The View

What the minimum wage failed to do

Hong Kong's three-year-old minimum wage has been ineffective and done little to alleviate poverty, despite its popularity among the city's politicians

PUBLISHED : Tuesday, 29 July, 2014, 11:48am
UPDATED : Wednesday, 30 July, 2014, 1:13am

Concern about the ability of markets to provide income equity for the least able members of the workforce has given the minimum wage its strong social appeal.

Statutory minimum wages were first introduced in developed countries to control the proliferation of inhumane work conditions in sweatshops.

Today, they target workers in most low-paid fields of employment in more than 100 countries.

Most economists oppose minimum wage laws because they increase unemployment - particularly among workers with very low productivity owing to inexperience or handicap - and therefore fail to reduce poverty.

Supporters say they increase the standard of living of workers and reduce poverty.

But if economic and social policy is going to be decided in the interests of the public, it is essential that empirical evidence be brought to examine whether the objectives are being met as intended or not.

The minimum wage’s main outcome is to distort labour market decisions

Hong Kong enacted a minimum wage law in May 2011. Has this helped low-income households and reduced income inequality?

A preliminary answer to this question can be gleaned from the data in the General Household Survey. Data in the four quarters before and after the minimum wage became effective was examined.

In the four quarters before May 2011, an estimated 233,000 households (or 10 per cent of all households) had at least one member who qualified for the minimum wage.

In the four quarters following the introduction of the minimum wage, that number was halved to 121,000 (or 5.1 per cent of all households).

This, according to the advocates, demonstrates the success of the minimum wage in helping workers with low pay.

But is this really the case? A more interesting result is the distribution of minimum-wage workers across households by income quintile groups.

If most of the minimum-wage workers came from the bottom 20 per cent of households by income, then we could safely conclude that the legislation was achieving its goals and that the minimum wage was alleviating poverty across households.

But the data (see chart) shows that one year before May 2011 only 26.6 per cent of the households with a worker qualified to receive the minimum wage came from the lowest income quintile.

One year after the minimum wage was introduced, an even lower 20.2 per cent could be found in the lowest income quintile.

In fact, workers who qualified for the minimum wage were fairly spread out among all households, with substantial percentages found even among the top two income quintiles.

Prior to May 2011, there were a combined 22.5 per cent of households with minimum-wage workers among the top 40 per cent of households by income, and after May 2011, the top two quintiles' share in fact increased to 24 per cent.

Many households, including many middle-income households and some high-income ones, have a member with low pay and low productivity.

Targeting low-pay individuals fails to focus resources directly on poverty-stricken households.

Similar findings have been found in the US, Britain and Canada. So Hong Kong is not special and is part of a general pattern commonly found elsewhere.

It is a mistake to believe that the minimum wage helps low-income households. As a policy instrument for alleviating poverty, its effects are too diffused among the population to be useful.

However, it is not difficult to understand why the minimum wage is favoured in so many countries. It provides governments with a low-cost policy ( since it does not require government expenditure outlays) with which they can claim they are addressing the problem of poverty.

It also provides politicians and union leaders with a convenient instrument to secure votes and support in their constituencies.

But politicians and officials should face up to the true effects of the minimum wage when it is reviewed later this year.

It is an ineffective solution for addressing poverty, and its main outcome is to distort the labour market decisions of employers and employees.

The only sensible response is to stop pretending it helps poor households. Let us stop wasting precious time on this ineffective policy.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong