Good Intentions, Regressive Outcomes

The statutory minimum wage rate in Hong Kong has been raised by 5.25% from $40 per hour to $42.1 per hour, effective starting on 1 May 2025. While this change intends to help low income workers, the government also had to consider the effects on efficiency during decision-making. While the adjustment addresses inflation, it also worsens unemployment and reveals political motives to supporting this change beyond just welfare concerns.

Normal wage is the number on workers' paychecks, while real wage is what can actually be bought using the money accounting for inflation. This means that worker's actual income will decrease if normal wage does not increase to respond to inflation.

The government has cited inflation as the reason for the increase in minimum wage rate.

Comparing the inflation rate calculated based on CPI with the increase in minimum wage rate, it is shown that this increase in wages are able to keep real wages of minimum wage workers level, even increasing them to an extent. The purchasing power of these workers is maintained.

As a result of the increase in minimum wage rate, the income of minimum wage workers (the poor) increases while the income of others do not. By equalising income, equity is improved.

Efficiency is improved with this adjustment by considering poverty as a negative externality. When workers get low wage such that the wage amount is not sufficient to pay for costs of living, they may turn to illegal ways of living, such as robbery, stealing and burglary. This incurs costs on the whole society (higher spending on police force for example) without being compensated by the crime committers. By equalising income, there are less people in poverty in the society, lowering the quantity of crime closer to the efficient level.

There is existing unemployment, evident by the fact that unemployment rate is non-zero. When price increase, the difference between $Q_d$ and $Q_s$ becomes greater. Labour surplus (unemployment) increases.

Picture a scenario where every burger in McDonald's is being sold at the same price. If each burger costs the same for consumers, they are obviously going to choose the tastier and bigger Angus Original rather than the dry, unappealing and small Sausage McMuffin.

Translating this scenario to the labour market, we can see that when employers are forced to pay more for minimum-wage workers, non-price competition becomes the methodology in employers deciding what workers to employ. As a result, groups like the elderly, the disabled and foreign immigrants are vulnerable to unemployment.

Workers' wages increase as a result. However, firms have to make up the loss from having to pay more wages by reducing non-monetary benefits given to workers. This ranges from holidays per year to cutting down on breaks given in daily work.

In the long term, the increased minimum wage causes low-skilled workers to struggle to enter the job market.

With the new minimum wage, the standard for qualifications to be hired in the job market has increased with employers looking for the higher skilled workers within all minimum wage workers. The low skilled workers lack experience, skills and overall qualifications to be able to justify being paid the minimum wage for their productivity.

In the McDonald's analogy, this is as if the less appealing, smaller burgers have been taken off the menu, because customers are able to get their larger and better counterparts for a similar price.

While internships exist to ensure that young adults can secure their source of job experience and thus the career ladder, non-student's job positions are not secured.

While it is mentioned above that the increase in minimum wage is able to improve efficiency, there are also reasons to claim that such an increase actually creates inefficiency instead.

The unemployed labour is a kind of idle resource, signalling inefficiency, as the factors of production are not fully utilised.

In order to avoid paying the increased minimum wages to their workers, firms may replace human labour with capital instead. Example include self-ordering kiosks in McDonald's and Self-checkout in supermarkets.

It has been established that the vulnerable workers are hurt by the increase in minimum wage. Taking consideration of this, why is this still politically popular?

Such corporations support the increase in minimum wage as the raise costs of their competition, small and medium enterprises (SMEs) can be raised as a result. The large corporations can afford to pay a higher wage than the SMEs.

Minimum wage is a relatively cheap way for the government to support low-wage workers. While administration fees are incurred, setting a minimum wage is still cheaper than the alternatives which include direct transfers and vocational training. Minimum wage is a way for the government to signal their pro-worker stance without fiscal cost.

This figure, while 5.25% higher than the previous $40 minimum wage, still leaves a full-time minimum wage worker below the poverty line.

While raising the minimum wage can help workers, there are other methods of helping them that have a greater effect.

The change is macroeconomically justified considering inflation but microeconomically flawed. It needs complementary measures to have a greater effect.