Faced with a still uncertain economic outlook, and weak sales and profits, as well ongoing deflation and therefore domestic pricing pressures, Hong Kong businesses are continuing to keep tight control of operating costs, including wages and benefits.

This was reflected in the latest wage and payroll figures for the June quarter, which showed a 0.9 per cent decline in current dollar (non-inflation/deflation adjusted) wages on top of the 0.8 per cent decline recorded in the March three months.

After discounting for deflation (a general decline in consumer prices), however, average wages were up 3.1 per cent in real terms in June 2002 over a year earlier, compared with 2.1 per cent in March.

Payroll costs showed a similar trend, with average payroll per person engaged being down 1 per cent in June compared with a year earlier, representing a further moderation from the 0.6 per cent decline in the first quarter of the year.

In real (deflation adjusted terms), average payroll was up 2.2 per cent, compared with 2.1 per cent in the opening quarter.

The wage rate includes basic wages and other regular and guaranteed allowances and bonuses. Payroll includes elements covered by wage rate as well as other irregular payments such as discretionary bonuses and overtime allowances.

The payroll statistics therefore tend to show relatively larger quarter-to-quarter changes, affected by the number of hours actually worked and the timing of payment of bonuses and back-pay.

Payroll indices, on the other hand, cover employees at all levels and proprietors actively engaged in the work of the establishments.

According to the government, about 54 per cent of companies in the June survey reported some decrease in their average wage rates compared with a year earlier. This was attributable to the reduction of guaranteed bonuses effected in early 2002.

However, 34 per cent of companies surveyed recorded some increase in their average wage rates over the same period. This was partly attributable to the retrenchment of lower-paid clerical staff and operatives and hence a rise in the proportion of relatively higher-paid workers over the past year.

The remaining 12 per cent reported almost no change in their average wage rates.

The release of the June wage and payroll numbers came as the Chamber and, earlier, the Employers' Federation were suggesting to their members that there would need to be further control of wage and salary costs in the year ahead.

In its own work on the background to the present situation, the Chamber has taken the following factors into account:

In the past five years, the Hong Kong SAR has experienced two short-lived recessions (1997-98 and 2001-02). These have adversely affected business conditions and there is little room for across-the-board increases in general pay.

The domestic economy has only just turned the corner, with growth turning modestly positive in the second half of this year. This tentative recovery cannot be put at risk by pay increases in the immediate future.

Despite the difficult economic times, the SAR has managed to increase the number of people in employment by some 110,000 in the past five years. Wage restraint throughout this period has helped in this.

Unfortunately, rapid growth in the labour force over the same period, has resulted in unemployment climbing to 275,000 compared with a little over 70,000 five years ago. This is not a level that can be tolerated for very long.

The private sector's commitment to reducing the number of unemployed is reflected in the recently announced "one company, one job" campaign, and other employment, training and re-training initiatives, in addition to wage restraint.

Although nominal (current dollar value) wages have only increased 2 per cent over the five year period, real wages have risen more than 11 per cent, due to deflation (a general decline in prices) of almost 10 per cent.

Spending power of wage and salary earners has, therefore, actually increased, while business profits have remained under pressure due to generally weaker trading conditions and reduced pricing flexibility due to continuing deflation.

As a result, the share of wages and salaries in the total output of the economy has increased to more than 56 per cent compared with less than 52 per cent five years ago, as the share of profits has decreased.

The SAR Government is now also committed to wage restraint, with civil service wages being cut from October 1 this year, partly reversing an earlier rise.

In its own pay review guideline to members, the Chamber said that further wage and salary restraint would be necessary in the coming year.

"There should be no general increase in wages and salaries in 2003." The Chamber letter to members said. "For some companies, even a general decrease in wages and salaries may be necessary to control costs. But as in previous years, it is for individual member companies to decide their own remuneration strategy based on the circumstances in their own business."

In its statement, the Employers' Federation added that after considerable consultation among its members, it made the following observations:

Companies that have introduced variable performance related pay effectively and sensitively have found that both employees and companies have benefited significantly. It continues to recommend this approach.

While there are wide variations among industries and companies, there is no basis for general increases to salaries in the foreseeable future. Some companies are questioning the need for any form of annual pay round. Most will continue to reward their top performers if they can afford to do so.

Reducing the total costs of employment in Hong Kong remains a priority since improving productivity is crucial. Companies must consider motivational strategies other than pay to sustain employee commitment.

Communicating with employees and explaining the rationale of company remuneration policy and practice is particularly important.

Notes :

Figures not in brackets denote percentage changes in the Nominal Wage Indices. Figures in brackets denote percentage changes in the corresponding real indices. The Real Wage Index is obtained by deflating the nominal index by the 1999/2000-based Consumer Price Index (A).

The distinctly larger year-on-year increases in the Real Wage Indices in December 2001 mainly reflected the influence of a marked decline in the Consumer Price Index (A) caused by the waiver of public housing rentals granted by both the Housing Authority and the Housing Society for December 2001.

** Not including stock, commodity and bullion brokers, exchanges and services companies; insurance agents and brokers, and real estate agencies.

* Refer to all industries covered by the survey.