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Economic Update

2019/05/03

We Cannot Ignore Lower Productivity Growth

Facing a gradually ageing population (Figure 1), Hong Kong’s total labour force is expected to reach a plateau during 2019 to 2022, according to a projection by the Census and Statistics Department.

Doing this kind of projection is never an easy task. The Greater Bay Area Initiative may further complicate statisticians’ tasks. This is because the initiative will certainty enhance the two-way flow of people between Hong Kong and the other ten cities within the cluster.

Measures such as tax relief and the relaxation of the counting method in respect of the 183-day rule have incentivized Hong Kong people to consider working across the border. The opening of both the Express Rail Link and the bridge to Macao and Zhuhai will also encourage Mainland talent to work in Hong Kong as well as the other way round. The net impacts of such developments on Hong Kong’s labour force in the long run will therefore be hard to determine.

In any event, few would deny that Hong Kong faces acute labour shortages for the time being, as the labour market remains very tight with the unemployment rate at 2.8%.

This might not be a big concern if a persistent improvement in productivity -- thanks partly to technology -- could serve to offset some of the shortfalls and hence help maintain the city’s overall competitiveness. However, the recent release of productivity data by the Conference Board may suggest this hope is unrealistic.

Hong Kong’s labour productivity growth, based on output per hour worked, halved in 2018 and is projected to remain tepid at 1.6% this year. This is compared with 3.7% during 2000-2007 and 2.7% during 2010-2017.

Total factor productivity (TFP) growth, which takes account of investment in capital and labour skills and gives a clearer picture on economic efficiency, also declined last year. Hong Kong’s growth in TFP fell to -0.6% in 2018 from 1.1% in 2017, compared to 2.0% during 2000-2007 and 0.2% during 2010-2017.

Indeed, Hong Kong is not alone in seeing such slower TFP growth when compared with the beginning of the century (Figure 2). At the global level, the average TFP growth was -0.1% in 2018, compared to 1% during 2000-2007.

The phenomenon of slower productivity growth over the past decade suggests that we should not bet too much on the efficiency gains that result from technological advancements.

Productivity is a driver of economic growth. Paul Krugman, the Nobel laureate in economics, once said: “Productivity isn’t everything, but in the long run it is almost everything.” In view of the acute labour shortage, an ageing workforce and slow productivity growth, how can Hong Kong remain competitive in the near term?

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