Jobs for Everyone

Until the 1990s, there was next to no unemployment in Hong Kong. Here’s why. And why, today, there is.

This article was originally titled Why There Is No Unemployment in Hong Kong. Today (2005), 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 employed.

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.

The security of the free market

But without 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.”

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.

The best training:

“on-the-job experience”

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.

Reinforcing dependence

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 being employed.

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.

But the 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 position.

For example, the biggest market in Japan for tourism is women 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.

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.

The security of

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 appeared 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 of interest.

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 in all.

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 rise.”

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.

…and 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 or Europe.

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.

Update #1:

What’s Changed

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 1991 the unemployment rate in Hong Kong was 1.5%. That’s around the general estimate of what economists give the grandiose title of “frictional unemployment”: people voluntarily looking for another job.

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 for welfare.

Update #2:

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?

A sad real-time experiment.