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Will stopping importation of labour reduce the unemployment rate in the Hong Kong hotel industry

Tang, Kai-cheung.; 鄧繼章. Tang, K. [鄧繼章]. (1996). Will stopping importation of labour reduce the unemployment rate in the Hong Kong hotel industry. (Thesis). University of Hong Kong, Pokfulam, Hong Kong SAR. Retrieved from http://dx.doi.org/10.5353/th_b3043065 1996

http://hdl.handle.net/10722/31236

The author retains all proprietary rights, (such as patent rights) and the right to use in future works.

Will Stopping Importation of Labour Reduce The Unemployment Rate in the Hong Kong Hotel Industry?

By K.C. Tang

Dissertation Submitted in Partial Fulfillment of the Requirement for the Degree of Master of Business Administration

The University of Hong Kong August 1996

Abstract

The objective of this study is to find out whether stopping importation of labour will reduce the unemployment rate in the hotel industry of Hong Kong. We examined the General Labour Importation Scheme which allowed the Hong Kong industries to import 25,000 labours. Employers had to pay the labours imported under this scheme a nominal wage dictated by Labour Department. The objective of this nominal wage was to protect the jobs of the local labours. However, we found that the nominal wage has a very important side effect, i.e., it fixed the wage and obstructed the market adjustment of the wage in the labour market. We also found that the high unemployment rate in the hotel industry was due to shrinking demand in 1994. All statistical data pointed out that the scenario of the high unemployment starting in 1994 and lasting up to date followed the prediction of Keynes' unemployment theory. According to Keynes, we need demand to restore the employment back to the frictional level. That means even we restored the marketing adjustment mechanism for the labour market of the hotel industry by abolishing the General Labour Importation Scheme, we cannot help to reduce the unemployment rate. Moreover, the imported labours only constituted 1.6% of the labour force of the Hong Kong hotel industry. If they were not here in the very beginning, the unemployment rate would only be reduced by 1.3%. We calculated the unemployment rate of the Hong Kong hotel industry be around 8% when 3,000 hotel workers lost their jobs in 1994.

m

Table of Content Acknowledge

1ii1

Abstract

1iii11

Chapter 1. Introduction • Background • Problem • Scope • Objective • Importance of This Study • Limitation

1 1 2 3 4 4 4

Chapter 2. Literature Review • Summary • The Characteristic of Labour Market • Supply Curve of Imported Labour • Protection for the Local Labour • Protection by Fixed Levy • Protection By Quota • The General Labour Importation Scheme • What Is Unemployment • Frictional Unemployment • Seasonal Unemployment • Structural Unemployment • Cyclical Unemployment • Economic Theories of Unemployment • Classical Theory of Unemployment • Keynes Unemployment Theory • Microeconomics Theory of Unemployment

5 5 7 8 10 10 11 14 14 15 16 17 19 20 20 23 28

Chapter 3. Methodology • Objective • Constructs • Variables and Attributes of Imported Labour • Variables and Attributes of Unemployment Rate • Methods to Measure the Variables • Analysis • Design of the Questionnaire

33 33 33 34 34 35 36

IV

Chapter 4. Finding: General Labour Importation Scheme • Summary • General Labour Importation Scheme in 1989 and 1990 • Expansion of the Scheme in 1992 • Reason to Expand the Scheme in 1992 • Impact of the Scheme as at 1992 • Protection for the Local and Imported Labours • Implication of the Expansion of the Scheme in 1992 • Turning Point in 1995 • Ending the General Labour Importation Scheme • Situation in Third Quarter of 1995 • Supplementary Labour Scheme • Argument on the Labour Importation Scheme

38 38 40 41 41 44 45 47 48 49 51 54 56

Chapter 5. Finding: Hong Kong Hotel Industry • Summary • The Importance of Tourism to Hong Kong Economy • Can The Hotel Industry Grow Fast Enough • The Priority Issues of the Hong Kong Hotel Industry • What Determine the Room Rate and Room Occupancy Rate • The Cost Structure of Hong Kong Hotel Industry • The Runaway Labour Cost • Hotel Industry's Motive to Import Labours • Expatriate Managers in the Hong Kong Hotel Industry • The Categories of Employees Mostly Needed • The Benefit in Importing Labour

59 59 61 63 66 68 70 71 74 76 77 78

Chapter 6. Analysis • Summary • The History of Unemployment Rate of Hong Kong • Is it Structural Unemployment • Unemployment Rate of the Hong Kong Hotel Industry • Unemployment Rate and Imported Labour • The Imported Labour and Nominal Wage • Imported Labours' Impact on Unemployment Rate • An Important Side Effect of the Nominal Wage • The Impact of General Labour Importation During Recession • Applying Microeconomics Theory • The Microeconomics Theory Cannot Explain • Keynes and Classical Theories Can Explain • The Self-curing Mechanism of Classical Economic Theory

82 82 85 86 87 89 89 91 92 97 98 100 101 101

• The Root Cause of the Retrenchment of the Hong Kong Hotel Industry • The Pessimistic View of Keynes • Demand Will Not Expand • Patinkin's Explanation • The Adverse Impact Imposed By Imported Labours

102 103 104 105 105

Chapter 7. Conclusion

108

Appendix 1. Interview The Vice Chairman of the Hotel and Restaurant Labours Union

110

Appendix 2. Interview Mr. Tam Yiu Chung, the Chairman of the Employee Retraining Board

112

Appendix 3. Employment Survey Report From 'Restaurant Workers Union' and 'Hotel and Restaurant Labours Union' (April - May, 1996)

113

Appendix 4. Interview the Senior Executives of 5 Hotels

115

Bibliography

119

VI

Chapter 1. Introduction Background Hong Kong has a very long history of importing labour to meet the manpower demand of some particular industry sectors. We have long been familiar with the expatriate managers, domestic helpers,...., etc. The most controversial policy was importing general labours under the General Labour Importation Scheme. This scheme was introduced in 1989.

