The Minimum Wage in Hong Kong
by Fred E. Foldvary, Senior Editor, 6 September 2010
For many years, Hong Kong has been ranked as the economy with the greatest economic freedom. The on-going study, “Economic Freedom of the World,” by the Fraser Institute in Canada, ranks countries on a freedom scale of one to ten. Elements of the index include taxation, regulations, foreign trade, and inflation. Hong Kong has recently ranked around 8.9, thus not with the complete freedom of 10, but higher than all other economies.The study, which can be seen on the web site “freetheword,” correlates economic freedom with growth and per-capita income. Economies with high economic freedom tend to have greater growth and higher incomes. Thus after World War II, Hong Kong developed from poverty to a per-capita income on the level of Western Europe. Foreign servants in homes were already covered by a special minimum wage. Now the government of Hong Kong will impose a minimum wage on labor in general.
Free-marketeers are shocked and puzzled. Why a minimum wage for Hong Kong, when it was doing so well? Labor organizations sought a minimum wage, but of course everybody wants a higher income. The puzzle is why the government granted it.
A clue to the cause of the new minimum wage is the recent 40 percent rise in land values in Hong Kong. Much of the gain from economic growth is captured by higher rent and land value. What counts for the standard of living is the real wage, the money wage relative to the cost of goods, including housing.
The land in Hong Kong is owned by the government, which leases out plots of land. The annual rates paid to the government are 15 percent of the rental. Thus the leaseholders, retaining 85 percent, capture most of the rising site value. There is no capital gains tax on the sale of property. In effect, leaseholders own the land. While taxes on enterprises are relatively low, the high cost of buying a leasehold or paying a rental cuts into the profits of enterprise.
Economic theory tells us that a minimum wage creates unemployment. The quantity of labor seeking jobs becomes greater than the quantity hired. Young workers get hit the hardest. The U.S. minimum wage rose from $5.15 to $5.85 in 2007, to $6.55 in 2008, and $7.25 in 2009. The minimum wages in some states are even higher. The unemployment rate for teenage workers in the USA is over 26 percent, and for African-American teens it is 36 percent.
The effect on employers goes beyond the minimum wage, since they have to pay taxes and overhead on those wages. A worker earning $7.25 may well cost the employer $10 after taxes and other expenses. If that worker is not producing $10 of product per hour, he is not hired.
A survey of small business in Hong Kong indicates that the minimum wage there could increase unemployment by 100,000 workers. Since it is relatively easy to start a business in Hong Kong, it has many small enterprises. The new minimum wage will not only raise labor costs, but will also introduce forms to fill out and records to keep. The minimum wage could be a gateway to other regulations and costs imposed on enterprise.
Land ownership has divided Hong Kong into wealthy landowners and relatively poor workers. The effective remedy is to shift public revenue from taxes on salaries and profits to revenue from land rent. Increase the rates paid by leaseholders to 85 percent of the site rent, not including the value of the buildings.
The collection of most of the rent would stop the escalation of real estate prices. The elimination of taxes on labor and business profits would give workers an increase in net wages, while reducing labor costs to employers. The collection of most of the rent will also prevent the real-estate boom and bust.
The only way for Hong Kong to preserve its economic freedom is to shift public revenue to land rent. Otherwise, the wealth gap and economic instability will result in greater regulations and costs that eventually will sink Hong Kong’s freedom rating.
-- Fred Foldvary
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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
JJS: If the geonomic solution of shifting taxes off our efforts while recovering the rental value of land makes sense to you, here's an action you might consider taking. The New York Times blog, Economix, just published "Professor Bernanke’s Summer Reading List". Reader Wyn Achenbaum suggested Mason Gaffney's fascinating book, Corruption of Economics. You might add a recommend. If you're not yet registered, you'll have to do that first. click here
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Editor Jeffery J. Smith runs the Forum on Geonomics.
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Also see: Most Chinese kept from good wages & affordable homes
MRT network driving up land value
Home-ownership costs fall for first time since early 1990s |
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