(This essay was published in Hong Kong Economic Journal on 25 February 2015.)
Since the adoption of minimum wage legislation in 2011, organized labor has been pushing for standard working hours legislation. If this becomes law, then it will be a severe blow to Hong Kong’s labor market flexibility and to the economy. Unlike the minimum wage, which affects only the bottom end of the labor market, standard working hours will affect the entire labor market, bring serious employment distortion, and reduce economic efficiency.
This problem is particularly acute in Hong Kong because working hours are widely distributed, making it nearly impossible to legislate uniform, economy-wide, standard working hours without serious economic consequences.
In June 2012, the Labour Department published the highly informative Report on the Policy Study on Standard Working Hours based on data from the 2011 Annual Earnings and Hours Survey and the General Household Survey. The Report confirmed that the dispersion of hours of work per week was very wide. In 2011, 15.3 percent of workers worked 40 hours or less, 37.7 percent worked 41-48 hours, 28.3 percent worked 49-55 hours, 12.5 percent worked 56-60 hours, 7.2 percent worked 61-65 hours, and 6.2 percent worked 66 hours or more.
For those who believe the work week should be only 40 hours, then 84.7 percent of the employees are working too long. If they believe in a cap of 48 hours per week, then 47.0 percent of the employees are working too long.
The Report assessed the static cost impact under various scenarios: (1) different weekly standard working hours thresholds (40-44 hours), (2) statutory minimum overtime pay rates (at 1.0 to 1.5 times), and (3) exemption criteria for employees.
If all employees are impacted by standard working hours legislation without exemption, then the static cost impacts would be alarming. The estimated impact on the additional wage bill to employers could range from $8.0 billion (1.7% of the total wage bill in 2011) to $55.2 billion (11.4%), with some 50.6-91.1 percent of full-time employees impacted.
While the points raised in the Report are useful, they do not explain why working hours are long in Hong Kong and why they are so widely distributed within the working population. Understanding these issues is critical and relevant to the question of whether there should be standard working hours legislation.
In 1960 people worked an average 52.4 hours per week, which declined to 47.7 hours in 1985, and 43.3 hours in 2014. Working hours in Hong Kong have displayed the well-known “backward bending” labor supply curve found elsewhere in the world, in which labor supply tends to fall when wage rates rise. People will voluntarily choose to work fewer hours and spend more time at leisure (or unpaid voluntary work) when they become wealthier.
It is important to emphasize that the choice of the number of work hours is primarily decided by market competition and is therefore voluntarily chosen by the workers themselves at the end of the day. In other words, it is a mistake to believe, as organized labor has often advocated, that employers dictate and can force workers to work long hours. All employers must compete for labor in the market. They do not have the power to dictate hours without losing workers to their competition. As Hong Kong’s labor force has grown very slowly in the past 30 years, their weekly hours of work have declined over time.
Even more revealing is the distribution of weekly working hours among men and women over the period 1985-2014 (see Figures 1 and 2), which shows that the portion of those working long hours (defined 48 hours or more) has declined over time. In 1985, 34.1% of men in the labor force worked 48 hours per week, 14.6% worked 49-59 hours, and 18.4% worked 60 hours or more. By 2014 the percentages had changed to 14.1%, 16.6%, and 13.4%. Similarly for women workers, 31.6% worked 48 hours a week in 1985, 7.5% worked 49-59 hours, and 9.2 % worked 60 hours more. The percentages changed to 10.4%, 13.0%, and 7.3% in 2014.
Overall, the total percentage of male workers working 48 hours or longer per week fell from 67.1% in 1985 to 44.1% in 2014. For women workers it fell from 48.3% in 1985 to 30.7% in 2014. Working hours adjust to supply and demand conditions in the labor market. People in general prefer to work shorter hours as their wage rates increase and this is what has been happening in the labor market in Hong Kong. Employers have adapted to the times, most importantly because they have to compete for workers.
Particularly noteworthy is the rising share of part-time workers in the labor force. The percentage of male workers working fewer then 25 hours per week has risen from 4.4% of the male labor force in 1985 to 7.0% in 2005 and then to 9.1% in 2014. For women the percentages have risen from 9.6% of the female labor force in 1985 to 11.1% in 2005 and then to 13.9% in 2014. The growth in part-time workers is significant.
