A fair minimum wage rate should not be less than $30 per hour

 In Minimum Wage, Welfare & Labour
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$20, $24, $25, $28, $30, $33 … This is the spectrum of minimum wage hourly rates that has been proposed by various parties in recent weeks.

 

The business sector is anxious for the rate to not substantially reduce its profits and harm Hong Kong’s competitiveness. The general public as consumers hopes the rate will not cause too much inflation. Low-paid workers demand that the rate be a “living wage”, sufficient to support their basic living. Yet, at the same time, they hope they will not get laid-off due to the pay rise. For Hong Kong’s long-term interests, the rate should also discourage parasitic trades, which can only survive on low-wages and subsidies provided by society.

 

All these demands are not illegitimate. The issue is how to balance the different demands in a fair way and to derive a reasonable rate. The balancing exercise is both art and science. It is art because it requires fair compromise from all sides. It is science because there are objective data on which the compromise can be worked out. Based on the available data, a fair compromise, we argue, will be at a level of not less than $30 per hour.

 

To begin with, an hourly rate of $30 is close to the demand of unionists as well as the living wage proposed by local research studies, which is about $33/hour. Any rate less than this level represents a more than 10% cut in the wage that allows workers to earn their basic living. Such a cut appears to require too much compromise from labour and is unfair.

 

An hourly rate of $30 will also only marginally affect the majority of economic sectors in Hong Kong. For the following sectors, an hourly rate of $30 will only reduce profit ratios by less than one percentage point: wholesale and import/export (0.004%), financing, insurance, real estate and business services (0.02%), transport, storage and communications (0.03%), manufacturing (0.07%), construction (0.07%), retail (0.20%), food processing & production (0.42%), non-Chinese restaurants (0.74%), Chinese restaurants (0.80%).

 

As these sectors together employ more than 70% of employees (about 1,953,000) in Hong Kong and roughly account for 65% of Hong Kong’s GDP, we do not expect a minimum wage of $30/hour to have serious repercussions for Hong Kong’s competitiveness or general price levels. The minimum wage’s marginal impacts on the profit levels of these sectors also suggest that the risk of job loss among the sectors’ low-paid workers should be very low.

 

For six other sectors which employ about 8% of Hong Kong employees (about 219,000), while an hourly minimum wage of $30 will cut profit ratios by between one and three percentage points, they still stand to maintain a reasonable level of profit ratio. In fact, some will still earn a relatively high level of profits even after absorbing the minimum wage. These six sectors and their respective profit ratios after absorbing the suggested minimum wage are: hairdressing and other personal services (15.0%), laundry and dry cleaning services (9.3%), local courier services (7.9%), fast food cafes (7.0%), real estate maintenance management (5.2%), Hong Kong style tea cafes (3.9%). Since these sectors are set to maintain a reasonable level of profits, we also do not expect a minimum wage of $30/hour to have serious consequences for their price levels or their low-paid workers’ employment prospects.

 

Where a $30 minimum hourly wage rate is likely to substantially reduce profits is in the elderly homes, security services, and cleaning services sectors, which hire about 4% of Hong Kong employees (about 118,000). While the elderly homes sector can maintain a profit ratio of 1.6% at this wage rate, the latter two sectors will suffer great losses. Due to the $30/hour minimum wage, the profit ratios of the security services and cleaning services sectors will drop from 5.3% to -5.8% and from 4.1% to -7.7% respectively. This notwithstanding, we are of the view that adjusting the minimum wage downwards just to keep these two sectors afloat should not be an option. It is clear that these two sectors can only survive on very low wage levels. To earn a profit ratio of 3%, the wage level of these sectors has to be kept at as low as $23 per hour. Their “breakeven” wage level is $26 per hour. As such, lowering the minimum wage just in order to keep the two sectors afloat will not only nullify the very purpose of minimum wage legislation, which is to forestall excessively low wages, but will also encourage the sectors to continue to rely on subsidies by society at large for their businesses. Allowing the existence of such parasitic trades by keeping the minimum wage low is unfair to “self-supporting” employers, to society at large as well as to low-paid workers. A better option would be to use a high-enough minimum wage as a policy tool to encourage the two sectors to restructure their business operations so that they no longer rely on low wages.

 

As regards the security services and cleaning services sectors, it remains uncertain how they will respond to a minimum wage of $30 per hour. It can be foreseen that some firms may be forced out of business and some workers may become unemployed. However, as we argued in another context, “this should be welcomed rather than deplored on the grounds of macroeconomic efficiency, as this will allow capital and labour to be redistributed to more productive use.” In the final analysis, the policy dilemma is not between a low-level minimum wage and unemployment; the policy choice is between providing subsidies to low-wage businesses and providing subsidies to the unemployed. Providing subsidies to the unemployed, we believe, is a better option.

 

George Cautherley (高德禮)

Vice-Chairman, Hong Kong Democratic Foundation (香港民主促進會副主席)

18 April 2010

 

A slightly different version of this article entitled “A fair peg” was published in South China Morning Post on 24 April 2010. 

 

 

 

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