This article was originally
titled Why There Is No Unemployment in Hong Kong. Today,
a more appropriate title is Why There USED TO BE No Unemployment
in Hong Kong.
When I wrote this in 1991 unemployment
in Hong Kong was 1.5%; now it’s around 7.7%, almost as high
as in France and Germany. What’s changed? Lots. So I’ve
added updates at the end of the article.
Recently, on a ferry crossing
Hong Kong’s harbor, I struck up a conversation with a black
musician from Seattle. He told me how much he preferred living in
Hong Kong to the States. What impressed him most about Hong Kong
was that “everybody has a job!” Each time he repeated
this comment his eyes would almost caress the Hong Kong skyline;
and he spoke as if a place where everyone has a job was so alien
to his experience, that he thought of Hong Kong as a fantasy land,
a place that simply could not exist on earth.
Back home, he told me, unemployment,
especially for blacks, is high [remember: this was 1991]. He was
also puzzled at the wide-spread influence of the United States here,
and the evident esteem in which his country was held when his personal
experiences were quite at variance to this image. Something he definitely
did not miss, he said, was his treatment by the police. From his
perspective he told me, blacks were either poor and therefore badly
treated by the police; or if they appeared to have money, the police
assumed they were drug dealers — and acted accordingly.
I don’t wish to add to the
barrage of words that’s been written about the drug problem,
except to remind you that whenever and wherever prohibition has
been tried it has failed. And it’s failing again. This man’s
sense of despair when talking about his life in Seattle made me
think one reason people turn to drugs is from an attitude of hopelessness
engendered by the impossibility of finding a job. And that impossibility
happens whenever minimum wage laws bar the unskilled from ever being
A minimum wage is simply another
form of price control: it prevents anyone from offering employment
below a certain price. Like any other price control, the result
is a shortage or a surplus: in the case of a minimum wage, the surplus
is called “unemployment.”
Politicians and some economists
claim that a minimum wage raises wages for all workers at the lower
end of the pay scale. All the evidence is to the contrary: every
country with minimum wage laws (or high unemployment benefits, which
have the same effect, establishing a minimum below which it is unprofitable
to work) also have high and persistent levels of unemployment. Only
in countries with no minimum wage laws is there little or no unemployment.
The reason is simple to understand:
an employer will only offer someone a job when the value of his
work exceeds the amount of his salary. When a minimum wage is set
at, say, $4 an hour, only those people whose value to a company
is greater than $4 an hour will find employment.
security of the free market
minimum wages laws, without unions, wouldn’t the workers be
“exploited”? Wouldn’t they be at the employers’
mercy? Not necessarily. In fact, when there are no minimum wage
laws and no unions, employees actually have far greater job security
— a security provided by the market. This is demonstrated
by the job market in Hong Kong — where there are no minimum
wage laws, where there are no laws establishing unions, and, as
this man put it so eloquently, where “everybody has a job.”(1)
Many years ago I employed a girl
called May as a messenger and “gofer.” This was her
first job: she was 16 years old; had finished just four years of
high school; her English was poor; she had no job skills of any
kind; she could not type; keep books; or anything else that might
be demanded in a business. She only had one qualification: she was
eager to work.
She was employed as a messenger,
to open the mail, to make coffee, to lick stamps, put things in
envelopes, go to the post office and do other menial tasks of this
kind. I paid her the princely amount of HK$800 per month, about
US$170 at the time, or 95¢ per hour.
In many respects, employing May
was a luxury — the luxury of not making or getting your own
coffee; the luxury of not planning ahead — of suddenly realizing
that you were short of cash and you could send her down to the bank
rather than having to go yourself; of being able to send her out
to pick something up or drop something off at the last minute. Many
of the things she did could have been simply not done at all; done
by other people in the company; or, with a little thought and planning,
done far more efficiently. Employing her was not essential to the
survival of the business.
Which is to say, if I’d had
to pay her $4 an hour, I wouldn’t have given her a job.
After she’d been working
with me for 12 months, her salary had doubled to HK$1,600 a month.
