The Unemployment Problem In Hong Kong Essay, Research Paper

Introduction

The unemployment rate became a hot topic in the past few months when it rose to

3.5 per cent, a recent high for almost 10 years. The jobless rate was higher than the 3.2 per

cent unemployment rate recorded in the May to July period. The underemployment rate in

the June to August period rose to 2.5 per cent from 2.3 per cent in the May to July period.

Until recently, most workers who lost their jobs were from the manufacturing sector. They

were middle-aged factory workers with few skills and little education. But in recent months

a large number of employees have been laid off in the retail and restaurant businesses.

Unemployment has spilled over to the service sector from manufacturing sector. Hong

Kong is facing a prolonged economic downturn.

The high unemployment rate has raised many social and economic problems. For

example, the number of people who commit suicide is increased. It is because more people

had lost their jobs for a long time. It is a serious threat to the lives of the poor. The

unemployed people may also feel that it is unmeaningful to live. As a result, they will

commit suicide to solve the problem. Moreover, the high unemployment rate results in the

increase of the rate of crime. There was an unemployed man who stole rice because he was

too hungry and he did not have money to even buy food! We can know how serious the

unemployment rate is.

By the way, higher unemployment rate causes lower purchasing power of people. A

lot of kinds of business are affected. Many people lose confidence in economics of Hong

Kong. They do not believe unemployment will be improved. Some say that the Government

should provide immediate assistance for the jobless. Some also say unemployment is due to

the attraction of cheap labor across the border. The Government can no longer play the role

of a bystander.

All of these above show the influence of the unemployment. In spite of how many

people who have talked about the topic of unemployment, everyone will be concerned

about this topic. The following sections will analyze this hot topic.

Reasons for unemployment in Hong Kong

1. Faster growth in total labor supply relative to that of total employment

In 1993 and 1994, the increase in Hong Kong labor force is 2.9% and 3.5%

respectively. At the end of 1993, the total labour supply is 2 970 000. Change in the total

labour supply is determined by the population growth, total employment and the emigration

condition. If the population growth and the total employment is stable, the extra labour

supply will increase the total labour supply. This extra labour supply are mostly from the

influx of illegal immigrants from China, imported labour ( 30,000 ), hiring of expatriates

( net increase is 40,000 from 1992 to 1994 ) and the returnees from overseas. Thus, the

supply of labour is greater than the demand and gives pressure on employment. From March

to May of 1995, the total labour supply had risen 4.4% but the total employment had just

increased 3.6%, so this aggravated the unemployment rate. However, this is just a

superficial reason. The following reasons can explain the reason of unemployment in a

deeper way.

2. Change in the economic structure

The economic structure in Hong Kong has changed from labour intensive to high

technology and large capital intensive. Also, it changes from manufacturing oriented to

service oriented industries. Therefore, the manufacturing factories move to China for cheap

labour. From 1988 to 1994, there are 60,000 jobs lost each year. Of the total employment of

different sectors, the portion of the manufacturing industries drops from 27.4% in 1990 to

17% in 1994. Many labour are released from the manufacturing industries. Though there are

a great demand of labour in the service sector, many of the unemployed still cannot find

their job because of job matching problem. They do not have the skills demanded in the job

market, so there are both a lot of vacancies of jobs and a lot of unemployed labour. This kind

of unemployment is called the structural unemployment which is a kind of involuntary

unemployment.

3. China Policy

Recently, the Chinese government tries to control the economy by macro policy

such as implementing the contractionary monetary policy , inflation control policy. This

leads to the slow down in the Chinese economy. The flow in of the Chinese capital to Hong

Kong for speculation and investment reduce. This affects Hong Kong’s economic growth

simultaneously.

In the past, the prosperous China-Hong Kong trade motivated the purchasing power

in the service sector of Hong Kong. However, there are some changes in the investment

environment in China recently. Firstly, it is the high inflation rate. For the past two years, the

inflation rate was about 20%. Under the macro policy, the recent figure is 18.5% which is

still quite high. Secondly, the government begins to raise the property tax. With these two

factors, the profitability of investing in China decreases. Therefore, the purchasing power of

Hong Kong’s service sector is directly affected and so many labour are being dismissed.

4. High rent and high inflation rate

8 years continuous high rent and high inflation rate make the production cost of the

Hong Kong enterprises, especially the labour cost , increase tremendously. On one hand,

this encourages the enterprises move their labour-intensive industries to other place where

the labour cost is cheaper. On the other hand, these enterprises try to dismiss labour or

reduce the engagement of work force but change to more capital and technology dedication

in order to reduce the production cost, increase standardization and productivity. Also,

many enterprises could not stand the high rent and closed down, such as the Japanese

department store, Mitsubishi. A lot of labour are then released out and become unemployed.

5. Non-intervention government policy

The Hong Kong government lacks long term planning in the economy. They just try

to adopt a non-intervention policy to the economic problems. In fact, in 1980s, the

economic structure was changing. The manufacturing industries were declining. However,

the government did nothing to help.

Also, the government, for a long time, ignores the research and development of the

high technology application. Thus Hong Kong’s industrial technology cannot not catch up

with the other three dragons. This explains why the productivity of the Hong Kong people

is reducing recently. In 1990-1994, the productivity of Hong Kong labour is 3.8% but

Taiwan and South Korea is 4.8% and Singapore is 4.5%. From this , we can see that the

competitive power of the Hong Kong industries is weakening and high unemployment rate

is inevitable.

Government carries out high land policy which leads to a tremendous rise in the

property price, so the rent of the shops and factories increases. The widespread

implementation of the sewage treatment charges also increase the production cost. This is

also a reason why the factories move to the north or close down.

6. Labour importation scheme

Is it the main reason responsible for the rising unemployment rate in Hong Kong?

a) The viewpoint of the government

Government economist Tang Kwong-yiu said that the labour importation scheme is

not the main responsible for the rising unemployment rate in Hong Kong. He attributed it to

the faster growth in total labour supply relative to that of total employment. Students

looking for summer jobs have aggravated the unemployment problem during the last three

months. Also, the influx of illegal immigrants from China, the return of overseas Chinese

and the hiring of expatriates also aggravated the job shortage.

However, Mr. Patten proposed replacing the Labour Importation Scheme with a

Supplementary Labour Scheme that would aim to cut the number of imported workers from

25,000 to 5,000 from January.

b) The viewpoint of Democratic Party

Though the labour importation scheme is not the main reason, it’s implementation

aggravates the unemployment problem. They believe that the change in the economic

structure is the main reason. The problem became obvious in the mid 80s as many factories

moved to the north. However, the government did not intervene. They still want a

termination of the scheme so that the problem can at least be lessen at the mean time.

c) The viewpoint of the labour union

They believe that the this scheme should be stopped at once. They were

disappointed by the Governor’s failure to scrap the imported labour scheme for the new

airport project. Construction workers would continue to see their jobs being taken by

foreign laborers. Unionist Lee-Cheuk-yan said that in Hong Kong, we don’t need any

imported labour, not even 5,000.

d) The viewpoint of the economists

i) Mr. Lui from the Economic Development Research Center of HKUST

A research has been done and the result is that the change in the economic structure

contribute 60% for the rising unemployment rate. The labour importation scheme is just a

minor factors and the influence to the labour market is not significant. The scheme is not just

carried out in Hong Kong but also in USA and Germany. But we cannot see that imported

labour has significant influence on the unemployment rate. This is because imported labour

though take away the job of the local labour, at the same time they create job opportunities

for them. If the company employees imported labour, the production cost can be reduced.

This will keep the enterprises from moving to other places or even will attract more

investors to Hong Kong. This will benefit the local labour.

ii) Mr. Wong from the Management Department of Lingnam College

He does not agree with the research of Mr. Lui. He believe that though the

importation scheme is not the main reason , it is the root of the sin. The influence that bring

to the economy is not insignificant. What’s wrong with this scheme is that the government

officials ignore the opinion of the public and make this scheme as a long term policy. Also,

the imported labour are widely employed in all kinds of job, so the government has not

considered the employment problem of the labour released out from the declining

manufacturing industries.

