Sunday, July 18, 2010

Poor in Hong Kong

Hong Kong will soon be introducing it's first minimum wage law. Exactly what that minimum will be set to is under debate: anywhere from HK$23 to HK$33 an hour ($3 to $4, respectively). The Economist reports the average wage for a fast-food worker is about HK$22; they also report that if the minimum goes to HK$24, about 30,000 people will lose their job and to HK$32, about 170,000 will be fired; these are according to a study cited by Miriam Lau, a Liberal member of the legislature. They are not in favor of the law (though they are willing to do HK$24), so take these numbers with a grain of salt.

The party also claims that 138,200 work below the rate of HK$24 and 400,000 work below HK$33. I'm interested in what the elasticity of the demand for labor is (or how responsive employers are to wage changes). Since HK$33 is pretty close to HK$32, I'll treat those as the time. This seems like a good time to highlight that these are very rough calculations: don't take them to the bank.

Assume the average for fast-food is the same for all low-wage workers (as in, for those 138,200 working below HK$24). That means we are looking at an 8.7% increase. Since fast-food probably pays a little better than many low wage jobs, let's round that up to a 9% increase (HK$2/HK$23, where 23 is the average between HK$22 and HK$24). We should also see a 24% fall in low wage employment (-30,000/123,200, with 123,200 being the average of 108,200 and 138,200). This gives us an elastic demand curve for labor: -24/9 = -2.67, the absolute value of which is way more than one.

Let's see what happens when they increase to HK$32. That's a 37% increase (HK$10/HK$27). Employment for those in that group falls by 54% (-170,000/315,000). So -54/37 = -1.46, the aboslute value is still more than one and thus still elastic.

So what does this mean for the low wage workers of Hong Kong? It means that, on average, the poor will be getting paid less money. (I bolded that for those that wanted to skip the math.) Yes some will be paid more but others will be fired and the increase in payment is not nearly as much as the decrease in employment. Of course all of this is from the group that's ideologically opposed to the minimum wage law and I doubt the degree of effect will be as strong as it is here, but the direction (i.e. it's an elastic demand curve) is probably spot on.

Why? If you went to my class, you'd know. There are increasingly more substitutes for low-wage workers because it's generally easy to replace with a machine. (This is also why these results are believable: elasticity went down as the wage hike went up because higher wage workers are harder to replace.) We see this a lot in the US: fast food workers work a lot with machines and as robotics improve, labor gets more elastic. In economicspeak, machines are a substitute.

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