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
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
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
Inflation rate & Unemployment rate in HK, 85-95
1995(qtr. 4) (estimated)
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.
Unemployment rate & percentage change in CPI(A) in Hong Kong from 77-94
Percentage change (monthly) in consumer price index(A)
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.
Spotting the optimal combination of unemployment and inflation level is a difficult
task. Generally, the governmental policy, people's expectation, the stage of economic
cycle and the built-in economic mechanism will all contribute effort in such determination.
Cost of Unemployment
Unemployment is costly to society. It affects Hong Kong's economy directly and
indirectly. We may consider the costs of unemployment in different ways.
Firstly, there is a loss of real output in our economy. When the economy does not
generate enough jobs to employ all those who are willing to work, a valuable resource is
lost. Protential goods and services that might have been enjoyed by consumers are lost
forever. This is the real economic cost of high unemployment.
Secondly, unemployment leads to the decline of purchasing power and negative
wealth effect is resulted. According to the Keynesian Consumption Theory, current
consumption depends on current income. The permanent income hypothesis also
emphasizes how the future affects consumption today by pointing out that people save in
good years to carry them through bad years. Changes in consumption will be affected by
changes in wealth. As a whole, consumption decreases under the negative wealth effect. The
level of consumption and investment gradually declines in sectors such as service industry,
retailing industry, food industry and manufacturing industry. Some industries may even shut
down. Employees lose their jobs as well. This becomes a spiral effect in our economy.
The costs of unemployment should also include the searching costs for new jobs. In
Hong Kong, there is a problem of frictional unemployment. People leave jobs for all sorts of
reasons, and they take time to find new jobs. Inevitably we have a pool of people who are "f
rictionally" unemployed while in the course of finding new jobs. But in attempting to find
a job (in most favourable wage rate), the worker incurs search costs in terms of extra
time,effort and wages forgone. The wise worker will weigh the gain from extra search
against its costs. If some workers found that it is difficult to find a new job, they may accept
lower wages offered by the employers in order to save the search cost. There may be a trend
that the wage rate gradually decreases and the negative wealth effect still appears.
Also, when there is unemployment, there is a loss of accumulated work experience,
an invaluable asset to the economy. Depreciation of human capital results. This is the social
cost of unemployment.
Moreover, high unemployment leads to higher incidence of psychological disorders,
divorces, suicides, mental anxiety and ill health. People's self-respect and also their health
are harmed as a result of unemployment.
Futhermore, the private cost of unemployment for an individual may be greatly
reduced if we consider the value of leisure (or of not working), and if unemployment
benefits are offered by the government.
Finally, unemployment is not only an economic aspect, it also becomes a political
conflict. As we know, conflicts are found between two sides. On the side of general public,
labor union and democratic parties, the influx of foreign labor force is the main reason of
unemployment. They urgently ask the government to restrict their entrance. On the side of
Hong Kong government, the enterprises and the capitalist, it is not the main reason.
Unemployment is mainly caused by the structural change of our economy. However, the
request and discontent of the public forced the government to make a concession. That is to
make regulations to restrict the influx of foreign workers.
Finding ways to solve the unemployment problem is of utmost im