Despite the effect of the labour importation scheme, this economic argument has

changed to a political issue for difficult political party to gain votes in the election and

support. They all try to bargain with the government officials and propose bills to debate in

the Legislative Council for a termination of the scheme.

Donna

In previous parts, we have explore the reasons of high unemployment rate recently,

how we will begin the part that describe the situation of Hong Kong?s unemployment. It

includes description about the current unemployment situation and the changes on

unemployment rate in the past 10 years, as well as the underemployment rate. Also, we will

analyze the change in our labor force.

In the second part, the unemployment rate in specific sectors will be analyzed so that

it can help to study the structural change in the unemployment rate. Also, the reason of the

structural change will be analyzed.

A. Unemplopment, Underemployment and duration of unemployment

1. Unemployment in HK

The recent unemployment figure in the 2nd quarter of 1995 is 3.2%. It is the highest

figure in the past nine years. Many people as well as the government are announced of this

significant increase in unemployment rate.

It is concluded that unemployment in HK changed from short-term to long-term. The

unemployment in 1989 is 1.2%, it gradually jumped to 3.2% in 1995, there is continuous

increase year to year, but no decrease in this 7-year period. Before, problem of higher

unemployment rate only extended from 2 to 3 years. This description of figures show how

unemployment change from short to long term.

Also, a graph is presented to show the changes of the unemployment rate in the past

10 years.

2. Underemployment in HK

When a person who work for pay less than 35 hours in a month, he is said to be

under-employed. In the 2nd quarter of 1995, the underemployment rate reached 2.1%.

There are about 589,000 people who are under-employed. There, we will also present the

figures in the past 10 years in a graphical form which can help to detect the degree of

changes.

3. Duration of unemployment

In 1994, there are 21,000 persons unemployed for more than 3 months , it

contributed 26.2% of the total number of unemployed workers. The figure jumped to 31,000

in 1995, the contribution also increased to 31%.

The data help to conclude that the duration of person who are unemployed extended

very much.

Before, they are temporarily unemployed, but they can soon find a new job within a

short period. But now, they have to face a permanent problem of losing job.

A set of data further illustrates the worse situation. The number of persons

unemployed for more than 6 months in 5 recent quarter are presented in a table.

B. Structural change in unemployment

According to the statistical data, the nature of unemployment rate changed very

much. Before, labour in manufacturing sector suffered most from economic slowdown and

change in economic structure. However, the retail and service sector also face this problem.

The unemployment problem extended from manufacturing sector to nearly all industry in

HK.

In this part, we are going to analyze the structural changes and explore the reasons

leading to these changes, particularly in the manufacturing, retailing, service and

construction industries.

1. Manufacturing sector

In 1987, the manufacturing sector employed about 800,000 workers, but it gradually

drop to 395,000. In the sector, there is an average decrease of 50,000 to 60,000 persons

employed.

The unemployment rate particular in the manufacturing industry from 43.9% in

1989 to 53.6% in 1994. There are several reasons explaining the increase. Firstly, owing to

economic slowdown and structural change, the manufacturing industry is badly affected,

many firms were closed. To save cost, the factories move their production line to mainland

China to take advantage of cheap labour. It left many local workers unemployed.

In addition, the workers in the manufacturing industry are of low skills, and they are

incapable to find other job requiring special skills. Another reason is which is controversial

is the importation of labour. Because their wages are lower, local workers are replaced by

them because the manufacturers want to save cost. As a result, unemployment become more

serious in this sector.

2. Retailing sector

Before, local retailing industry prosper from 1980s due to economic growth and full

confidence of investors to make investment in HK or in China. But in recent years, retail

industry also suffer a slowdown.

According to statistical data, in the past 3 years, the retail industry has an average

1.9% growth in sales volume. However, in April 1995, the figure decreased for 2%

compared with the same period in last year. Also, unemployment rate in this sector

increased.

In first quarter in 1995, the total unemployment in retail industry contribute 30% of

the economy?s total, which it the second highest share, while the largest share is the

manufacturing industry.

3. Service industry

Service industry continuously grow in the 1980s and early 1990s. Many people are

employed in this sector. However, it also suffered from the economic decline in recent years.

