HK's unemployment falls, but workers don't get the rewards

PUBLISHED : Wednesday, 21 September, 2011, 12:00am
UPDATED : Wednesday, 21 September, 2011, 12:00am


Some good news amid the gloom: Hong Kong's jobless rate over the three months to August dropped to just 3.2 per cent.

That not only means the rise in unemployment following the collapse of Lehman Brothers three years ago has been completely eliminated. As the first chart below shows, it also means Hong Kong's unemployment rate has fallen to its lowest level since the before the Asian financial crisis of 1998.

With such low unemployment you might think Hong Kong's workforce would be happy, especially when they look at jobless rates elsewhere in the world. In the United States 9.1 per cent of the workforce is unemployed. In the euro zone the rate is 15.7 per cent. Even in booming Australia, 5.3 per cent are out of work.

Yet Hong Kong's workers are far from happy. In pretty much any other developed world economy, a jobless rate of 3.2 per cent would be called full employment. More than that, in most countries 3.2 per cent unemployment would be considered a dangerous shortage of labour; the sort of shortage where intense competition among employers to attract workers would threaten to ignite a dangerously inflationary upward spiral in wages.

As a result, officials, businesses and many ordinary people would be crying out for more immigrants to fill the vacancies.

In Hong Kong, however, there are no such calls. Quite the reverse: the vehemence of political and popular opposition to recent suggestions that an estimated 100,000 foreign maids who have lived in Hong Kong for more than seven years could be granted permanent residency shows that opposition to immigration remains deeply entrenched, despite the low unemployment rate.

This opposition has been dismissed by some as blind prejudice. Yet a closer examination shows that it is understandable, at least as far as Hong Kong's workers are concerned.

Although Hong Kong's economic growth is brisk and unemployment is low, the city's workers have not benefited. As the second chart below illustrates, although Hongkongers are working both harder and smarter - productivity has risen by a third over the last 10 years - wages have failed to keep pace. When you adjust for inflation, they have actually fallen by nearly 6 per cent over the same period.

There are several reasons for this unwelcome - to the workers - stickiness in pay.

One is that the official unemployment rate, which only counts people who are actively looking for work, is a poor indicator of the amount of slack in the labour market. If you look instead at the labour force participation rate - the proportion of potential workers either in employment or looking for work - you see that it has been on a declining trend for the last 20 years. And even though the participation rate has risen since the depths of the recent downturn, it remains low by historical standards, indicating that there is still some slack in the market.

But perhaps the main reason why inflation-adjusted wages have fallen despite the strength of the economy is the combination of Hong Kong's famously flexible labour market combined with the inflexibility of the city's other economic sectors, especially the property market.

A flexible labour market is reckoned essential to Hong Kong's ability to adjust to changing economic conditions, particularly as the Hong Kong dollar peg rules out adjustments in the exchange rate.

As a result, local regulations make it easy to hire and fire employees, while weak unions mean workers have little leverage in wage negotiations.

In such a skewed market, the rewards of growth tend to flow not to the workers, but to those who control scarcer resources. In Hong Kong that means property.

Even if nominal wages rise, property owners respond to the increasing demand by raising rents, which pushes up the rate of consumer inflation. That means, wages stagnate in real terms, while the city's landlords reap the rewards of the higher growth.

So it is hardly surprising that people object to the possibility of higher immigration, despite the low unemployment rate. Their reasons are understandable. Hong Kong's last big rise in immigration, which saw the number of immigrants from the mainland climb steeply from 21,000 in 1991 to 61,000 in 1996, halted real wage growth in its tracks, and depressed real wages among the city's lower paid.

Hong Kong's workers don't want that to happen again, even if the headline unemployment rate is at a 13-year low.