the unemployment rate

The Unemployment Rate
Introduction
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 deeper way.
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 unemployment.
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 simultaneously.
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 is inevitable.
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 manufacturing industries.
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.

Donna
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 10 years.
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 changes.
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
very much.
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 HK.
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 construction industries.
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 employed.
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 increased.
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 manufacturing industry.
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 in 1995.
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 years.
Inflation rate & Unemployment rate in HK, 85-95
Year
Unemployment rate
Inflation rate
1985
3.20%
3.50%
1986
2.80%
3.00%
1987
1.70%
5.20%
1988
1.30%
7.50%
1989
1.20%
10.00%

1990
1.10%
9.80%
1991
1.70%
11.50%
1992
2.00%
9.20%
1993
2.00%
8.90%
1994
1.90%
8.20%
1995(qtr. 1)
2.80%
9.20%
1995(qtr. 4) (estimated)
3.20%
9.00%
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.
2. Validity
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.
3. Implication
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.
Solution
Finding ways to solve the unemployment problem is of utmost
importance now.

Since the supply of labor is so much greater than the amount
demanded, one way
is to let market mechanism to determine the relationship between
labor supply
and labor demand. The Government can also implement some new
plans to help lower
the high unemployment rate. According to the reasons of
unemployment that we
have discussed, below are some suggested solutions:
1) Correct Hong Kong people's attitude on “full employment", to
let them realize
that Hong Kong's unemployment level will be at a rather stable
rate of 3-4%
these few years. So, by maintaining the unemployment rate at 2-3%
can help to
control the increase in labor cost as well as the stability of
the Hong Kong
economy.
2) The high unemployment rate of Hong Kong is partly attributed
by the increase
number of imported labor. Therefore, the simplest way is to
reduce the number of
imported labor. The Government should base on each year's
economic growth rate
to adjust the necessary number of imported labor so that it can
match with that
of the market labor demand. Actually, the increase in the number
of imported
labor is due to their willingness to accept lower wages than
local workers. But

does it mean that if the local workers are willing to lower their
wages to a
level that is too low and harsh treatment at the same time, like
working for
long hours and accepting a wage of only $4,000 a month. Their
wage cannot
support their basic living needs. So, workers are not always
passive, they
should voice their opinions and fight for their own rights like
strengthening
the power of the labor unions and not just relying on the
Government for
implementing new policies to combat unemployment.
3) The Government could lower the requirements for applying the
unemployment
allowance to help workers solve their problem. However, the
workers should not
just wait for the help from the Government. They should actively
seek jobs and
can show their discontent to the Government for unfair treatment.
Some companies
also employ illegal workers. The Government can also implement
new laws such as
that in the United Kingdom. It will be a criminal offense if the
employers
employ illegal workers. This can help to deter them from hiring
those illegal
workers.
4) Increasing investment and production capacity can also be a
solution. The

Government can do this by increasing its expense and decreasing
the profit tax
rate so as to raise investment interest in the local industry. If
there is an
increase in investment, there will be more employment
opportunities, increasing
both the supply and demand. Increasing government spending can
stimulate
aggregate demand and hence decrease the unemployment rate. By
doing these can
also strengthen Hong Kong's competitiveness with other Asian
countries.
5) It is important for the Government to manage the increase in
labor cost,
increase employment as well as labor productivity. there should
be strategies to
maintain economic growth in a steady rate, to control labor and
labor cost form
growing too fast and to prevent the increase in inflation rate
due to economic
growth. The Government can set up a committee to look into the
cause of some old
industries since structural changes of the economy is the main
reason for the
high unemployment in Hong Kong. People do not possess the
necessary skills
needed to perform some specific task.
m