Labour Issues

The Hon Donald Tsang Yam-kuen,
Chief Executive
Hong Kong Special Administrative Region
Government House
Central
Hong Kong



Dear Donald,

Minimum Wages and Standardized Working Hours

The Hong Kong General Chamber of Commerce is pleased to offer its views on the issue of whether our community should define wage rates and working hours through legislation. We believe, with only a very few exceptions, that these factors are better left to the marketplace.

There are both practical and theoretical problems with the notion of a mandated minimum wage. At the theoretical level, a minimum wage is a clear interference in the marketplace, and one that becomes progressively more distorting over time. At the practical level, a minimum wage most directly hurts the least skilled, least experienced and least educated workers. Moreover, it is a disincentive to investment, and may – under some circumstances – lead to illegal activity that has the potential to put at risk workers' safety.

The concept of “standardized” working hours is a derivative of the previous effort to establish a maximum number of hours that may be worked at one time, or within one period. The idea that some workers need more rest than others, for safety reasons, is well accepted by the business community. Indeed, it is in the public interest that some workers be restricted to a specific number of hours per day, or a certain number of days worked without a break. However, defining a “standard” work period for other than safety reasons is likely to undermine our strong work ethic and lead to unnecessary litigation. As with wage fixing, it is the smaller companies that will be hurt the most.


Pilots, drivers, heavy equipment operators and medical personnel all need to be well-rested when performing their duties. Failing to allow such workers to get adequate rest is a safety issue, and should be treated as such. However, stock brokers, insurance agents, bankers and traders need to be able to respond quickly to changes in the marketplace. Putting artificial limits on when they are allowed to do their jobs would be a disservice to Hong Kong's role as the premier business and financial centre in the Asian half of the world.

Each of these issues, wages and hours, is dealt with at greater length below.

Wages

Hong Kong is repeatedly held up as an example to other economies of the results that can be achieved when government refrains from interfering in marketplace decisions. Indeed, as you yourself said in your October 2005 Policy Address,

“We do not seek to intervene in the market. Rather, we want to actively protect market order and fair competition by preventing manipulative practices such as price fixing, bid rigging and market sharing.”

While your comments were in reference to a possible Competition Law, the principle applies equally to labour legislation: intervening in the market and price fixing are undesirable. We agree.

Theoretically, there are two fundamental flaws with minimum wage legislation:

• A minimum wage is a fixed price. That price must be determined by some formula other than market forces, and so it is inherently less accurate than a price agreed upon between a willing buyer (or employer) and a willing seller (employee).



• Once prices are fixed by law, they become “sticky”, which is to say that they are much more difficult to adjust than prices set in the marketplace. Hence, even if a minimum wage level is coincidentally set at the actual market rate, that price would quickly become obsolete as supply and demand change.

Practically, there are many more problems. As Hong Kong is the most highly globalized economy on earth, there will be undesirable effects on employees:

• Fixing wages above market rates would result in some employers moving their operations out of our jurisdiction.



• Employers required to pay above-market rates might reduce workers' hours to hold overall costs steady, with a probably (and unwelcome) loss of productivity.



• Employers may decide to hire new workers outside Hong Kong, to avoid paying artificially high wages.



• Those companies unable to move out of Hong Kong or reduce individuals' working hours may decide to eliminate some positions altogether, in order to hold costs steady.



• A small number of companies might employ workers at “illegal” market rates. Employers willing to do this would be more likely to cut corners on other regulations as well, perhaps putting workers' – or public – safety at risk.

In all of these cases, the opportunities available to the most vulnerable members of our society – those who are unable to contribute at least as much value to their employers as the artificial minimum wage – would deteriorate. As responsible members of society, we cannot support this.

Third, there are the undesirable effect on employers:

• Employers who chose to absorb the higher labour cost may have to increase their prices. Higher prices do not affect all consumers or customers equally; those least able to absorb higher prices are hurt more than those with more financial flexibility. Moreover, higher prices would directly affect Hong Kong's regional and global competitiveness.



• Companies may choose to reduce profit margins. Lower profit expectations would lead to less incentive to invest. As a result, jobs that might have been created or kept in Hong Kong would be more likely to be created elsewhere, or relocated outside the SAR. Again, those who would suffer are the most vulnerable members of our society.