Service sector includes the hotel service, transportation service, food and beverage,

financial and asset management, etc.

In the service sector, there are about 15,000 people unemployed in 1995, which

represents an 21% increase compared with last year. It is higher then the total unemployment

figure in the manufacturing industry.

The reasons are basically the same in explaining high unemployment rate in both the

retailing and service industry. Again, economic slowdown lead to reduced investment and

consumption of goods and services. Also, economic decline in China also reduced

investment projects in the Mainland, thus demanding less service.

With high inflation rate, people are more sensitive on the way they spend money.

Now, they spend less on buying goods and consuming service which are unnecessary.

Therefore, large service corporation such as HK Telecom begin to cut the labour force to fit

with the demand.

More importantly, service industry also start to operate in Mainland China. The

decline in the service industry cannot absorb the large labour force, especially workers who

leave from the manufacturing industry.

4. Construction industry

The unemployment rate in this sector is lower when compared with the

manufacturing, service and the retailing industries. In 1995, the unemployment rate in

construction decrease, but the underemployment rate increased.

There are some large project that lead to greater labour supply in the construction

sites. For example, the New Airport project demands many skilled construction labour. On

the other hand, the demand of lower-skilled construction workers decreased because of the

decline in the estate market.

The large construction project are often technology oriented, and the machines and

equipment is more difficult to manipulate. So, unemployed construction workers from the

estate market cannot transfer to the large project because they are not qualified to operate the

high-tech machines. Therefore, some vacancies are unfilled by the low-skill workers.

Unemployment in this sector remains unsolved.

C. Vacancies by different sectors in HK economy

The following chart is given to illustrate the portion of vacancies by different sectors

in 1995.

It is arguable that the unemployment in HK is not so serious, because there are still

many vacancies . However, the problem is that the unemployed workers cannot find the job

that fit to them or they refuse to accept a lower wage. On the other hand, employers may not

employ workers of lower skills. So, there is a situation that the demand and supply of labour

skill is not matched.

D. Relationship Between Unemployment Rate and Inflation Rate

A general belief tells that there is a negative relationship between unemployment

rate and inflation rate. Some economists claim that the contemporary economic situation in

Hong Kong, high unemployment rate associated with a relatively low inflation rate, is a

predictable result from periodical adjustment of built-in economic mechanism.

Since 1987, the persisted high inflation rate had pushed the costs of production and

operation up to a very high level. Therefore, people suffered from a reduction of purchasing

power and negative wealth effect. Meanwhile, people tend to save more because of their

fear on the instability arising from the transition of sovereignty in 1997. On the other hand,

policy-makers tried to release the high inflation rate by means of imposing a higher interest

rate. By the way, the general price level begins to fall after a continuous increase for eight

years.

Inflation rate & Unemployment rate in HK, 85-95

Year

Unemployment rate

Inflation rate

1985

3.20%

3.50%

1986

2.80%

3.00%

1987

1.70%

5.20%

1988

1.30%

7.50%

1989

1.20%

10.00%

1990

1.10%

9.80%

1991

1.70%

11.50%

1992

2.00%

9.20%

1993

2.00%

8.90%

1994

1.90%

8.20%

1995(qtr. 1)

2.80%

9.20%

1995(qtr. 4) (estimated)

3.20%

9.00%

As explained in the previous sections, the high unemployment rate is caused by

many factors, like change in economic structure, importation of foreign labor, which will

eventually lead to a negative wealth effect and a reduction in general consumption level. The

low inflation rate is traded off by a high unemployment rate. On the other hand, the serious

unemployment rate demonstrates that our economy has moved from an economic boom

period to a slump in which accompanied with a low inflation rate.

1. Empirical observation in Hong Kong & Phillips curve

Just similar to what professor A.W. Phillips had practiced during 1950s, we have

plotted empirical observed quarterly data on unemployment and the rate of change in

(wages) inflation for the period between 1977 and 1995 in Hong Kong on a scattered

diagram. In the meantime, we have tried to sketch a curve which seems to fit the data. By

observation, the graph shows that the unemployment rate and inflation rate is negatively

related as long as the curve is downward sloping.