It allows a

maximum of 25,000 general workers to work in Hong Kong. Unfortunately that starting from 1990, the unemployment rate of Hong Kong started to soar. In 1989, the unemployment rate was 1.4%. It rose to the historical height of 3.6 % in the third quarter of 1995. In 1995 labour unions and some political parties lobbied the government to stop importing labour. In his policy address on October 11, 1995, the Governor announced that the quota of the General Labour Importation Scheme would be cut to 5,000. This drastic reduction in the quota for imported labour immediately provoked criticism from many commercial associations. The leaders of these organizations bemoaned that they would not be able to operate in Hong Kong any more. Their only way out was to move their operation to some other locations with abundant cheap labour, for example, China. We know that manufacturing industry can move. In fact many factories in Hong Kong have already been moved cross the border to China. Hong Kong has lost its

Chapter 1. Introduction

manufacturing industry. However, what can the service industry do? Hotel industry is a service industry. It needs people to serve people. Its existence affects Hong Kong's competitiveness as the business hub of the South East Asia. We cannot afford to lose the hotel industry.

Problem Is imported labour really so important for the hotel industry? In early January 1996, when the Legislative Council approved reducing the quota of the General Labour Importation Scheme to 2,000 that is a further reduction of what put forward by the governor, some hotel operators immediately aired their strong disapproval in the television interview. They insisted the hotel industry needs imported labour. They said that the industry needs imported labour to survive. However, from 1993 to 1995, the hotel industry was retrenching. Three large hotels closed down and many hotels reduced the size of their work force. Around three thousand hotel workers lost their jobs in that period. The Hotel and Restaurant Labours Union said that it was very difficult for their unemployed members to find a job again. Some of their members who were laid off because of closing down of hotels in 1994 have been unemployed for more than a year. Union leaders blamed the General Labour Importation Scheme for generating the high unemployment rate. They believed the imported labours who were young, energetic and willing to

Chapter 1. Introduction

accept a low wage grabbed the jobs of local work force. They pressed the government to stop importing labours. Information from the unions and the employers are contradicting. Nevertheless, the government has put the General Labour Importation Scheme to almost full stop in January 1996 by reducing the quota to 2,000. Can stop importation of labour reduce the unemployment rate of the Hong Kong hotel industry?

Scope The scope of this study is limited to the class A, class B, and class C hotels as defined by Hong Kong Tourist Association. Now there are around 75 such hotels. Boarding houses are excluded. Around 30,000 people are working in the above mentioned categories of hotels. Our study concentrates on the operative and technical staff of the hotel industry, who constitute the largest portion of the workforce and are directly affected by the General Labour Importation Scheme. Our study covers the time period from 1988 up to 1995. More attention has been placed on 1994. It is because 1994 is the turning point. Starting from late 80s up to 1993, many industries in Hong Kong were suffering shortage of manpower and high inflation rate. Unemployment was a non-issue. However, in late 1994, it became a serious problem.

Chapter 1. Introduction

Objective The objective is to find out the relationship between imported labour and the unemployment rate in the hotel industry. We hope this research will give us more insight about the subject, and eventually lead us to put the issue of unemployment under control.

Importance Of This Study Unlike manufacturing industry, the hotel industry cannot be moved away. Every year around 10 million travelers visit Hong Kong. If the hotel operators do move their hotels to other cities, Hong Kong would lose its facility to accommodate the 10 million visitors. Gone with these travelers will be HK$ 70,000 millions of revenue. Moreover,

Hong Kong will never be a

commercial hub in the Pacific Rim. Since the hotel industry is such an important factor for Hong Kong's competitiveness in the global market, we cannot afford to make any mistake in policy that affects the industry. We must find an answer to the above-mentioned problem.

Limitation We take a semi-quantitative approach. We analyzed the relationships between different groups of data graphically. Due to limitation of resource we have not used full fledged quantitative methods, such as Chi-square analysis, linear regression, ANOVA (Analysis Of Variance), etc.

4

Chapter 1. Introduction

Chapter 2. Literature Review Summary This chapter summarizes some famous theories and models on imported labour and unemployment. These models and theories will be used to explain the unemployment of the Hong Kong hotel industry in the next few chapters. Following are the topics being explored: • The characteristic of labour Market The supply and demand in the labour market follow the basic marketing principles. The labour supply curve is upward slopping while the labour demand curve is downward slopping. • Supply Curve of Imported Labour The supply curve of imported labour is usually a horizontal line because there is virtually unlimited supply as far as we are willing to import. • Protection for the Local Labour Imported labours are willing to take a wage lower than the market rate of the host country. The host country usually implements some restrictions to prevent imported labour from displacing local labour. • Protection by Fixed Levy Some governments protect their local labour by levying a fixed amount per imported worker from employers so that the wage of the imported labour will be higher than the wage of the local labour. • Protection by Quota Some governments use a quota system. At no time the number of imported labour can exceed the quota. • The General Labour Importation Scheme of Hong Kong The Hong Kong Government uses a very complicated system. It sets a quota. At the same time the employers are asked to pay a nominal market wage. • What is Unemployment Unemployment means enforced idleness of wage earners. There are several types of unemployment.

Chapter 2. Literature Review

Summary • Frictional Unemployment Frictional unemployment is the employment caused by imperfection of the labour market. It cannot be reduced unless we change the structure of the labour market. • Seasonal Unemployment Seasonal unemployment is due to fluctuation in supply or demand of labour due to some seasonal factors. • Structural Unemployment Structural unemployment is due to structural change in demand of labour, for example, Hong Kong lost huge number of manufacturing jobs because many manufacturers moved their factories to mainland China. • Cyclical Unemployment Cyclical unemployment is due to fluctuation in demand of labour along the business cycle. • Economic Theories of Unemployment Economists worked out many theories to explain the phenomenon of unemployment. Following are these theories. • Classical Theory of Unemployment Classical theorists believe unemployed workers will exert a downward pressure on wages. As the labour cost is reduced with the reduced wage, employer will increase the production, consequently the demand on labour. • Keynes Unemployment Theory Keynes does not agree with the classical theorists that employers will increase the production again when workers accept a reduced wage. He believes in time of recession price will drop with wage. As price drops, profit will also drop, hence the employers will have no incentive to increase the production even the labour cost is reduced. • Microeconomics Theory of Unemployment Microeconomics theorists agree with the classical theorists, but with a minor modification. They believe unemployment above frictional level is due to workers' obstinacy to accept a reduced wage. As the workers' obstinacy disappears with time and they take the job at reduced wage, the self-curing adjustment of classical theory will kick in to bring the unemployment back to the frictional level.

