the unemployment rate

Change in the economic structure The economic structure in Hong Kong has changed from labour intensive to high technology and large capital intensive.. High rent and high inflation rate

The Unemployment Rate

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

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