Unemployment rate & percentage change in CPI(A) in Hong Kong from 77-94

Year

Month

Unemployment rate

Percentage change (monthly) in consumer price index(A)

1977

Sep

4.00%

0.35%

1978

Mar

3.00%

0.34%

Sep

2.70%

0.41%

1979

Mar

2.30%

0.71%

Sep

3.40%

1.20%

1980

Jan

3.20%

1.22%

Sep

4.30%

0.61%

1981

Mar

4.10%

0.89%

Oct

3.10%

2.48%

1982

Jan

3.30%

1.50%

Apr

3.20%

1.20%

Jul

4.00%

0.10%

Oct

4.10%

1.20%

1983

Jan

5.10%

-0.30%

Apr

4.40%

1.70%

Oct

4.10%

2.40%

1984

Jan

3.70%

0.80%

Apr

4.10%

1.00%

Jul

3.40%

0.10%

Oct

3.80%

-0.70%

1985

Jan

3.40%

-0.30%

Apr

3.30%

0.50%

Jul

3.00%

0.10%

Oct

3.30%

-0.30%

1986

Jan

3.00%

-0.10%

Apr

3.20%

0.50%

Jul

3.00%

0.70%

Oct

2.60%

0.60%

1987

Jan

2.00%

0.70%

Apr

2.00%

0.80%

Jul

1.80%

-0.10%

Oct

1.90%

1.10%

1988

Jan

1.80%

-0.20%

Apr

1.70%

1.10%

Jul

1.70%

1.10%

Oct

1.50%

0.20%

1989

Jan

1.30%

1.30%

Apr

1.50%

1.10%

Jul

1.20%

1.10%

Oct

1.40%

0.20%

1990

Jan

1.30%

1.30%

Feb

1.50%

1.40%

Mar

1.70%

-0.10%

Apr

1.80%

1.10%

May

1.60%

1.30%

Jun

1.60%

0.30%

Jul

1.70%

0.70%

Aug

1.80%

0.10%

Sep

1.70%

1.30%

Oct

1.50%

0.60%

1991

Jan

1.40%

1.30%

Apr

2.10%

0.60%

Jul

2.30%

1.00%

Oct

2.00%

0.60%

1992

Jan

1.90%

1.20%

Apr

2.50%

1.00%

Jul

2.10%

0.50%

Oct

2.00%

0.60%

1993

Jan

2.00%

1.50%

Apr

2.40%

0.80%

Jul

2.10%

0.00%

Oct

2.00%

1.60%

1994

Jan

1.90%

-0.60%

Apr

2.20%

0.60%

Jul

1.90%

1.10%

2. Validity

We have found strong evidence showing that professor Phillips’ findings on the

relationship between unemployment rate and inflation rate is very much applicable to the

real situation in Hong Kong.

3. Implication

Spotting the optimal combination of unemployment and inflation level is a difficult

task. Generally, the governmental policy, people?s expectation, the stage of economic

cycle and the built-in economic mechanism will all contribute effort in such determination.

Cost of Unemployment

Unemployment is costly to society. It affects Hong Kong?s economy directly and

indirectly. We may consider the costs of unemployment in different ways.

Firstly, there is a loss of real output in our economy. When the economy does not

generate enough jobs to employ all those who are willing to work, a valuable resource is

lost. Protential goods and services that might have been enjoyed by consumers are lost

forever. This is the real economic cost of high unemployment.

Secondly, unemployment leads to the decline of purchasing power and negative

wealth effect is resulted. According to the Keynesian Consumption Theory, current

consumption depends on current income. The permanent income hypothesis also

emphasizes how the future affects consumption today by pointing out that people save in

good years to carry them through bad years. Changes in consumption will be affected by

changes in wealth. As a whole, consumption decreases under the negative wealth effect. The

level of consumption and investment gradually declines in sectors such as service industry,

retailing industry, food industry and manufacturing industry. Some industries may even shut

down. Employees lose their jobs as well. This becomes a spiral effect in our economy.

