, the prudent approach was “to find the balance between improving low pay and avoiding damage to efficient businesses and to employment opportunities”. The role of the minimum wage was to encourage businesses to improve efficiency, performance and investment in staff, as well as create opportunities for the unemployed to take up work and for those in work to develop their skills. The prudent approach was to make time for all these to happen.

As regards the appropriate starting wage, our opinion is that it is important not to read Britain’s rate or other countries’ rates mechanically and out of context. The Low Pay Commission opined in its report that comparing minimum rates across countries was not straightforward. Regarding the minimum-wage-to-median-wage ratio, the Commission pointed out that it was “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.” What this cautions against is looking at a minimum wage level outside of the context of a country’s structure of income distribution.

Hong Kong’s Gini index is 43.4 while Britain’s is 36.0. This means that Hong Kong’s income distribution is significantly more unequal than Britain’s. In other words, as Britain’s income distribution is less unequal, its median wage is located at a higher level in its structure of income distribution. This in turn means that the median wage is relatively closer to the top wage compared to the median wage in an income distribution that is more unequal. An income that is 46% of the median wage in a country with a more equal income distribution is higher than the same income in a country with a less equal income distribution.

To understand this point, we can compare Britain’s initial minimum wage level in 1999 in terms of purchasing power parity (PPP) in sterling (£) with 11 other countries in the European Union and OECD having a national minimum wage. The minimum wage rates of these 12 countries as purchasing power parity in 1999, in descending order, were: Australia (£4.83), Netherlands (£4.56), Belgium (£4.55), France (£4.10), Canada (£3.74), Britain (£3.60), USA (£3.38), New Zealand (£3.15), Japan (£2.57), Spain (£2.43), Greek (£2.34) and Portugal (£1.93). It can be seen that Britain’s minimum rate was in fact among the top half of the rates of the 12 countries. It cannot be considered as low.

Apart from purchasing power parity, one may also look at Britain’s minimum wage level from another angle. In 2008, Britain’s minimum wage level was about 23% of the median earning of the country’s top 10% in the earnings distribution. In this light, if we express the suggested HK$ 5,000 minimum wage rate as a proportion of the median earning of the top 10% in Hong Kong’s earnings distribution (which was about $45,000 in 2006), the local ratio turns out to be only about 11%. From this angle, one may argue that compared to Britain, a minimum rate of $5,000 for Hong Kong will be indeed too low.

Although Britain’s minimum wage level may not be of direct relevance to Hong Kong because of differing contexts, the Low Pay Commission’s deliberations on the relationship between minimum wages and economic competitiveness, its analysis of the relationship between income inequality and wage exploitation, as well as its concerns about taxpayers possibly made to subsidize wage exploitation should broaden the local discourse on minimum wages. Exclusive emphases on the possible negative impact of a minimum wage on economic competitiveness and mechanical interpretations of the wage level itself are not conducive to helping Hong Kong find a balanced albeit prudent approach to this important issue.

George Cautherley

Vice-Chairman, Hong Kong Democratic Foundation

An abridged version of this article was published in SCMP on 14 January 2010.

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