Chapter 2. Literature Review

Chapter 2. Literature Review The Characteristic of Labour Market Many countries with rapid growing economy are short of labour. They usually resort on imported labour to solve this problem, for example, Singapore, Saudi Arabia. How do these imported workers affect the labour market of the host country is usually a controversial issue. Union leaders see the imported labours as intruders who deprive the jobs of their members. Business leaders say that the imported labours only take up jobs which no local workers want to take. Without imported labour, they cannot continue with their business. That means more jobs will disappear. In the eyes of economists, labour is one of the marketable commodities that complies with the marketing mechanism of supply and demand as shown in the following diagram. Real Wage S l Labour Supply Curve

D l Labour Demand Curve

•>

Employment

Ll L2

Chapter 2. Literature Review

The labour demand curve is a downward slope curve. It is the aggregate marginal productivity schedule of labour based on the principle of diminishing return to scale. Every point on this curve represents a situation where marginal increase in supply of labour into the production system will yield equal amount of marginal revenue. The labour supply curve is upward slopping. Every point of this curve is the equilibrium trade-off between the value of a marginal hour of leisure and the market wage of the whole work force. Equilibrium occurs at the point where the labour demand curve intersects the labour supply curve. At this point, the real market wage is Wi and there is no shortage of labour. Employers cry for shortage of labour because the slope of the labour supply curve is very steep. In other words, the supply of labour is inelastic. If the employers want to expand the production capacity by

increasing the

employment to L2, the real wage will rise drastically to W2 which the employer can not afford. Supply Curve of Imported Labour It is under the above situation we import labours. Usually imported labours come from developing countries with low living standard. They are willing to take a wage lower than the market value of the host country. Moreover, the supply of imported labour is unlimited if we do not set a quota. Following diagram shows the supply curve of imported labour.

8

Chapter 2. Literature Review

Real Wage SL Labour Supply Curve

Si Supply Curve of Imported Labour

DL Labour Demand Curve

Employment L3 Li L2 Source: Lok-sang Ho, Pak-wai Liu and Kit-chun Lam, International Labour Migration: The Case ofHong Kong. Hong Kong Institute of Asia-Pacific Studies, September 1991

The supply curve (Si) of imported labour is a horizontal line at W3 which is lower than the nominal market wage Wi. It is a horizontal line because there is unlimited supply.

As far as the employment level is greater than L3,

employers will employ imported labour, because from L3 onward, the wage of the imported labour will remain at W3 which is much lower than the market wage of the local workers. Employers can freely expand the level of employment without increasing the wage, and imported labour will displace the local workers.

Chapter 2. Literature Review

Protection of the Local Labour In order to protect the local workers, the Government usually sets a quota or levies a fixed amount per imported worker from the employers. The purpose of the levy is to increase the effective wage paid by the employers to a level higher than the wage of the local workers. The effect of the levy is explained graphically in the following diagram. Protection By Fixed Levy Real Wage SL Labour Supply Curve

ST Simnlv of Imported Labour

DL Labour Demand Curve

Employment Li L2 Source: Lok-sang Ho, Pak-wai Liu, and Kit-chun Lam, International Labour Migration: The Case of Hong Kong, Hong Kong Institute of Asia-Pacific Studies, September 1991

In the above diagram, the Government purposefully levies a fixed amount per imported workers from the employers such that the wage of the imported labours rose from W3 to W4 which is higher than the wage of local labour (Wi). Since the wage of the foreign workers is higher than the wage of local workers, employers will employ local workers first. However, when

10 Chapter 2. Literature Review

employers increase the employment level beyond Li, for instance, to L2, the wage of local worker will soar to W2 due to the inelasticity of the local labour market. Under such situation, employers will start to employ foreign workers whose wage is fixed at W4 which is lower than W2. Moreover, no matter to what extent the employment level is increased, the wage will be kept at constant at W4 as far as the Government continues with the status quo. The advantage of the afore-mentioned levy system is that employers are given an opportunity to expand their production without drastically increase their human resource cost, while the job opportunities of the local workers are protected.

Protection By Quota Quota is another mechanism to protect the local labour from the imported foreign workers. The quota system is explained graphically in the following diagram:

11

Chapter 2. Literature Review

Real Wage SL Labour Supply Curve

A

Si Supply Curve of Imported Labo

DL Labour Demand Curve

Employment -L3 LI

Source: DerivedfromLok-sang Ho, Pak-wai Liu and Kit-chun Lam, International Labour Migration: The Case ofHong Kong. Hong Kong Institute of Asia-Pacific Studies.

In above diagram, the Government sets the quota for imported labours to L3. That means only L3 number of foreign workers can be imported. Since the wage of foreign worker (W3) is lower than the wage of local workers (W1), employers will employ foreign workers first. Eventually L3 number of local workers will be displaced by L3 number of foreign workers. In other word, the number of local workers being employed contracts to Li - L3. The impact of the imported labour is a right-ward shift of the supply curve of the local labour as shown in following diagram:

12 Chapter 2. Literature Review

Real Wage SL Labour Supply Curve

shifted right-ward

Si Supply Curve of Imported Labour-'

DL Labour Demand Curve

Employment

Source: derivedfromLok-sang Ho, Pak-wai Liu, Kit-chun Lam, International Labour Migration: The Case of Hong Kong, Hong Kong Institute of Asia-Pacific Studies

Since the local labour supply curve moves right-ward, the wage of local labour will drop to Wi' if the aggregate demand on labour is kept constant at Li. If the demand on aggregate labour increases by L3 (to Li + L3), the real wage will return to original level (W1). The advantage of the quota system is allowing the employers to expand their demand on local labour up to an amount equals to the quota without drastically increasing the wage. The disadvantage is that local workers will be displaced by foreign workers and

13

Chapter 2. Literature Review

their wages will be subjected to downward pressure if the aggregate demand on labour does not expand. The General Labour Importation Scheme Hong Kong's system is very complicated. Hong Kong adopts a quota system for its General Labour Importation Scheme, but at the same time a nominal wage is set. The Hong Kong employers pay the foreign workers the nominal wage and at the same time are subjected to the control of a quota system. The details of

Hong Kong's

General Labour Importation Scheme will be

reviewed in chapter 4.

