LC Paper No. CB(2) 510/98-99(01)

LETTERHEAD OF Federation of Hong Kong Industries

8 October, 1998

The Hon. Lee Kai-ming
Panel of Manpower
Legislative Council
8 Jackson Road
Hong Kong

Dear Mr Lee,

Research Paper on Proposal on Minimum Wages in Hong Kong

In regard to the above paper which has been referred to us for comment, we would like to submit the following views for your Panel's consideration.

Given its objective, the "research" paper fails to address all the pros and cons of its proposal in an objective manner as a proper research paper should. It seems that the author, namely, the Hong Kong Social Security Society (HKSSS), has not researched thoroughly into the experiences of countries that have statutory minimum wages and the major arguments it puts forward for establishing a minimum wage system in Hong Kong are, therefore, lop-sided and highly unconvincing.

Basically we believe Hong Kong's free market system, which allows employers to adjust their pay packages realistically according to employees' skills and productivity and the principle of supply and demand, has been working very satisfactorily. This tradition is crucial to making Hong Kong attractive to both local and foreign investors. To introduce a minimum wage system would force employers to pay higher wages to some employees who may not possess the required experience and skills and would therefore weaken Hong Kong's competitive edge. We should also bear in mind that our neighbouring economies like Singapore, Malaysia, Taiwan and South Korea do not have statutory minimum wages.

The HKSSS have strongly argued that minimum wages could serve as a safety net by offering a certain degree of wage protection for workers and ensuring a certain standard of living for them and their families. They have also argued that the system can narrow the gap between the rich and the poor and help cut down on the spending on social security.

However, according to the Organization for Economic Cooperation and Development (OECD)'s Employment Outlook 1998 published in June this year, the main beneficiaries of a minimum wage system would not be just any worker but mostly young workers and women. It is particularly women and the less skilled who are most likely to be trapped in low-paying jobs, whereas for many youths such jobs are often stepping stones to better paying jobs. In the OECD's analysis, statutory minimum wages fail to target efficiently those workers in families who really need help. Instead it would help many workers in households with median incomes and above because many low-paid workers live in such households, while it fails to help families with no workers at all. The OECD therefore concludes that "[t]he fact that low-paid workers are not highly concentrated in poor households suggests that increases in statutory minimum wages, in most cases, are likely to have a limited impact in cutting overall family poverty rates. The distributional case for minimum wages is, therefore, weak". The OECD's analysis refutes the argument that statutory minimum wages can serve as a safety net and narrow the gap between the rich and the poor. The OECD even warns that trimming government expenditure on welfare, as the HKSSS claims its proposal can achieve, "could risk increasing the extent of in-work poverty" which defeats the whole purpose of the proposal itself.

The HKSSS believes that statutory minimum wages is employment neutral, neither creating nor destroying job opportunities. They are being simply not true. In the OECD's Employment Outlook 1998, again, it is pointed out that there are some adverse effects on youth unemployment. Evidence in nine OECD countries suggests that higher minimum wages adversely affect teenage employment. According to the OECD report, "a 10 percent increase in the minimum is associated with a 1 1/2 to 3 percent decline in teenage employment, the effects being essentially the same regardless of whether they have high or low minimum wages".

Based on the above, we have grave doubts that the proposed system of minimum wages would be the solution to family poverty and low family income, as the HKSSS claims it to be. We are also concerned that it can result in job losses, especially for young people with lower skill and less experience. We believe providing a safety net for the poor should be a question for the Government, instead of employers, to address. The Comprehensive Social Security Assistance scheme has been established for exactly that that purpose. We therefore submit that the HKSSS's proposal is not worth pursuing any further.

Yours sincerely,

Henry Y.Y. Tang