Market Intervention: Minimum Wage and Job Subsidies

Microeconomics: Theories and Applications
Lecturer: Eliot Li
Ma Chuen Yuk Calvin (10553569)
Tsang Cheung Yat (10554388)
Tong Ka Chi Kelly (10555969)
Wu Kwan Yee (10555995)
Man Ka Man (10548104)
3 December, 2012

The Debates about Market Intervention: Minimum Wage & Job Subsidies

Summary. This paper discussed two types of market intervention, Job subsidies and Minimum Wage. These two kinds of interventions will be discussed in both Hong Kong and International in two area, efficiency and equity. By summarising the arguments to find out the effects of minimum wage in both efficiency and equity, analysing the statistics and journals to find out if it is support to the reality.

INTRODUCTION In a free market, the equilibrium price and quantity are determined by the market demand and supply. With different government interventions, the market equilibrium price and quantity transacted will have different changes. Like price floor and subsidies, these interventions are very common and usually they are aimed to achieve political or economics objectives. This report mainly focuses in Hong Kong and minimum wage will first be discussed then will be the job subsidies.

Part I - Minimum Wage

1 Introduction of Minimum Wage

1.1 Introduction of General Minimum Wage

The definition of the Minimum wage, from Wageindicator.org : The minimum wage is the lowest wage rate a worker should be paid. As in a free market, the wages is determined by the supply and demand, for country that wanted to control the minimum wage rate of the labour market, minimum wage law and regulations have to set by the government but sometimes the minimum wage rate may set lower than the wage rate determined by the market, then the minimum wage set will be ineffective.

1.2 Purpose of Minimum Wage The general purpose of the minimum wage is to keep pace with the inflation and the rising cost of living. For some territories, like Hong Kong, imposing minimum wage to narrow the income gap of the society, RTHK the pulse (12/112010): Mr Matthew Cheung Kin-Chung, GBS, JP, Secretary for Labour and Welfare (2010), says the aim of the statutory minimum wage is to protect grassroots workers.

2 Minimum Wage in Global and Hong Kong

2.1 Introduction of Minimum Wage in Global There are about 197 countries and territories have imposed minimum wage to protect the workers from treating unfairly. In different countries or territories, the methods of imposing minimum wage are different. For some country like the US and Canada, their minimum wage is set by different States or Jurisdiction, but some like Japan, their minimum wage is categorized by the industries and for United Kingdom, the minimum wage is determined by different age group and the sophistication of work. For Hong Kong, the government imposed a general minimum wage to the labour market.

2.2 Introduction of Hong Kong Minimum Wage Labour Department (2010):The Statutory Minimum Wage provides a wage floor to protect grassroots employees. It becomes effective on 1st May 2011 and the initial minimum wage is $28 per hour. The minimum wage applies to all employees. If the employers fail to pay the minimum wage to the employees, The highest prosecution is to a fine of HKD$350000 and go to jail at most for 3 years.

2.3 Impacts of Minimum Wage in Global and Hong Kong

2.3.1 Efficiency As minimum wage is an market intervention, the efficiency of the market will then be affected. There are serval studies that show the minimum wage can improve the efficiency of the labour market:

3 Impact of the National Minimum Wage (n.d.): “There are several ways in which the minimum wage can affect firms’ productivity. Some, such as changes in work practices, investment in training and skills, innovation and management attitudes, are positive and increase efficiency. “ the above statement point out that when minimum wage imposed, the effect on the firms’ productivity will have a positive result in improving the efficiency of the society. The general view on the efficiency of the minimum wage is trended towards have a positive result.

RTHK the pulse (12/112010): In Hong Kong, the some economists think that the increase in unemployment rate is not true. The estimated figures did before the law introduced is about 100,000 people will lose their job but Lee Cheuk Yan (2010) thinks that is 1not accurate “I don’t think that is a really a correct figure because what they did was assuming businessmen do not do anything to counter the wage the increase, then they have to lay off people. It’s only an assumption” he said. An other figures find out that when company can increase their revenue by 0.6%, it is enough to cover up the increase all in minimum wage. Furthermore, many industries that involved in minimum wage have no room to lay off. Industries like cleaners and security guards cannot be laid off.

After the minimum wage that imposed in Hong Kong on the 1st May 2011, Census and Statistics Department(2012) the unemployment rate is in a decreasing trend (decrease from 3.5 to 3.3). This statistics proved that the statement that Mr. Lee claimed is right and that imposing minimum wage in Hong Kong can improve the efficiency but not worsen.

2.3.2 Equity For equitability, some economists think that equity is hard to attained when minimum wage is implied. As (British Journal of Industrial Relations, Vol. 47, Issue 2, pp. 306-326, June 2009) mentioned that “discrimination, for example, narrows job oppotunities for women and minority workers and creates a condition of occupational crowding in the low-end of the labour market. “ we can see that the imposed of minimum wage will lead to inequality to the society.

In Hong Kong, there is some economist share the same view of it. RTHK the pulse (12/112010) . Rick Glofcheski, General Editor, Employment Law & Practice in Hong Kong, (2010): “Employees are always put in a situation of “take it or leave it” basis, workers will take the job when it is offered, they seldom will negotiate as they do have low bargaining power. If negotiation is attempted they usually cause the employers to send him away or not offered the job.” As the minimum wage imposed, the labour force of Hong Kong increases, the employers have more choices to pick, these will reduce the bargaining power of some low skilled workers which these leads to inequality of the society due to the imposition of minimum wage.