Why? Because in that 12 months she’d learned many job-specific
skills which made her far more valuable to the company than when
she was fresh from high school. She was now keeping some records;
typing labels; managing the petty cash; and other things she was
simply unable to do 12 months before. Alone, none of these specific
skills are of great significance. Taken together, her 12 months’
“on-the-job training” had given her an education that
she could receive nowhere else.
She also learned other things in that year: how to look after herself,
to manage her own time and money, and she was also able to reward
herself with things that only money can buy. In a word, she was
learning independence — she was becoming self-sufficient in
the real world; the reverse of the lesson you receive on welfare
which reinforces the dependence you experience as a child and teenager.
By denying unskilled teenagers
the opportunity to work at their market value, which is low, minimum
wage laws interrupt the essential developmental process of slowly
gaining independence from one’s parents — and inevitably
some people remain “stuck” in the child/teenager state
for the rest of their lives, with devastating social consequences.
If there’d been a minimum
wage set at, say, HK$1,600 a month, there’d have been no job
for May in my company. May might never have received that one year
of on-the-job experience she needed to learn the skills with which
she could command that minimum wage of $1,600 per month. Instead,
12 months out of school, May could have still been unemployed and,
worse, despairing of ever finding employment.
Perhaps the reason she dropped
out of school was because her parents could not afford to keep her
there any longer. If so — and if not true in her case it’s
true for many others — she could not have afforded any other
kind of training. A minimum wage law would have denied her a job
at her market value; and so denied her the opportunity to rise above
it. Instead of being rewarded for her eagerness to work, and so
increasing her market value by learning new skills, she could have
been consigned like so many black Americans to a life of never-ending,
soul-destroying unemployment...the psychological experience of being
told by society that you have no value, that you are worthless.
One government intervention always
requires another. In countries with minimum wage laws, governments
often try to alleviate the resultant unemployment with all manner
of training schemes. Such schemes have serious disabilities, aside
from increasing the tax burden on those in employment. First, they
can never replace the experience of simply having a job, however
menial that job may be. Part of the experience of your first few
jobs is discovering what’s possible, and what kind of things
you’d like to do, things you can only find out in the real
world, never in a classroom. Related to that certainly in Hong Kong
is that most employees take night classes of one kind or another;
and from these courses they learn something that will increase their
market value in their current employment or prepare them for their
next. When you are paying for your own education, your motivation
is far higher; and you choose something very relevant to what you
need or want. The ability to make such choices can only come from
An argument often used in support
of minimum wage legislation is that wages under the selected level
are “too low,” “below the poverty line,”
or in some other sense thought to be dehumanizing.
overwhelming majority of people who’d be employed below any
minimum wage level would be people like May, who’d quickly
graduate from that low-level wage...the turnover of workers at that
wage level (in a free labor market) is very high. There is a very
big difference between someone who is working for the first time
who is probably living with their parents, and whose income however
low is almost entirely available for discretionary spending and
the “average” worker who is supporting 2.2 (or was it
2.3?) children. A wage that would certainly spell poverty to this
“average” worker spells luxury to someone in May’s
It’s easy to lie with statistics,
especially in economics. In Australia many years ago, politicians
pointed to the number of jobs “created” by high tariffs
on imports into the country. Someone did a survey of worker behavior
in the textile industry, one of the most highly-protected industries
at the time. It was discovered that the average length of employment
in textile factories in Melbourne was 9 months; and that the majority
of workers in these factories were migrants to Australia, who took
this menial employment temporarily while they oriented themselves
to a new society. In other words, neither the economy nor the migrants
would have missed those jobs had textile tariffs been abolished.
You might ask, why did I increase
May’s salary so that within 12 months it had doubled? And
I can assure it was certainly not out of the goodness of my heart,
though I do figure myself as a good employer. (Not all my employees
will agree with that statement.) The reason was very simple: having
discovered her increased worth, May was now in a position to seek
another job at a higher salary if I did not raise hers. And this
brings me to the amazing feature of the Hong Kong labor market...of
any labor market where there are no restrictions on the employment
of labor: employees know their own worth, their market value, and
if you don’t pay them what they are worth, they’ll quickly
find someone who will.
knowing your own worth
A free labor market provides workers
with far more job security than any union-devised scheme. And what
is that job security? In a place where “everybody has a job,”
every worker knows they can find an alternative job within a very
few weeks. And how do they know what they are worth? They read the
classified ads in the newspapers.