What Is Unemployment Unemployment means enforced idleness of wage earners who are able and willing to work but cannot find jobs. In other words, it means being deprived of job. Guy Routh pointed out that unemployment was a phenomenon of capitalist society. A slave cannot be unemployed, though he can be idle if he is given no work to do. In ancient times, beggars and the poor were jobless, but they were not unemployed because they were never considered as would-beemployees. They were not job seekers. As capitalism and factory system developed, unemployment appeared. Capitalism created a large labour force who has no land to plant. They must work in factories or offices to earn their living. They are job seekers.

14

Chapter 2. Literature Review

Economists are working hard to find out the causes of unemployment and reduce the unemployment rate. Traditionally they classified unemployment as frictional, seasonal, structural and cyclical. Frictional Unemployment Frictional unemployment arises because the labour market is not a perfect market. There is no perfect information. Consequently it takes time to match job vacancies with would be job holders. In a dynamic economy, changing job is inevitable. The reason is some firms will contract, even close down, while others are expanding and diversifying. In this dynamic process, demands on quantity and quality (skill, knowledge and qualification) of labour change. In the job market, some workers will withdraw, while others will re-enter or first enter. The workers' preference on jobs will also change according to shift in social value, affluence level, and reward system. The change of preference prompt workers to switch jobs. The net result in supply side is workers quit, being laid-ofF, re-enter, or first enter the job market. In demand side some old job vacancies disappear, some new vacancies appear. An obvious phenomenon of frictional unemployment is coexistence of job vacancies and unemployment because supply and demand are not adjusted instantaneously.

The main reason of

delayed adjustment is imperfect

knowledge about the mobility of the job market. Employers take time to match their job opening with the employees' offer, and vice versa. This is whyfrictionalunemployment is also called search unemployment. The search

15

Chapter 2. Literature Review

duration should be short, because job vacancies and the unemployed with suitable skill are all existing in the same market. The frictional unemployment rate can be reduced by reducing the search period by improving the information flow of the job market. Economists see frictional unemployment rate as a function of the number of workers changing jobs, number of new entrants into the job market and average of job search duration. Since the above three factors are affected by the aggregate demands of the job market, we can deduce that frictional unemployment varies with the aggregate demand of the job market. Some economists regard frictional unemployment as the irreducible minimum level of unemployment.

Seasonal Unemployment Seasonal unemployment is identified with seasonal fluctuations in demand and supply of labour. It occurs because of seasonal changes in climate. For example, seasonal climate will affect activities in construction and tourist industries. The influx of school leavers in summer will affect the supply of labour.

The seriousness of seasonal unemployment is dependent on the

degree of variation of climate condition and the ease of workers moving from one job affected by seasonal factors to another job not being affected. Usually, seasonal unemployment imposes no major problem on national economy, but it may seriously affect individual sector of the industry which is heavily dependent on seasonal trade.

16

Chapter 2. Literature Review

Structural Unemployment Structural unemployment is also due to mismatching in supply and demand of labour.

The mismatching in supply and demand of labour of frictional

unemployment is a matter of timing. The mismatching in supply and demand of labour in structural unemployment is more fundamental. Workers being unemployed are not perfect substitutes of workers in demand. Such phenomenon is due to structural changes in pattern of labour demand. These changes can be stimulated by change of consumers' tastes, change of production technique, etc. An example is the

exodus of Hong Kong's

manufacturing industries to Guangdong province of China. In order to access cheap labour, Hong Kong's entrepreneurs move their manufacturing business to China. Such movement leaves behind in Hong Kong a huge population of manufacturing workers. Their skill is no longer needed. While the demand on manufacturing workers subsided, the demand on services, supervisory and white-collar workers soared, because employers need them to support the manufacturing business in China. In summary, demand on one set of skills increases, while demand on other set of skill decreases. Those with redundant skill are unemployed. Can they acquire the new skill or be relocated to other location or industry sector where they are in demand again? The answer to

17

Chapter 2. Literature Review

this

question

distinguishes structural unemploymentfromfrictional

unemployment. In both cases of frictional and structural unemployment, job vacancies coexist with unemployment.

In structural unemployment the

coexistence of vacancies and unemployment is a long term phenomenon while in frictional unemployment it is short term.

This is why structural

unemployment is sometimes viewed as a severe case of frictional unemployment. Some academists even lump the two types of unemployment together. In the perspective of

microeconomics theorists, structural

unemployment is due to inadequacy of labour-using investment. The laboursaving investment is not balance by labour-using investment. For instance, investment in computer technology to automate the manufacturing process will reduce the demand on manual worker. Theoretically the reduction in demand on manual workers should be balanced by the increase in demand on software engineers. However, can so many redundant manual workers be converted to computer professionals? The most horrible aspect of structural unemployment is the creation of a large population of'unemployable labour'. They are unemployable not because they have defects in personality or have physical and mental disabilities. It is because they are not suitable for the new jobs. Their unsuitability cannot be reduced by re-training, hence they cannot find jobs. However, 'unsuitability' is a slippery concept. It changes with the market condition. In slack labour market, any minor mismatching will be perceived as unsuitable. In a tight labour market, employers can tolerate more

18

Chapter 2. Literature Review

severe mismatching. So we must be very careful in determining what is 'unemployable.' A useful way to identify structural unemployment from frictional unemployment is to measure the unemployment rate across different labour groups. A sudden change in the array of unemployment rate across different labour groups is usually an indicator of structural unemployment. (Richard G. Lipsey, Employment Policy and the Labour Market, ed. Arthur M. Ross Berkeley: University of California Press, 1965)

Cyclical Unemployment Cyclical unemployment is also known as Keynesian unemployment. (J.M. Keynes, The General Theory of Employment, Interest and Money, London: Macmillan, 1936). It occurs during recession of business cycles when there is inadequate short-run aggregate demand. When investment or consumption falls off the peak of the business cycle, some workers lose their jobs because there are not the same number of jobs as at the peak of the business cycle. In other words, cyclical unemployment is due to deficiency of overall demand. In classical theory (before Keynes' concept), people believe full employment is natural. There is a tendency to full employment because supply generates its own demand.