2.4 Conclusion of minimum wage

Imposing a minimum wage mainly aim to improve the efficeny and equity of the economy but sometimes the objectives can not be accomplished. After Hong Kong minimum wage law imposed, the unemployment rate is trend towards decreases which it improve the efficiency of the economy. On the other side, the minimum wage law failed to substain the equity. Since the average wage rate have increases, the labour force increases that reduces the bargaining power of the employees to choose their job and fight for their rights. The equality of the economy worsen. So the minimum wage scheme can improve the efficiency of the economy but will worsen the equity of the economy.

3 Introduction of Job Subsidies

3.1 Introduction of General Job Subsidies There is various kind of job subsidy that practices in different economy but mostly they practice “wage subsidies”, like Australia and United Kingdom. Besides the wage subsidies scheme, other country like France practices transport subsidy which Hong Kong also practice a similar scheme.

3.2 Purpose of Job Subsidies The general job subsidies scheme is used to maintain the society equality and to provide more job opportunity to the public by applying different Job Subsidies scheme to lower the cost of work and increase the incentive of working.

4 Job Subsidies in Global and Hong Kong

4.1 Introduction of Hong Kong Job Subsidies In Hong Kong, there is a job subsidies scheme called transport support scheme. This scheme eased on 1st October 2011. Labour Department (2011) The Objectives of this scheme is to help all eligible low-income employees on a house hold basis in Hong Kong meet part of their traveling expenses. This scheme is an apply-needed scheme that not all the labour force can enjoy the benefit of the scheme. This scheme is trying to narrowing the income gap by reducing the employees expenses on transport in order to increase their usable amount of money.

4.2 Introduction of Global Job Subsidies Internationally, job subsidy always involved various kinds of scheme. for easier to discuss , we choose the France transport subsidy as the discuss target. Economic Instruments in Environmental Policy (2008): The transport subsidy adopted by the France government through “Versement Transport”", a tax on wages paid by employers, earmarked for public transport subsidies. In addition, employers in the Paris agglomeration are now required to reimburse half of the "Carte Orange" price to their employees who buy it to reduce the deficits of the public transit companies.

4.3 Impact of Job Subsidies in Global and Hong Kong By considering the France transport scheme and the Transport Support Scheme, the impact will analyze in two part, efficiency and equity

4.3.1 Efficiency Both the France transport scheme and Transport Support Scheme provide subsidy to the employers to reduce their expenses on transportation to work. These kinds of scheme can increase the working incentive as the real income for the employees increase, the employment rate will increase. As mentioned above, the efficiency of the society should be increases when the employment rate increases.

4.3.2 Equity For the French transport scheme, the subsidy for the employees are actually paid by the extra amount of charged tax of the employers. This kind of scheme can reduce the income gap and the society can improve the equality.

For the Transport Support Scheme, the subsidy is from the government revenue which is from the tax payer but for the one who benefits in the subsidy scheme, must reach the special requirement. Some of the tax payer from the low income group may not benefit from the scheme. The criteria of the scheme affect the equity of the economy which is not like the French transport scheme, have a greater equality results

4.4 Conclusion of Job Subsidies To conclude, the Job subsidies provide by different territories have different effect on the efficiency and equity. For efficiency, both French transport scheme and Hong Kong Transport Support Scheme can increase the employment rate indirectly which improves the efficiency of the economy. For effectiveness, the French Transport Scheme can get a better results as it can narrow the income gap more than the Hong Kong Transport Support Scheme but still it can reduce the income gap less significantly.

Reference List
British Journal of Industrial Relations, Vol. 47, Issue 2

Census and Statistics Department Unemployment and underemployment statistics for August - October 2012

Census and Statistics Department Unemployment and underemployment statistics for July - September 2012

Census and Statistics Department Unemployment and underemployment statistics for June - August 2012

Census and Statistics Department Unemployment and underemployment statistics for May - July 2012

Census and Statistics Department Unemployment and underemployment statistics for April - June 2012

Census and Statistics Department Unemployment and underemployment statistics for March - May 2012

Census and Statistics Department Unemployment and underemployment statistics for February - April 2012

Census and Statistics Department Unemployment and underemployment statistics for January - March 2012

Census and Statistics Department Unemployment and underemployment statistics for December 2011 - February 2012

Economic Instruments in Environmental Policy (2008)

Labour Department (2011)

Low Pay Commission (n.d.)

RTHK the pulse (2010) Lee Cheuk Yan (2010)

RTHK the pulse (2010) Mr Matthew Cheung Kin-Chung, GBS, JP, Secretary for Labour and Welfare (2010)
Labour Department (2010)

RTHK the pulse (2010) Lee Cheuk Yan (2010)

RTHK the pulse(12/112010) . Rick Glofcheski, General Editor, Employment Law & Practice in Hong Kong, (2010)

Unemployment and underemployment statistics for November 2011- January 2012

Unemployment and underemployment statistics for October - December 2011

Wageindicator, n.d., (3 Dec. 2012)