Clearly tightness in the labor market and rising wage rates have attracted more part-time workers, especially women. Notice that this trend preceded the minimum wage legislation by at least six to seven years. In all likelihood minimum wage legislation was adopted in response to the growth of part-time, low-pay workers. Organized labor recognized this as an opportunity to garner electoral votes in response to public concern for these workers.
What has not been appreciated sufficiently is that the growth of low-pay workers resulted from labor market tightness, which induced married mothers to enter the labor force on a part-time and casual basis. Most were casual workers who had weak incentives to invest in their own productivity, including investment offered by employers. Their pay was naturally low. Minimum wage legislation boosted their wages artificially and attracted even more casual workers to enter the labor market at the low-pay end.
In 1985, the distribution of working hours was prominently single modal and peaked at 48 hours per week for both men and women (see Figures 3 and 4). This flattened over time and showed signs of becoming weakly twin-peaked by 2014. The growing dispersion of working hours is a symptom of a very tight labor market – a situation that is likely to continue because the working age population is projected to stop growing for decades.
This dispersion helps to explain why average working hours have fallen despite labor market tightness, from an average 47.7 hours in 1985 to 43.3 hours in 2014. More work has been spread to part-time and casual workers, especially for jobs requiring fewer skills and training.
Working hours for men declined from 49.5 hours in 1985 to 44.9 hours in 2014, and for women from 44.6 to 41.2 hours. The difference rates of decline reflect the entry of a larger pool of non-working women into the labor force. Also, while working hours fell in all age groups, the declines were larger among older workers whose skills can be more readily substituted.
These findings are supported by a negative correlation between the decline in average working hours and the level of education. Among workers with primary education or less, working hours declined from 49.7 hours in 1985 to 44.5 hours in 2014. For those with secondary education they fell from 47.3 to 44.8 working hours, and for those with post-secondary and tertiary education from 42.0 to 40.8 working hours.
The same pattern of changing working hours is repeated across broad industry sectors and occupation groups. All sectors experienced declines in the average number of working hours except for the “finance, insurance, real estate, professional and business services” sector, where working hours increased from 42.0 hours in 1985 to 44.1 hours in 2014.
All broad occupation groups also experienced declines in the average number of working hours except for the “professional and associate professional” group, where working hours increased from 39.0 hours in 1985 to 41.3 hours in 2014. These are the industries and occupations where readily-available substitute workers are much more difficult to find.
Changes in the pattern of working hours and their distribution over time suggest three conclusions. First, working hours are determined by supply and demand conditions and they have declined in the workforce as wage rates increased, except in specific areas where there is an acute short supply.
Second, highly-skilled workers in these specific areas – well-educated workers in professional occupations and the finance and business sectors – are working longer hours because of supply shortages that reflect Hong Kong’s inadequate manpower in regards to education and attracting skilled immigrants.
Third, for jobs that require lesser skills, Hong Kong is increasingly filling them with part-time and casual workers in a tightening labor market. The year 1996 represented a turning point in the sex composition of the labor force. The ratio of female workers to male workers, which had been stagnant throughout the period 1986-96, began to rise steadily from 0.58 in 1996 to reach 0.80 in 2014. Large numbers of women were drawn into the labor force to meet demand, yet the total number of male workers in 2014 was the same as that in 1996. This has placed considerable stress on the domestic family, especially with rapidly rising divorce rates and single-parent families.
These are the real dynamics of the labor market in the past 30 years that were not discussed in the Labour Department’s Report. Imposing standard working hours on such a labor market would have very severe economic consequences. Where would the extra work hours come from?
Hong Kong can only find more hours by having more women enter the labor force, making them work longer hours, and delaying retirement age. But if more married women with young children enter the labor force or postpone retirement age, there will be wide societal consequences, especially on fertility patterns, mother’s time spent with young children, and the mobility prospects for younger workers. All of these measures are disinvesting in our children and young people, and ultimately our future prosperity.
Standard working hours legislation solves no problems and further distorts the adjustment process in a tight labor market. Government and society should focus on better ideas.