Any departure from full employment is a temporary

phenomenon which is due to price, wages, or interest rate not been adjusted quickly enough. It is the flexibility in wages, interest rate and price that

19

Chapter 2. Literature Review

maintains full demand and brings the unemployment rate back to frictional level. From our experience we all know that the above classical theory is at odd with reality. Keynes firstly refuted the existence of automatic adjustment of classical theory. Keynes believed demand (investment) is the most important element. He pointed out that consumption is stable in the short run. However, investment is not. Investment varies according to the changes in the expectation of businessmen. Any fluctuation in investment

affects

employment.

Economic Theories of Unemployment Economists work very hard to study the nature of unemployment. The most important issue is to determine whether unemployment is a choice of workers, or is a result of economic forces beyond the control of firms and workers. Not understanding the nature of unemployment, policy makers have no mean to measure and reduce unemployment. In the past few decades, 3 theories of unemployment evolved. They are the Classical, Keynesian, and New Microeconomics theories.

Classical Theory of Unemployment Classical theory is sometimes referred as neo-classical theory. It rests on Say's law which states that supply creates its own demand to explain the

20

Chapter 2. Literature Review

phenomenon of unemployment. (James J. Hughes and Richard Perlman, The Economics of Unemployment, Wheatsheaf Books, 1984, P.53). It also relies on Walras' general equilibrium mode to explain how price adjustment restores and maintains market equilibrium and returns the labour market back to fiill employment mode. The weakness of this theory is its inability to explain why unemployment over frictional level arises in first place.

Also, Walras'

mechanism to maintain general equilibrium between supply and demand does not allow the existence of market imperfection, for example, imperfect information about the real wage, union or government intervention by setting up minimum wage law, etc. The operation of classical theory can be explained graphically by following diagram.

S l Labour Supply Curve

D l Labour Demand Curve

• L3

21

Li

Employment

L2

Chapter 2. Literature Review

Full employment happens at point E where the labour supply curve intersects with the demand supply curve. At this equilibrium point, the real wage is equal to Wi and the labour being employed is Li. If for whatever reason real wage rises to W2, firms will reduce their demand of labour to L3 where marginal productivity of labour is equal to marginal revenue again because of the effect of diminishing return to scale. In supply side, the reduction in demand of labour creates surplus of labour of the amount L2 - L3 in the labour market. This surplus of labour will trigger off an equilibrium force that applies a downward pressure on real wages. In other words, the surplus labours are willing to accept a real wage less than W2 in order to be employed. When real wage falls below W2, marginal productivity of the labour demand curve will be greater than marginal revenue. Consequently firms will increase their demand on labour along the labour demand curve again. Eventually, the demand of labour will be back to E which is the original equilibrium point again. This adjustment process takes time. Workers need time to realize and accept lower wage. How long will the process take? Will it take a period as long as the great depression in 1920, or few years, or few months? The Walrasian analysis does not answer these questions, but we generally perceive the process is fast enough, otherwise, we should rather believe such self-adjusting mechanism as not existing. Moreover, this mechanism is automatic. No government or union intervention is needed. However, the classical theorists

22

Chapter 2. Literature Review

do accept the existence of long run unemployment if union artificially set a minimum wage level. However, they see such long run unemployment as the result of labour recalcitrance to the force of the economic system, instead of a defect of the economic system. Classical theorists believe any artificial barrier will sooner or later crumble under the brute force of the economic system. How reliable is the classical unemployment theory when it is being subjected to test of the real world? The fact is great depression together with high unemployment as long as 10 years did happen in United States and United Kingdom. The classical unemployment theory cannot explain why these great depressions could last so long!

Keynes Unemployment Theory Keynes denied the existence of automatic restoration to full employment advocated by classical theorists, although he accepted the labour supply and demand curves depicted in the following diagram. (Keynes, 1936)

23

Chapter 2. Literature Review

Real Wage

A

S l Labour Supply Curve

D l Labour Demand Curve

*• L3

Li

Employment

L2

In the above diagram, fixll employment occurs at point E. Wi is the equilibrium real wage. Assume there is reduction in aggregate demand due to decline in planned investment, or weakening of consumption, then less labour is required. If demand of labour falls from Li to L3, real wage will move up the labour demand curve from E to E'. At E' real wage becomes W2 and surplus of labour with quantity equals to L2 - L3 appears. Classical theorists believed the surplus labour would push the real wage down, but Keynes did not agree. Keynes did not believe workers could reduce unemployment by accepting lower wage. He believed unemployment was involuntary because it was totally out of workers' control. He explained that reduction in real wage without increasing demand in the first place, would reduce price. Reduction in price (deflation) would bring the real wage back to its original level at W2.