The costs of unemployment should also include the searching costs for new jobs. In

Hong Kong, there is a problem of frictional unemployment. People leave jobs for all sorts of

reasons, and they take time to find new jobs. Inevitably we have a pool of people who are ?f

rictionally” unemployed while in the course of finding new jobs. But in attempting to find

a job (in most favourable wage rate), the worker incurs search costs in terms of extra

time,effort and wages forgone. The wise worker will weigh the gain from extra search

against its costs. If some workers found that it is difficult to find a new job, they may accept

lower wages offered by the employers in order to save the search cost. There may be a trend

that the wage rate gradually decreases and the negative wealth effect still appears.

Also, when there is unemployment, there is a loss of accumulated work experience,

an invaluable asset to the economy. Depreciation of human capital results. This is the social

cost of unemployment.

Moreover, high unemployment leads to higher incidence of psychological disorders,

divorces, suicides, mental anxiety and ill health. People?s self-respect and also their health

are harmed as a result of unemployment.

Futhermore, the private cost of unemployment for an individual may be greatly

reduced if we consider the value of leisure (or of not working), and if unemployment

benefits are offered by the government.

Finally, unemployment is not only an economic aspect, it also becomes a political

conflict. As we know, conflicts are found between two sides. On the side of general public,

labor union and democratic parties, the influx of foreign labor force is the main reason of

unemployment. They urgently ask the government to restrict their entrance. On the side of

Hong Kong government, the enterprises and the capitalist, it is not the main reason.

Unemployment is mainly caused by the structural change of our economy. However, the

request and discontent of the public forced the government to make a concession. That is to

make regulations to restrict the influx of foreign workers.

Solution

Finding ways to solve the unemployment problem is of utmost importance now.

Since the supply of labor is so much greater than the amount demanded, one way is to let

market mechanism to determine the relationship between labor supply and labor demand.

The Government can also implement some new plans to help lower the high unemployment

rate. According to the reasons of unemployment that we have discussed, below are some

suggested solutions:

1) Correct Hong Kong people?s attitude on ?full employment”, to let them realize that

Hong Kong?s unemployment level will be at a rather stable rate of 3-4% these few years.

So, by maintaining the unemployment rate at 2-3% can help to control the increase in labor

cost as well as the stability of the Hong Kong economy.

2) The high unemployment rate of Hong Kong is partly attributed by the increase number of

imported labor. Therefore, the simplest way is to reduce the number of imported labor. The

Government should base on each year?s economic growth rate to adjust the necessary

number of imported labor so that it can match with that of the market labor demand.

Actually, the increase in the number of imported labor is due to their willingness to accept

lower wages than local workers. But does it mean that if the local workers are willing to

lower their wages to a level that is too low and harsh treatment at the same time, like

working for long hours and accepting a wage of only $4,000 a month. Their wage cannot

support their basic living needs. So, workers are not always passive, they should voice their

opinions and fight for their own rights like strengthening the power of the labor unions and

not just relying on the Government for implementing new policies to combat

unemployment.

3) The Government could lower the requirements for applying the unemployment

allowance to help workers solve their problem. However, the workers should not just wait

for the help from the Government. They should actively seek jobs and can show their

discontent to the Government for unfair treatment. Some companies also employ illegal

workers. The Government can also implement new laws such as that in the United

Kingdom. It will be a criminal offense if the employers employ illegal workers. This can

help to deter them from hiring those illegal workers.

4) Increasing investment and production capacity can also be a solution. The Government

can do this by increasing its expense and decreasing the profit tax rate so as to raise

investment interest in the local industry. If there is an increase in investment, there will be

more employment opportunities, increasing both the supply and demand. Increasing

government spending can stimulate aggregate demand and hence decrease the

unemployment rate. By doing these can also strengthen Hong Kong?s competitiveness

with other Asian countries.

5) It is important for the Government to manage the increase in labor cost, increase

employment as well as labor productivity. there should be strategies to maintain economic

growth in a steady rate, to control labor and labor cost form growing too fast and to prevent

the increase in inflation rate due to economic growth. The Government can set up a

committee to look into the cause of some old industries since structural changes of the

economy is the main reason for the high unemployment in Hong Kong. People do not

possess the necessary skills needed to perform some specific task. That is why there are

quite a large amount of