(This essay was published in South China Morning Post on 12 October 2016.)

 

The government announced on 19 September that around 31,800 households had applied for the Low-income Working Family Allowance and 20,633 were approved. Initially the government expected about 200,000 households would benefit from the scheme. Why were its estimates so far off the mark?

 

One possibility is that a person is less likely to understate her income under oath when filling out an application form for a government subsidy than during a survey. If this is correct than the number of individuals reported to be below the poverty line have been grossly overstated.

 

Like many economists I have always doubted the usefulness of the poverty line as a concept to characterize and define poverty.

 

In an attempt to understand poverty in Hong Kong, I spent the past two years studying the problem, wrote scores of articles on the topic that were recently collected in the book Fixing Income Inequality in Hong Kong. Here are the key insights I have gleaned:

 

First, from 1976 to 2014, the individual earnings of men in the bottom 50% of the income distribution increased on average by 2.5% per annum in real terms; women did slightly better at over 3.5%. Among the top 10% of the income distribution, men’s earnings rose on average by over 3.5% per annum, and women’s by over 4.2%. This has contributed to greater inequality in individual earnings over time. The primary cause for this has been the rising pecuniary rewards to more education.

 

Second, during the same period, household income inequality increased even more than the inequality of individual earnings. Five factors contributed to this: ageing, positive marital matching, the continued influx of unskilled immigrants, family breakdown, and public rental housing allocation policy.

 

Third, the rapid swelling of households headed by retired individuals with no income has artificially boosted the number of zero or low-income households. This has caused the recent increase in measured household income inequality and will continue to do so in the coming two decades.

 

Interestingly, poverty rates among economically active households (before cash and in-kind transfers are included) have been remarkably stable – averaging about 7.8% during 1985-1994, 10.5% during 1995-2004, and 9.8% during 2005-2014. There is no consistent pattern of rising inequality.

 

Fourth, rising inequality in individual earnings reflects the higher rewards of more education. Positive marital matching, in which more highly educated men marry more highly educated women, has also contributed to greater observed household income inequality.

 

Fifth, China’s opening has led to a huge influx of unskilled immigrants. This has increased the proportion of unskilled workers in the population and most probably further depressed unskilled wages relative to skilled wages over time as these immigrants entered the labor force.

 

Sixth, family breakdowns have risen dramatically in the past three decades. Our current crude divorce rate is top five in the world at 3.1 per thousand population. Divorces occur much more frequently among low-income households, who have fewer assets to divide, and are also a by-product of the greater ease of cross-border marriages.

 

Higher divorce rates have led to a swelling of household formation among low-income households and their concentration in public rental housing. Some 67.4% of all divorced individuals (numbering 66,000) living in public rental housing estates were in the lowest income quartile, against 29.7% (38,000) of those living in other types of housing.

 

The key poverty issue in Hong Kong is therefore not abject poverty (although there are such sad cases), but the rising economic divide that is widening household income inequality. The problem begins in the home. Even if we create more high value-added jobs, this would do little to lift low-income households out of near poverty. More education opportunities would make a difference, but they take a very long time to produce an effect.

 

The seventh and final insight is that the allocation of public rental housing units creates perverse incentives for divorce among low-income families. One party of a divorced family remains in the public housing units (usually women with children), while the other party moves out (often to rent sub-divided housing in the private sector). But if the latter remarries, they become eligible to apply for public rental housing again.

 

A policy to foster homeownership among this group of households would reverse the perverse “divorce subsidy” of the current public rental housing program and moderate rising household income inequality.

 

Homeownership is the most reliable means to escape “near poverty” for many. It provides security in family formation, retirement support, and building ties with the next generation. It is the economic and social foundation for personal liberty and a free society.

 

This is the story I want to tell about Hong Kong – inequality here is not really so terrible and neither is abject poverty, but there is a lot of near poverty related to the growing proportion of unskilled residents stuck in housing units they do not own. And liberty will only thrive in Hong Kong when homeownership is within the reach of all.

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