It used to worry me to note that
the classified section of the newspaper appears to be the most popular
reading material in my office until I realized that my staff are
not planning to resign en masse; they’re merely checking
their market value and keeping themselves aware of the alternatives
available. In a free labor market, each employee is responsible
for his or her own welfare. The alternative to some union or government
“guarantee” of job security is the knowledge of his
or her own self-worth in the marketplace, and that knowledge is
freely and continually available from newspaper classifieds, employment
agencies and, perhaps more importantly, discussions with friends
and associates...the state of the job market is a continual topic
Exploitation can of course occur
under any system. The possibility of exploitation is far lower in
a free labor market provided the law of contract is respected and
redress for any grievance is available (to either party...the employer
can also be subject to exploitation). A free labor market fosters
employees’ psychological independence: the market “forces”
them, as it were, to assume responsibility for achieving their own
self-worth. Obviously, some people are more self-assertive than
others; but the free market encourages the growth of self-assertiveness
Unionization, by contrast, is a
reverse form of indentured servitude. Unions achieve power by government
edict which suspends or modifies the law of contract between employers
and employees. The “closed shop” enforces union membership
as a prerequisite to employment in a particular industry or company,
revoking the employer’s freedom to choose and the freedom
of choice of all those who cannot get union membership.
Normally, such a union has “achieved”
higher-than-market wages for its members through its ability to
restrict the employers’ choice of workers. Employees in this
happy situation may still feel exploited (though they shouldn’t
— they’re the exploiters). But their options are severely
limited: it’s impossible for them to command anywhere near
the same salary in any other employment. And the longer they’ve
been in this situation, the less able they are to adapt to change:
the market will usually cause change in the end...as in the recent
example of New York’s Daily News, where union intransigence
(plus managerial misjudgment) looked like permanently ending its
members’ sinecures until Robert Maxwell came to the “rescue.”
Where the law of contract prevails,
unions can have no privileges beyond those freely and voluntarily
granted by its members. Similarly, employers are free to refuse
to deal with any union. It’s interesting to note in the United
States, where the legal powers establishing unions have been eroded
over the past decade, as people have become freer to choose they
have generally chosen not to deal through unions.
In Hong Kong, unions as known in
the west exist only in government, and in the form of professional
associations such as lawyers, doctors and so on. Private sector
unions are more like general welfare, watchdog or mutual aid associations,
having no state-granted powers of exclusion from the law of contract.
Cultural attitudes in Hong Kong
impose an additional burden on the employer which underlines the
workings of the “invisible hand” in a free labor market.
Few people here will “confront” their employer and say:
“Look, the going rate for my services according to the market
is about 20% more than you are paying me. I think I deserve a pay
To avoid a confrontation of that
kind, most employees in Hong Kong, if they feel underpaid, will
first sign a contract for another job, and then give notice. So
the employer must also read the classifieds to be sure the wages
he is paying are in line with the market. Otherwise he’ll
lose his employees.
In Hong Kong’s free market
for labor, wages are set by the impersonal forces of supply and
demand. Without unions or other collective organizations, wages
are negotiated on an individual basis between an employer and employee.
However, while this appears to be the case what an individual employer
or employee would report as being his or her experience, the reality
is different. The actual “negotiations” are taking place
between competing employers, as a job-seeker considers a number
of different job offers at the same time.
The employer who fails to fill
a vacant position has no alternative but to increase his offer to
win over the potential employee, or another one.
For some people, criteria other
than the actual wage are of equal or greater importance. With no
government unemployment benefits or pensions, an employee could
seek companies offering such benefits. Or: if security is of paramount
importance, an employee can seek that ultimate in job security:
“work” for the government.... A free market is a smorgasbord
of possibilities, where government, by keeping out of the way, enables
consenting adults to creatively and imaginatively achieve their
potential (to the extent they desire to) at the given level of wealth.
