(This essay was published in Hong Kong Economic Journal 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 – compared to their parents’ generation. Most people believe that income inequality has increased since 1980 and intergenerational upward mobility has decreased.

 

The rising Gini-coefficient of household income inequality is often cited as evidence of this. It rose from 0.429 in 1976 to 0.537 in 2011 see (Figure 1). The Gini-coefficient of individual income inequality among those who are economically active  also rose, from 0.411 in 1976 to 0.487 in 2011.

 

The higher income inequality ratio for householdsI is almost entirely the result of their changing 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. This means measured household income inequality will naturally rise because of population ageing, divorce patterns, and preferences for not living with parents.

 

The underlying distribution of household income after removing these factors, however, might not have changed. Moreover, if transfers from governments are taking into account, they are unlikely to have increased at all – in other words, the alleged rise in household income inequality would be just that, alleged.

 

Another factor cited as evidence of rising inequality is the survey result that a fresh university graduate is not paid much more than $10,000 per month. Investing in schooling and a university education is therefore argued to not be worth the investment because a person working 48 hours per week and paid the minimum wage of $32.50 per hour can make over $6,760 a month. Education in this context is no longer seen as a vehicle for improving economic opportunities for the disadvantaged.

 

But this conclusion is misleading. The rates of return to schooling for those with secondary education have 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 education levels rose. Over the period 1981-2011, the average years of schooling of the working age population increased from 6.1 years to 9.2 years, while the proportion of the population with non-degree post-secondary education rose from 2.6% to 8.5% and those with a university degree rose from 2.5% to 16.0%. These are all rapid increases, but the higher rates of return to education are proof that the expansion has not happened fast enough.

 

Consider that the rates of return to university degree education, estimated to be 17.0% in 1976 and 22.7% in 2011, would beat the 40-year performance of 99.9% of the world’s fund managers. What better investment opportunity is there to be found?

 

The amount of human capital found in a fresh graduate with a university degree represents only a fraction of the lifetime human capital they will eventually possess. University graduates also invest more in themselves than secondary school graduates even after graduation. This is why it is misleading to compare the salaries of fresh university graduates with those of average workers or minimum-wage earners, and why comparisons of the earnings of university and secondary school graduates must be done when they are at the same age. I have done this in the next set of figures.

 

In 1976, the ratio of earnings of university graduates relative to secondary school graduates rose only slightly with age (see Figure 2). But by 2011, the gulf was much wider. Today’s university graduates have even more incentive to continue to invest in themselves after graduation than secondary school graduates, given the return to human capital investment is even higher today than in the past.

 

All of this points to the fact that there is value to be had in expanding education opportunities for all. The average years of schooling among the working population have risen only from 6.1 to 9.2 years over three decades, which is clearly an underinvestment. Expanding education opportunities will promote earnings equality among working individuals and is a desirable policy objective to pursue.

 

Evidence of intergenerational upward social mobility in Hong Kong is limited. Figure 3 (Table 2 for reference only) gives the correlation of parents’ schooling attainment to child’s schooling attainment for birth cohorts born in the period 1951-1991, using census data.

 

Younger generations are in general more educated than older ones because they have been required to spend more years in school. I therefore measure schooling attainment of a person in terms of percentile ranks relative to the schooling attainment of those in their same birth cohort to remove 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, so intergenerational upward mobility is higher when the correlation is lower.

 

The correlation is highest for those born in 1951-56. These were the postwar years when many immigrants first came to settle in Hong Kong.

 

For those born after this period, the estimates show that the correlation has been quite stable at between 0.28 and 0.32, averaging around 0.30, except for those born in the period 1961-76. The estimated correlation of 0.30 is similar to that found in the U.S. correlating parent’s income with child’s income.

 

An obvious explanation for why the latter group appears to have a lower estimated correlation, and therefore higher intergenerational upward mobility in schooling opportunities, has to do with the waves of emigration Hong Kong experienced.

After the 1967 disturbances, many families left Hong Kong. Fears of political uncertainty over the restoration of sovereignty over Hong Kong to China also led to another fresh wave of emigration.

 

As families left, this created more education opportunities for the children of families who stayed behind – particularly as many of those who left likely would have had higher chances of obtaining more schooling.  Data on the number of emigrants after the 1967 disturbances are not available, but we have evidence on the number of emigrants leaving Hong Kong in the period 1980-2014 (see Figure 4).

 

 

In a typical year the average number of emigrants is between 10,000 and 20,000. A substantially higher number left in the period 1987-1997. The cumulative additional estimated number who left was 300,000. The two emigration waves probably had a very significant effect on the education opportunities of children who remained in Hong Kong and substantially improved their upward mobility prospects.

 

The evidence on why household and individual income inequality have worsened over time is therefore more complex than the numbers might suggest. 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. A child born today with a good “birth lottery” is worth more than one born into the same family circumstances in the past because their education will have a higher rate of return.

 

Intergenerational upward mobility measured in terms of schooling opportunities were largely unchanged for those born in the period 1956-91. However, a subset born in the period 1961-76 saw improved opportunities due to the waves of emigration Hong Kong experienced over political unrest and uncertainty.

 

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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