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The slow death of minimum wage protection: Market failure meets political failure

By George Cautherley

The minimum wage law fails Hong Kong as it covers less than 2 per cent of employees, and it has increased their wages by only 10 cents in real terms over the course of the last six years.

It is not necessary to invoke the legislative process to repeal a minimum wage law, even if a government wishes to do so. All the government needs to do is use the review process to make the law ineffective. This appears to be exactly what our government has done.

Protest for minimum wage labour workers rights

Protest for minimum wage in 2009. File photo: Apple Daily.

There are two ways to turn the law into mere words on paper: periodic revisions that barely or never catch up with inflation, thus forever keeping the purchasing power of the minimum wage down, and periodic revisions that benefit fewer and fewer workers.

Figures on the real purchasing power of the statutory minimum wage and the number of employees covered by these wages over the years indicate that since the introduction of the first statutory minimum wage in 2011, all subsequent minimum wage uprates have had these two effects: keeping the purchasing power of the minimum wage more or less at its initial level while also making the minimum wage increasingly irrelevant to most workers.

Hong Kong’s first statutory minimum wage in May 2011 was HK$28 per hour. It was uprated to HK$30 per hour in May 2013. Adjusting for inflation in the two years before the uprate, as measured by the consumer price index (A), which reflects the impact of price changes on relatively low-income households, the real purchasing power of the HK$30-per-hour wage in 2013 was actually HK$27.7 — 30 cents less than the initial minimum wage.

The HK$30-per-hour minimum wage in 2013 was in turn uprated to HK$32.5 in May 2015. Adjusting for the cumulative inflation over the four years between 2011 and 2015 the 2015 uprate, on the surface an increase, kept the real purchasing power of the $32.5 peHKr hour minimum wage at exactly HK$27.7 again!

The new minimum wage that took effect from May 1 this year is HK$34.5 per hour. Based on inflation figures as of March this year and using the initial minimum wage as the base line, it can be calculated that the real purchasing power of the current minimum wage is HK$28.1.

minimum wage

Photo: Labour Department.

So at long last this year’s wage uprate has put the minimum wage’s purchasing power back on par with that of the first minimum wage of 2011! It is 10 cents more than the 2011 wage in real terms.

On the number of employees covered by individual minimum wages over the years, the first $28 minimum wage covered 6.4% of employees; the second $30 minimum wage covered 3.4% of employees, a drop by 46.9%; the third $32.5 minimum wage covered 1.4% of employees, a further drop by 58.8%.

As for the new $34.5 minimum wage, based on the latest statistics as of May/June 2016 and taking into account market wage growth since, it is very likely that the current wage’s coverage lies between 1% and 2% of employees.

The dropping trend of the minimum wage’s coverage over the years is clear and most importantly, the drop is significant, at no less than 70% in 6 years.

At present, only workers at the lowest wage level qualify for protection from the minimum wage law. The majority of low-wage workers — over 70% of those who were qualified six years ago — have been disqualified by the minimum wage review process.

The subsistence needs of workers can help put the failure of the minimum wage law into further perspective. To make ends meet, the breadwinner of a three-person household needed an hourly wage of about $34 in 2011, $37 in 2013, and $40 in 2015.

In other words, the $28 minimum wage in 2011, the $30 minimum wage in 2013, and the $32.5 minimum wage in 2015, were respectively $6, $7, and $7.5 an hour short of meeting workers’ subsistence needs at the time.

minimum wage

Photo: GovHK.

As of March this year, the same three-person household would need, to survive, to earn about $42 per hour. If they are at the very bottom of the pay scale and earning the $34.5 minimum wage now, they are again $7.5 an hour short.

Over the years, workers counting on the minimum wage have found their life becoming more and more miserable!

In this connection, it is important to note that low-paid workers earning wages higher than the minimum are also miserable. It is estimated that about 15% of workers are currently earning hourly wages lower than the $42 subsistence level.

This sorry state of the operation of our minimum wage law demands explanation and reflection.

Minimum wage laws, like competition laws, social security laws, and employment laws, are political responses to market failure. As Economics Nobel laureate Joseph Stiglitz reminds free-market advocates, markets, if not properly regulated, can “concentrate wealth, pass environmental costs on to society, and abuse workers and consumers.” Markets must be “tamed and tempered” by government intervention.

In reality, however, governments do not always work to protect ordinary citizens. The political system can be as failing as the market system. Stiglitz observes that when the political system fails, it tends to reinforce rather than correct market failures.

In view of the failure of the minimum wage to meet the needs of local low-income workers, there have been calls for reform of the review process, such as allowing more labour representatives on the Minimum Wage Commission and reviewing the wage annually instead of bi-annually.

But given Hong Kong’s political predicament, in which an unelected and unaccountable government has long been criticized for colluding with big business, it is very doubtful that it will do anything to revive a minimum wage law which is effectively dead.

George Cautherley was born in Hong Kong during the Japanese Occupation, the fifth generation of his family to have lived and worked in China. Since 1964 he has been a business entrepreneur in the medical products field. For more than 25 years he has engaged extensively in public policy development through organizations and groups such as the Hong Kong Democratic Foundation, The Professional Commons, the Healthcare Policy forum and Clear the Air.

The slow death of minimum wage protection: Market failure meets political failure