• A minimum wage is only imposed on those companies that employ the most vulnerable members of society. It is more likely that a local SME would be affected by such as law as compared to an international merchant bank. As such, a minimum wage is a tax on employers, but one that is unevenly and regressively applied.

Finally, there is the question of the impact on unemployment. The table below aggregates data from the Census and Statistics Department's “Quarterly Report on General Household Survey”. As we do not yet have a specific minimum wage rate to evaluate, we have taken the liberty of identifying the number of people who would be affected at three broad rates: $3,000, $4,000 and $5,000 per month.

Workers at Risk

Employees by Monthly Earnings	Regular Employees (A)	Underemployed (B)	Regular and underemployed A+B = (C)	Percent
Under $3,000	152,700	27,500 *	180,200 *	5.20%
$3,000-$3,999	263,300	17,900	281,200	8.12%
$4,000-$4,999	133,400	12,800	146,200	4.22%
Sub-total	549,400	58,200	607,600	17.53%
Total	3,364,700	100,400	3,465,100	100.00%

* Includes those who earned under $2,000 and those who earned $2,000 to $2,999 per month.
Source: “Quarterly Report on General Household Survey”, April to June 2005, Census and Statistics Department, Hong Kong SAR Government.

The table identifies between 180,200 and 607,600 people whose jobs would be at risk under various minimum wage scenarios. By law, these people would be denied the right to work for a wage that is commensurate with their contribution to an employer's business.

Hours

Tired people run a higher risk of making mistakes, so putting a limit on the number of working hours is a good idea, if done sensibly and selectively. It is in all of our interests to ensure that well-rested people do jobs requiring constant attention, for reasons of safety. In the airline industry, for example, such regulations are already in place and it would make sense to examine other jobs on a case-by-case basis. Heavy equipment operators, high rise construction workers and many positions in the health care field come to mind.

In these safety-related cases, the reason for limiting the number of hours is to ensure people in positions of responsibility are able to do their jobs. As such, the rules should concentrate on consecutive hours worked and the number of days without a break. Someone working such a job for 30 hours in a two-day period might be a danger to himself and to others, but working 50 hours over six days may be perfectly safe.

For most jobs, limiting the hours that one may work does not seem to make sense. Certainly anyone who has had a late night conference call with New York or London understands that business simply cannot stop because the clock says it should. We would rapidly lose our position as the most international business and financial centre in the Asian half of the world if we adopted such rules.

The concept of “standardizing” hours is primarily aimed at creating a statutory overtime rate of pay. As such, it should not be considered as a matter of safety.

Conclusions

The important issue of reducing poverty has been captured by the proponents of a minimum wage, but without justification. On the surface, the argument seems quite attractive: if employers pay people more money, the results will be less poverty. Since all employees must be paid at least the minimum rate, the cost is spread evenly throughout society.

Despite the attraction of this argument, it doesn't work. First, it links wages with poverty, which is an unproven assumption. While there are quite a number of employed people who may be considered poor, poverty tends to be more the result of unemployment than of low wages. Creating jobs, and ensuring people have the skills required to do the work, is the better solution.

Second, every society has people who do not have the skills, training, experience or education to enable them to earn as much as others. Helping these people to improve their skills offers a real chance to raise their incomes. Vocational training and skills enhancement programs are the right way to reduce poverty. Job creation is the key.

Poverty is a community-wide problem that needs support from everyone, not just those hiring unskilled or semi-literate workers. The more equitable, and more effective, means of addressing the issue is to raise the qualification of our workforce. In doing so, the less skilled will be helping themselves and our entire economy.

The second undesirable consequence is that those who earn the minimum wage will find that their incomes don't rise. Because anyone earning less than the minimum would have to compete for better paying jobs, the large supply of willing workers would reduce any incentive to raise wages. Moreover, if the minimum wage rate is raised, that increase – and not improvements in productivity or profits – becomes the benchmark for all workers.

There is much more we can do to provide better opportunities for the least fortunate in our society. Ensuring that we remain competitive is a critical aspect of enticing employers to create jobs here, rather than somewhere else.

Sincerely,





David Eldon
Chairman