(This essay was published in South China Morning Post on 1 April 2015.)

There is a growing public perception in Hong Kong that economic opportunity has worsened for the younger generation – those born after 1980 – as income inequality has risen and intergenerational upward mobility has decreased.

 

The rising Gini-coefficients of both household and individual income inequality are often cited as evidence of this. The Gini-coefficient for households rose from 0.429 in 1976 to 0.537 in 2011, while that for economically active individuals increased from 0.411 in 1976 to 0.487 in 2011.

 

The higher income inequality ratio for households is almost entirely the result of their changing demographic composition. Hong Kong has more low-income households today because there are more households composed of single parents, young working adults, and non-working elderly persons than in the past.

 

Household income inequality therefore has risen naturally because of population ageing, divorce patterns, and preferences for not living with parents. Remove these factors and the changes are quite modest.

 

The picture is simpler for individual income inequality.

 

One factor cited as evidence of rising inequality is the survey finding that fresh university graduates are not paid much more than $10,000 per month. Since a person working 48 hours per week and paid the minimum wage of $32.50 per hour can make over $6,760 a month, this would suggest that the investment in schooling and a university education might not substantially improve earnings.

 

But this conclusion is misleading. Rates of return to schooling for those with secondary education have in fact risen over time from 12.5% in 1981 to 15.8% in 2011. For university degree graduates they have risen from 17.0% in 1981 to 22.7% in 2011 (see Table 1). The greater increase among those with more education is conclusive evidence that education opportunities have not grown rapidly enough, for otherwise the returns could not have risen by so much.

 

 

Table 1: Rates of return to education

Average years of schooling in the population Percentage of population with non-degree post-secondary education Percentage of population with university degree education Rate of return to education for a
Primary school graduate Secondary school graduate University degree graduate
1981 6.1 2.6 2.5 0.058 0.125 0.170
1996 7.7 4.1 8.2 0.056 0.148 0.210
2011 9.2 8.5 16.0 0.053 0.158 0.227

 

These rates of return also increased even as average years of education for the working population increased, from 6.1 years in 1981 to 9.2 years in 2011, and more people attained higher education. This is yet more proof that the expansion of education opportunities has not happened fast enough to meet demand.

 

Evidence of intergenerational upward social mobility in Hong Kong is limited. One way to measure this is to correlate parents’ schooling attainment to their child’s schooling attainment, in both cases based on how they did in comparison with their peers. This removes the confounding effects of rising schooling trends that would bias measured correlations.

 

A high correlation implies that parent’s schooling attainment strongly determines child’s attainment. Therefore, intergenerational upward mobility is higher when the correlation is lower. The correlation is highest for those born in 1951-56, at around 0.37-0.38. These were the postwar years when many immigrants first came to settle in Hong Kong.

 

For those born between 1956 and 1991, the correlation is mostly stable, averaging around 0.30 (similar to the correlation of parent-to-child incomes in the U.S.), except for those born in the period 1961-76 when it dropped to about 0.25-0.26.

 

This had to do with the waves of emigration from Hong Kong that occurred after the 1967 disturbances and the coming restoration of sovereignty over Hong Kong to China.

 

As families left, this created more education opportunities for the children of families who stayed behind and substantially improved their upward mobility prospects.

 

To summarise, household income inequality has worsened relative to individual income inequality due to population ageing, divorce patterns, and preferences for not living with parents. Individual income inequality has worsened because of underinvestment in education.

 

Many policy advocates have used rising income inequality measures to push for income redistribution. But this merely tries to fix the measures of income inequality. Redistribution will not halt the underlying forces that are driving the income distribution to become more unequal over time. Rising inequality can only be prevented by expanding education opportunities and encouraging couples to stay together.

 

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