Clearly, the simple absence of
minimum wage laws does not ensure jobs for all the presence or absence
of such laws in the middle of the Gobi desert will have no effect
on the size, extent or nature of the job market. Legislating the
US minimum wage in Bangladesh would not raise anybody’s wages;
it would raise the level of unemployment to somewhere between 98%
and 99%. Regardless of the level of wealth in any society, a free
market for labor is, in the long run, in the best interests of all.
wages can fall
In any free market, prices can
fall as well as rise; and that applies to the price of labor. In
an inflationary environment, wages tend to rise more slowly or not
at all during a recession; where price inflation is low or non-existent,
wages will fall during a recession as a growing number of people
compete for a declining number of jobs. This decline in jobs is
inevitable as businesses lay workers off as sales slow; and some
companies go bankrupt.
However, such a decline in wages
will lead some employers to create new, lower-paying jobs that were
uneconomic at higher wage levels (as in the case of May). Such adjustments
always take time, and during that time the level of unemployment
will rise. In countries with a free labor market, the unemployment
usually peaks, in the middle of the recession, at around the unemployment
rate that is “normal” during booms in the United States
An economy-wide decline in wages
reduces all business’ costs, allowing the economy to adjust
much more rapidly to a recessionary environment. In countries with
no minimum wage laws like Hong Kong and most Asian nations, recessions
start later and end earlier than in the US and Europe. This is partly
due to free markets for labor but primarily because low or no government
intervention in the labor market goes with less government intervention
overall. Asian economies are thus far more flexible, and so adjust
far more rapidly to changing world circumstances than the more rigid
economies of the west.
It is also no coincidence that
countries with free labor markets have far higher rates of economic
growth than the US or Europe...slower economic growth, which means
a slower rise in the standard of living for all, is the price people
must inevitably pay for high levels of government intervention,
including among other things minimum wage laws.
Britain left Hong Kong more than
its heritage of English common law. From the time Sir Murray Maclehose
became Governor of Hong Kong in November 1971, the British colonial
administration started to duplicate Britain’s welfare state,
just as Maggie Thatcher began to chip away at the original.
Starting from such a tiny base,
it was many years — almost 30 in fact — before Hong
Kong’s welfare system became a serious drag on the economy.
In July 2002 there were some 260,000
registered unemployed in Hong Kong — while 405,844 people
were on welfare. When an unskilled laborer can get a job paying
HK$6,000 or (if he has a wife and two kids) HK$8,000 to $10,000
per month in welfare benefits, why work?
In previous recessions, unemployment
in Hong Kong soared as businesses shrank or went bust, but then
quickly disappeared as wages fell. When the Asian economic crisis
hit in 1997, unemployment soared — and stuck. Wages have not
declined as they did in the past. Indeed, such wage cuts that have
been proposed — specially by big companies like the phone
company — have caused widespread protests. Even though democracy,
such as it is in Hong Kong, was all but totally emasculated by China
when it took Hong Kong back in 1997, many issues that were once
purely private have become politicized.
Another change that is related
to the expansion of welfare is Hong Kong people’s attitude
to immigrants from China. They used to be welcomed, though perhaps
not with open arms; today they are resented. Twenty or so years
ago, an immigrant had to fend for himself; today he can qualify
Hong Kong passes
minimum wage bill
Hong Kong’s legistature passed a mimimum
wage law on Friday, 16 July 2010. The unemployment rate: 4.9%.
If the minimum wage rate is set too high, that figure will go up.
If it’s not, why bother?
An interesting real-time experiment.
In fact, the current  unemployment rate in Hong Kong is 1.5%.
That’s around the general estimate of what economists give
the grandiose title of “frictional unemployment” people
voluntarily looking for another job.
For example, the biggest market in Japan for tourism is girls in
their early twenties who are in exactly this position: having no
responsibilities they can spend all their relatively low incomes
on themselves and therefore have the highest available spending
power of any group for such luxuries as travel.
© 1991 by Mark Tier