Incentive scheme is a straight wage subsidy by any other name

PUBLISHED : Thursday, 17 February, 2011, 12:00am
UPDATED : Thursday, 17 February, 2011, 12:00am

Transport subsidy may be left in limbo

SCMP headline, February 15 It is not a transport subsidy. The Work Incentive Transport Subsidy Scheme will be a straight HK$600 a month giveaway to any working person who qualifies as being sufficiently poor.

It won't matter whether he or she spends the money on bus fare to get to work or spends it on lunch because work is right next door to home. There is no requirement at all that the money be used for transport. If you qualify as poor enough the government will transfer HK$600 to your chosen bank account every month.

This is a wage subsidy. There is nothing transport about it. The only reason it is called a transport subsidy is that it replaces a 2007 scheme that gave HK$600 a month to low-paid workers from outlying districts. That earlier scheme was arguably transport-related as it covered workers with long commutes. Its successor covers everyone in Hong Kong, long, short or no commute at all.

It is also more generous. The earlier scheme had a wage hurdle of HK$6,500 a month. This has now been lifted to HK$10,000 a month for a two-person household and HK$13,000 for a three-person household.

But this is not the most important figure in determining how effective this scheme will be. The statistic that really tells the story is a government estimate that 380,000 workers, or about half of those who qualify, will take up their entitlements.

This implies to me that about half our population is lacking in self- respect. Ask yourself, how would your grandfather react to a total stranger who said to him: 'Here, have a little of my money as you obviously can't look after your family with your own.'

He would have had to be mighty down on his luck before he would accept such a degrading offer, wouldn't he? Yes, self-respect. Think about it. Fortunately, the estimate also says that about half our population has it and won't stoop this way for a few dollars.

But those who take the money won't really get it anyway. I now put you into the offices of Anycompany's finance director as he is discussing wage increases with the company's managing director.

'It's getting pretty competitive out there,' says the finance director. 'If we don't give our people a good increase this year we could lose a lot of them. We're paying them an average of about HK$8,000 a month right now but they expect as much as a 7.5 per cent increase.'

'Oh, they do, do they?' says the managing director. 'That's easy then. I work out that 7.5 per cent is HK$600 a month and the government has just announced that it will pay them that much for us. Seems to me we don't have to do anything at all.'

'Wonderful,' says the finance director and pencils in a zero in the percentage increase column next to the wages heading.

You think it won't happen? Think again. Employers might not notice if just a few hundred people get that HK$600 a month but they can't miss 380,000 people getting it.

The labour market sets a price for labour in this economy as it does in every economy. If government is happy to pay it then employers won't.

The same thing happens in public housing. We set the rents at levels so low that they give the bottom third of the income bracket some of the cheapest urban accommodation on earth. Employers know it and in consequence adjust wages for that bottom third even further downwards.

Thus public money earmarked for a living subsidy to the deserving poor becomes instead a wage subsidy collected by employers. That's what happens when bureaucrats muck about in dynamic, intricate things like the economy. But fools still rush in where angels fear to tread.

All of this further ignores that government has to raise this money from the same population on which it spends the money. While it may be true that very few low-paid workers pay any salaries tax, their employers have other ways of making them pick up the tab.

If employers find their return on invested capital too low then they will move prices up or move wages down or move away. All three translate to a squeeze on the workers. The only way to escape this conundrum is through economic efficiency, which wage subsidies undermine.

But the greatest irony of this wage subsidy scheme may be what halts it at the moment. It's in limbo because the righteous brigade believes it may encourage sin by making no distinction between married and unmarried couples in a household.

There's no knowing where you'll go when the nutters get involved.