24

Chapter 2. Literature Review

He saw increase in aggregate

demand as the only way to restore full

employment. Keynes agreed with the classical theorists that initially workers would not accept reduction in wage because of market imperfection. Due to imperfect information, or unions' intervention, or mere human obstinacy, workers do not realize that real wage must be downwardly adjusted in order to intersect with the labour demand curve. Classical theorists call this type of unemployment frictional-voluntary unemployment. However, Keynes defined this type of unemployment as involuntary because workers could not reduce it by accepting lower wages. Situation could not be improved by directly reducing real wage because price would fall with real wage (deflation). Price falls because labour cost which is part of the overall cost falls. In an atmosphere of high unemployment, people will refrain from spending. In order to increase sales, firms reduce price when price of labour (wage) falls. The falling price reduces the profit margin. The reduction in profit margin discourages firms to increase production, because increasing production will move the labour demand to a point where marginal cost will be greater than marginal revenue in the marginal productivity schedule (aggregate labour demand curve). In summary, directly reducing real wage causes deflation. Deflation could not increase demand. Without increasing demand, we could not bring employment back to the original level (Li). Perhaps increase in real value of money (deflation)

due to reduction in price will stimulate

consumption again. However, this process is very slow and painful. In

25

Chapter 2. Literature Review

Keynes' eye, wage policy will not ease the involuntary unemployment predicament. Only expansion in fiscal policy which increases demand will help. Basing on the above theory, Keynes predicts real wage will increase during economic down turn (reduction in demand of labour) because of fall in price. Patinkin expands Keynes' theory. He firstly criticizes Keynes assumption on free movement of the labour demand curve. Keynes' labour demand curve is not subjected to any quantity constraint. It looks like that firms can sell whatever quantity produced. Patinkin believes Keynes' labour demand curve must be modified to reflect constraint in demand of product as depicted in the following diagram. (Don Patinkin, Money, Interest, and Price, New York: Harper and Row, 1965).

Real Wage

A

SL Labour Supply Curve

DL Labour Demand Curve

*• L3

26

Li

Employment

L2

Chapter 2. Literature Review

When demands on goods or products decline, demands on labour will follow. Such situation is represented in the above diagram by shifting the employment from Li to L3. According to Keynes, when demand on labour shrinks from Li to L/3, real wage will rise from Wi to W2 along the labour demand curve. Patinkin criticized such movement had implied that firms could sell whatever quantity they could produce. In fact no more than what produced by L3 could be sold due to decline in demand. There was no upward force to push real wage beyond W3. The labour demand curve virtually moved leftward. The new labour demand curve became DL'E'FL3. SO marginal productivity or real wage at employment level of L3 was undetermined. Real wage could bounce upward or downward between E' and F. This state was unstable, but employment could not be increased. If real wage was equal to W2 , the labour market would be in a dis-equilibrium state because there was excess of labour (E'C). The supply of labour would apply a downward pressure on real wage. If real wage was equal to W3, there would be no surplus of labour because more workers had moved out of the labour market due to low wage. Patinkin contributes to Keynesian theory by freeing real wage from marginal productivity labour demand curve. Having done that, he is more Keynesian than Keynes in upholding the concept that a direct cut in real wage will not improve the employment level. However, he breaks away from Keynesian

27

Chapter 2. Literature Review

theory by stating that real wage is undetermined, and can move freely over a wide range, at reduced output.

Microeconomics Theory of Unemployment Microeconomics theory completely breaks away from Keynesian theory. Microeconomics theorists believe unemployment is due to microeconomics disruption which can be fixed by appropriate microeconomics adjustment. They are strong believers of Walrasian system of general equilibrium equations, but with modification. The modification is targeted at the labour market imperfections which prevent the effective application of automatic self-adjustment of the classical economic theory. To understand the microeconomics theory, we must first understand Friedman's natural rate of unemployment. Friedman defines the natural rate of unemployment as the level of unemployment which cannot be eliminated by conventional Walrasian adjustment because of structural characteristic of the labour and commodity markets, market imperfections, the costs to collect information about job vacancies, the costs of mobility, and so on. (Milton Friedman, 'The role of monetary policy,' American Economic Review, Vol.58, March 1968) However, microeconomics theorists believe any unemployment above natural rate can be eliminated by conventional Walrasian adjustment, i.e., excess supply of labour will push the real wage downward. Reduction in real wage will bring unemployment back to its natural level. In other words, real wage

28

Chapter 2. Literature Review

moves with the unemployment in a direction to bring the unemployment back to the natural level. The movement of real wage is the basis of adjustment for a temporary disequilibrium. The weakness of this theory is over-simplification of the role of wage. It treats wage just as one of the prices in the Walrasian system. Keynes perceives any change of wage will stimulate wide range of repercussion. Fluctuation of wage will affect other prices in the system. Both classical and microeconomics theorists see reduction in real wage as a mean to bring unemployment back to the frictional level. Microeconomics theory is more advanced because it adds 'job searching' as a blockage for downward adjustment of wage. Microeconomics theorists treat 'job searching' as a utility maximizing activity which has a cost tag. The cost is due to loss of working hours to look for a better job. This cost is an investment for the future. It keeps the unemployment rate at a level above the frictional level. Classical theory sees no barrier for the workers to accept lower wage. Microeconomics theorists see a barrier created by imperfect information, workers' obstinacy, and utility-maximizing search. Because of the utility-maximizing search, unemployment may last for a period of time before workers realize that they can only find a job at lower real wage. Critics argued that 'job searching' of microeconomics theory is usually done by those employed. They are searching for a better job. Unemployed have no choice but to accept whatever job available. So 'job searching' should not affect the unemployment rate. Microeconomics theorists defend that as long

29

Chapter 2. Literature Review

as workers trade employment for opportunities, their theory holds. Critics further argue that 'job searching' is a cost so it should reward the "job searcher' with a better paying job. We know that this is not always so. The microeconomics theory of unemployment is demonstrated graphically in the following diagram:

Real Wage SL Labour Supply Curve

DL Labour Demand 'Curve

Employment

Li' Drop out immediately

Due to whatever reason, production contracts and consequently the demand on labour is gradually reduced from Li to L3. The reduction takes time and

30

Chapter 2. Literature Review

goes through some intermediate steps as shown in the above diagram. The real wage drops from Wi to W3' first. At that moment, L3 workers immediately accept the reduced real wage (W3) and keep their jobs. Li' number of workers cannot accept the reduction in real wage and drop out of the labour market immediately. However, L3' numbers of workers have not yet realized that the real wage has been reduced to W3'. They know that real wage is reduced, but they think that it is only reduced to the level of W i \ They keep searching for jobs with real wage of Wi'. When they are aware of what happened, some of them will drop out of the labour market while some will accept the reduced wage of W3'. Those late comers who accept the real wage at W3' further drive the wage down and repeat the whole process until real wage settles at W3 which lies on the labour supply curve again. In summary, in the eyes of microeconomics theorists unemployment above natural rate is due to workers' recalcitrant to accept a lower wage along the labour supply curve. To reduce unemployment, the government should help to convey the information of the labour market to the workers. When workers accept the reduced wage, the automatic supply and demand adjustment of classical economic theory will kick in, i.e., reduce labour cost will increase production which eventually brings the employment back to original level. Again, microeconomics theorist cannot explain the prolonged depression happened at United States and United Kingdom in 1920s. Nowadays, academists usually apply Keynes' theory to

31

heavy and persistent

Chapter 2. Literature Review

unemployment while reserving microeconomics theory for relatively milder unemployment situation.

