(This essay was published in South China Morning Post on 18 November 2015.)


What do worker complaints about long working hours, parental dissatisfaction with the Territory-wide System Assessment (TSA), dishwasher salaries, and earnings inequality have in common? They are all symptoms of two wider developments in society that need urgent attention.


First, the labor market has become increasingly tight as our labor force is no longer growing as fast as it used to for demographic reasons.


Second, the number of more educated workers is too low relative to less educated workers.


The increasing shortage of educated skilled workers has driven up the private rate of return to schooling continuously over time: among men for first-degree education from 16.2% in 1976 to 25.1% in 2014, and for secondary school education from 11.6% in 1976 to 14.2% in 2014. The rate of return to primary school education has actually fallen from 4.7% in 1976 to 0% in 2014. The results are similar for women.


Why has this happened? The simple answer is that the economy has been growing continuously due to technological progress, and markets have become more efficient and better integrated in the world. Hong Kong has a very tight labor market. But the shortage of skilled workers remains far more severe than that of unskilled workers. This drives up the rate of return to schooling.


Similarly, both wage rates and the number of hours worked have increased the most for educated workers with first degrees and to a lesser extent those with secondary school education, thereby increasing their individual earnings. The increases have been fastest among better-educated women.


The rising wage premium associated with more education is the fundamental reason why there is intense study and examination pressure in the universities and schools. Reforming the school curriculum and assessment methods such as the TSA will not fundamentally reduce this pressure so long as the supply of university places falls short of demand and keeps driving up the private rate of return to university education.


A corollary of this under supply is that there is a relative abundance of less educated workers. Since the mid-1990s, the labor force has increased by about half a million due to the entry of women into the job market. Many of them are less educated recent immigrants from the mainland.


Because there are so many less educated workers, their wages and earnings have fallen increasingly behind the better educated over the past 40 years. The laws of supply and demand tell us that the prices of things in relative abundance are necessarily cheaper.


This brings us to a curiosity: dishwashing jobs have very low skill content, so why do they pay $12,000 a month in this market? The answer is that dishwashing is a job with no learning opportunities. Such jobs will not enhance productivity in the future so there is little room for wages to ever rise. A job where one cannot accumulate human capital will only appeal to elderly workers, and these folks are disappearing from the workforce. It is again a matter of supply and demand.


Hong Kong’s tight labor market will get tighter in the years and decades ahead. Given a continued shortage of skilled workers, one can expect wages and earnings inequality to continue rising. It is a no-brainer what government should do – invest in human capital and try to attract more skilled and talented people to Hong Kong. This will be good for both economic growth and economic equality.


Current anti-poverty measures alleviate earnings inequality through government income supplements, but not the drivers of inequality. If we provide more education opportunities, then some of the less educated workers of the future will become better educated. This will reduce the relative abundance of less educated workers and market forces will work to increase their wages and earnings. This is how the iron law of supply and demand operates.


Many critics argue “trickle down economics” has not worked because earnings inequality has widened despite economic growth in the past 40 years, and low earnings workers have not benefited. What they miss is that education opportunities have not increased sufficiently despite the rapid economic growth. Education policies in Hong Kong and pretty much everywhere are largely under the control of government.


Governments decide how many education places to subsidize, which more or less fixes access to higher education. Governments also directly control immigration policy. The alleviation of poverty and inequality will come by tackling education and population policy – income redistribution policies alone will not be enough to get us there.

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