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  • Dec 24, 2014
  • Updated: 9:10am
The View
PUBLISHED : Tuesday, 29 July, 2014, 11:48am
UPDATED : Wednesday, 30 July, 2014, 1:13am

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

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

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This article is now closed to comments

5353b57f-a9f4-46e1-903d-34f50a320969
"Most economists oppose minimum wage laws because... – and therefore fail to reduce poverty." - this is NOT what the Minimum wage is supposed to do Richard, who are the "most economists" you refer to?
"The only sensible response is to stop pretending it helps poor households. Let us stop wasting precious time on this ineffective policy." Whose 'precious time' are we wasting here? But it does help poor households- Minimum Wage is to give a semblance of a LIVING wage.
Artie
Milton Friedman is also accredited on advocating abolishing minimum wages. His argument is that if you set a minimum wage then this is a distortion as some people that are low skilled and do not deserve that wage is left unemployed as the employer is choosing either to be "charitable" by employing this low skilled person or not to employ that person (assuming that the employer will not choose an illegal activity by employing that person at less than minimum wage).
In HK the minimum wage is HK$30 per hour and working 50 hours a week gives you about $6,500 a month. I cannot fathom why anyone could consider a person should earn less than that amount in Hong Kong. This is not ignoring political correctness it is just incorrect.
rpasea
The problem with the minimum wage in HK is it is far too low. A household with 2 full time workers at $30 per hour and 50 hours per week makes about 13K per month, far too little to live on without govt assistance. Double the minimum wage and the household would be getting 26K per month, or the borderline for being able to live in a place like HK.

I don't see this happening though as maintaining a large portion of the population in poverty is necessary to justify the massive govt departments dedicated to subsidizing employers with public housing, transport allowances, cash handouts, nearly free healthcare and on and on. If workers were able to earn a living wage many of these career civil servants would be out of a job. Can't have that.
kongshan2047
Singapore does not have a minimum wage and Swiss voters have overwhelmingly rejected a minimum wage at a recent referendum. After 3 years of it coming into effect in HK, perhaps it is time for us to review the policy again and evaluate both the positives and negatives of the statutory minimum wage.
Artie
rycwong, I agree the $6,500 minimum wage may be earned by an individual in a family that (as a family) earn substantially higher than the $6,500. For me I see no difference if a millionaire's child works for 50 hours a week and earn $6,500 a month and a less fortunate person who did the same work and earned the same amount. Not everyone can rely on family members (even if family members are wealthy) for support (in particular on a long term basis) and for me the importance is one's self esteem and well being is fostered when you can support yourself (or have a choice). Accordingly, I still think it is not wasteful or undesirable to have minimum wages as I see it a minimum safety net for all in HK.
On a personal note, I cannot support myself with a wage of $6,500 a month and those that are doing so I admire them and they are truly great.
Artie
All the additional studies show are that more people are encouraged to take up employment after minimum wages were implemented. There are always people that will find it hard to find work and minimum wage will never really help this group. it is a misconception that minimum wages were ever thought to assist this group. There needs to be other policies and assistance to move this group out of poverty such policies include education/retraining and welfare payments. Minimum wages have achieve some alleviation of poverty and it cannot be abandoned just because it is not a miracle cure for poverty.
kctony
There is such drastic ambiguity. "One year before May 2011, 26.6%..." Shouldn't the measurement be absolute income increase? A lot of other demographic factors could have gone into the drop to 20.2%.
Are the examples of USA, Canada, & Singapore realistic comparisons?
"Most economists..." Don't forget we study books on researches of the western wealthy nations where wage is #1 enemy to their economies.
All I know is that office workers are not affected by the minimum wage. Then look at the kid working in the local teahouses (Char chan tengs). His pay has been raised in line with the minimum wage. If you take it off, and then there is the mainlander waiting willing to work for $20/hour, how would you feel for the kid? Oh, sure, it's a free market. Please have compassion on people's livelihood. Please.
kongshan2047
Employees have not yet realized the downside of minimum wage because the economy is still relatively strong, where average wage tends to be higher than the statutory minimum wage. But what if an economic downturn suddenly comes? Or what if HK experiences a long period of deflation just like the way we did between 1998 and 2004? I am not saying that we should abolish the minimum wage but I think it ought be adjusted according to economic circumstances. It should be upwardly adjusted when there is inflation or when the economy is relatively strong. Likewise, it should also be reduced when there is a recession or deflation.
johnyuan
Minimum wage was adopted few decades ago in US. It has evolved into livable wage whereby the amount set is subjected to be adjusted. Obama most recently is calling for an adjustment. US don’t look at minimum / livable wage as welfare. Hong Kong fight against minimum wage in the legislature by and large supported by employers on the ground that minimum wage is welfare payout. Remember, minimum wage is earned and not a charity.
.
Statistical numbers showing if people are out of poverty by minimum wage in Hong Kong such research is heading the wrong direction. What is not measurable by minimum wage is the improved dignity with a better income for their labor.
.
Professor’s whole premise looking for justification in removing poverty through minimum wage is egregiously misled by his looking for the measurable of numbers. I advise him to put his frame of mind to the immeasurable – human dignity and sense of equality.
.
When his current premise prevails by the support of those who once opposed minimum wage, he is the one should be remembered that despite with credential as a professor at HKU he has misrepresented US of its purpose and evolving use of minimum wage.
.
The minimum wage has failed in Hong Kong only in the amount in making it a livable wage.
rycwong
"I cannot fathom why anyone could consider a person should earn less than $6,500 a month in Hong Kong. This is not ignoring political correctness it is just incorrect."
This is a great statement, neither can I.
But the figures in the article show that the vast majority of those who make less than this amount are not just "a person." The vast majority of these persons are a member of a household. And the household they belong too is often not poor. Almost half of the households with members who qualify for the minimum wage and are working have household incomes above the median level.
The minimum wage helps those persons who make $6,500 a month and live by themselves, but it helps many more others who belong to households that have more than just meager means.

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