32

Chapter 2. Literature Review

Chapter 3. Methodology Objective The objective of this study is to answer the following question : Will stopping importation of labour reduce the unemployment rate in the Hong Kong hotel industry ?

Constructs The above question involves two constructs, i.e.: - stopping importation of labour - reduce the unemployment rate in Hong Kong hotel industry In order to fulfill our objective, we have to find out the relationship between the above two constructs. Our approach is to qualify and quantify the 'imported labour' and 'unemployment rate of the Hong Kong hotel industry' first. We focus on following attributes and variables :

Variables and Attributes of Imported Labour - Details of the labour importation scheme : . When did the scheme start and stop . The mechanism to protect the local labour - The number of imported labours in the hotel industry

33

Chapter 3. Methodology

- How did the imported labour affect the hotel industry - The reason for the hotel operators to import labours

Variables and Attributes of Unemployment Rate - The history of unemployment rate - The nature of unemployment of the hotel industry - The unemployment rate of the hotel industry - The relationship between unemployment rate and real wage - The relationship between unemployment rate and demand on hotel rooms

Methods to Measure the Variables We rely on following information and data to quantify and qualify the above attributes and variables: - Publications of Legislative Council and Education and Manpower Board - The Governor's Policy Address in 1995 - Publication of Hong Kong Tourist Association and Census and Statistics Department - The survey result from the 'Hotel and Restaurant Labours Union' We also interviewed the vice chairman of the 'Hotel and Restaurant Labours Union' and the chairman of the "Employee Retraining Board' to seek their opinion on the question.

We haven't personally interviewed the

representatives of the employers. We discovered that Frank M. Go (Head of

34

Chapter 3. Methodology

the Department of Hotel and Tourism and Management of Hong Kong Polytechnic University) in 1995 has interviewed the senior executives of 5 large hotel chains based in Hong Kong.

The details of the interview is

recorded in his book, namely, Globalization Strategy in the Hotel Industry, Routledge, 1995. We used the results of his interview to help qualifying our constructs. Analysis Having collected the data and figures about the 'imported labour' and the 'unemployment rate in the hotel industry', we then tried to establish the relationship between them by mapping the data to : - the model of imported labour developed by Lok-sang Ho, Pak-wai Liu, and Kit-chun Lam in their paper, namely, International Labour Migration : The case of Hong Kong, Hong Kong Institute of Asia-Pacific Studies, September 1991, and - the classical theory, microeconomics theory and Keynes theory of unemployment When we tried to evaluate hotel operators' reasons for importing foreign labour, we discovered such evaluation involves the subjective preference and internal value systems of the hotel operators, which cannot be measured by hard statistical data. So we send questionnaires to human resources departments of the large hotels to find out the employers' view on the subject.

35

Chapter 3. Methodology

Design of the Questionnaire The questionnaire is shown below :

Please fill in the blanks or tick the appropriate : 1. What types of imported labour are mostly needed ? - Operative - Craftsman - Supervisory and Technical - Clerical - Secretarial - Managerial and Professional; - Any other: 2. Is the nominal wage set by government appropriate ? - Should be higher - Should be lower - It is appropriate now 3. Is the cost of imported labour lower than the cost of local labour ? If not, then why do you employ imported labour ? 4. What is the reason that these labours cannot be hired locally ? (Why local applicants are rejected ?) It is because of : -Age - Skill (please specify: - Attitude - Any other reasons 5. Do you believe you can hire these labour locally by: - Waiting longer (advertise longer) - Raising the wage (significantly or slightly) - Don't know - Lower the requirement slightly 6. How many imported labours are there in your organization ? 7. How many employees are there in your organization ? Thank you for answering the above questions.

36

Chapter 3. Methodology

The objective of the questionnaire is to check whether the hotel operators import labours because their wage is cheaper than the wage of the local workers. In other word, can the labours be employed locally by adjusting the wage slightly upward. There are 75 class A, B and C hotels in Hong Kong. We did get the reply from 12 hotels (16%). The results of the survey are shown in chapter 5. Detailedfinding,analysis and conclusion of our study are shown in the next few chapters.

37

Chapter 3. Methodology

Chapter 4. Finding: General Labour Importation Scheme Summary This chapter reviews the General Labour Importation Scheme. This scheme does not cover the importation of labour for the new airport project. • General Labour Importation Scheme in 1989 & 1990 In 1989, Hong Kong Government started a scheme to import 2,718 foreign workers to relieve the labour shortage problem. In 1990, a quota to import 12,700 more workers was approved. • Expansion of the Scheme in 1992 In 1992, the government decided to continue with the General Labour Importation Scheme, but with a ceiling. At no time the total number of imported labour should exceed 25,000. • Impact of the Scheme as at 1992 The government surveyed 290 firms for their opinion on imported labour in 1990. Most of the firms (>70%) believed the imported workers increased the productivity of their organization. However, local workers and unionists were suspicions about the objective of the government. • Protection of the Local and Imported Labour The government denied there was a hidden agenda to suppress the wage in favour of the employers. .Employers were stipulated to pay the imported workers a nominal market wage published by the labour department. Moreover, there was a quota system to limit the number of imported workers. In order to prevent employers from using a bogus contract to cheat, employers must pay the imported workers through bank account. • Implication of the Expansion of the Scheme in 1992 The government's decision to continue with the General Labour Importation scheme indicated there was a strong believing among the policy makers that the labour shortage problem would not be eased in the next few years.

38

Chapter 4. Finding: General Labour Importation Scheme

Summary • Turning Point in 1995 Unemployment rate rose from 2.0% in 1992 to 3.6% in 1995. 3.6% is the historic peak in last 10 years. The Governor announced there was a very strong case for significant changes in the General Labour Importation Scheme in his policy address on October 11, 1995. • Ending the General Labour Importation Scheme The government then proposed a new scheme, e.g., reducing the quota to 5,000 and employers had to prove the required workers could not be hired locally before applying visa for the foreign worker. • Situation in Third Quarter of 1995 In the 3rd quarter of 1995, there were 15,344 foreign workers imported under the General Labour Importation Scheme. That means the utilization of the scheme is 61%. At that time there were 90,600 unemployed and 52,000 vacancies. • Supplementary Labour Importation Scheme In the end of 1995, the Education and Manpower Branch announced the details of a Supplementary Labour Importation Scheme which should replace the General Labour Importation Scheme according to the Governor's Policy Address in October. In week of January 7, 1996, Legislative Council approved the Supplementary Labour Importation Scheme, but with a modification, e.g., the quota was reduced to 2,500 instead of 5,000. • Argument on the Labour Importation Scheme The business leaders accused the government of making a secret deal with the unionists. They suspected in ending the General Labour Importation Scheme, the Government lured the unionists to give up their private bill which calls for a complete end to all importation of labour, including those for the new airport project. Economists feared the absence of cheap labour might lead more employers to move their business to China, hence lost of more jobs. Hotels cannot be moved. What will happen to the hotel industry?

39

Chapter 4. Finding: General Labour Importation Scheme

Chapter 4. Finding: General Labour Importation Scheme

General Labour Importation Scheme in 1989 & 1990 Hong Kong Government started a General Labour Importation Scheme in 1989. This scheme does not cover the importation of labour for the new airport project. Importation of labour for the new airport project is covered by the Special Scheme For the Airport Core Project which will not be discussed here. The details of the General Labour Importation Scheme are as follows: • In May 1989, a quota to import 2,718 labours, including skilled workers, technicians, and supervisors, was set. • In May 1990: - A quota to import 2,700 labours, including skilled workers, technicians, and supervisors, was set - A quota to import certain amount of experienced operators every year was set. This quota will be reviewed yearly. The quota of first year (1990) was 10,000.

40

Chapter 4. Finding: General Labour Importation Scheme

Expansion of the Scheme in 1992 In January 1992, Legislative Council approved Executive Council's proposal to continue with the General Labour Importation Scheme, but with a ceiling, i.e. total number of imported labour under this scheme at any time should not exceed 25,000, including the 13,800 workers who were imported at 1989 and 1990 and were still staying in Hong Kong.

Reason to Expand the Scheme in 1992 In January of 1992, the Secretary for Education and Manpower said that the main reason to continue with the General Labour Importation Scheme was shortage of labour. From 1989 to 1992, the aggregate demand on labour was greater than the aggregate supply of labour. The root cause of this phenomenon was slow growth of supply of labour coupled and rapid growth of the economy. The structure of the economy was also changing rapidly. The continuation of importing labour would ease the bottle neck in labour supply of certain sectors of the Hong Kong industry. It should give the economy greater flexibility for growth, and at the same time relieve the upward pressure in wage. Easing the upward pressure on wage should suppress the inflation which should be beneficial to both the employers and employees. The utilization of the labour importation quota allocated in 1989 and 1990 are shown in table 1 and table 2 in the next 2 pages.

41

Chapter 4. Finding: General Labour Importation Scheme

Industry

Machine Shop Construction Wholesale & Retail Electronic & Electrical Printing Hotel, Catering & Tourism Jewelry automobile Clothing Banking Textile Furniture Plastics Transport Shipbuilding Insurance Footwear Others Total

Total Quota Allocated

Visa Application Approved 304 795 24

Quota Utilization

552 991 46

Visa Application Received 310 810 26

316

210

186

58.86%

79 248

52 264

47 250

59.49% 100.81%

51 235 58 0 13 17 37 26 3 0 2 44 2718

6 151 55 0 11 15 15 33 24 3 0 0 34 2004

6 148 53 0 11 15 32 22 3 0 0 28 1924

11.76% 62.98% 91.38% N.A. 84.62% 88.24% 86.49% 84.62% 100.00% N.A. 0.00% 63.64% 70.79%

55.07% 80.22% 52.17%

Source: Legislative Council Reference Document, File: EMB CR 7/3051/87 Pt.20(92)

42

Chapter 4. Finding: General Labour Importation Scheme

Table 2. 1990 Labour Importation Scheme Quota Utilization Industry

Total Quota Allocated

Machine Shop Construction Wholesale & Retail Electronic & Electrical Printing Hotel, Catering & Tourism Jewelry automobile Clothing Banking Textile Furniture Plastics Transport Shipbuilding Insurance Footwear Others Fishing Total

Visa Application Approved 663 1993 1230

Quota Utilization

684 2079 1222

Visa Application Received 672 2103 1299

576

610

568

98.6%

179 2452

188 2463

170 2402

94.97% 97.96%

49 122 2455 1 476 84 287 260 168 0 13 1128 465 12700

49 120 2476 1 473 88 282 260 162 0 13 1174 237 12670

48 117 2408 1 436 83 275 251 159 0 13 1100 225 12138

97.95% 95.90% 98.08% 100% 91.59% 98.80% 95.81% 96.53% 94.64% N.A. 100% 97.51% 48% 95.57%

96.92% 95.86% 100.65%

Source: Legislative Council Reference Document,file:EMB CR 7/3051/87 Pt. 20(92)

Obviously, the utilization of 1990 quota is much higher than the 1989 quota. This may be due to actuation of labour shortage after 1989, thus foreign labours were welcome. Some people see bureaucracy as a reason for the unused quota in 1989. Because in 1989 employers had to argue with Labour Department the value of the nominal wage which they had to pay the

43

Chapter 4. Finding: General Labour Importation Scheme

imported labours. This argument usually lasted for a long time. From 1990 onward, the Government published the nominal wage and there was no more time wasting argument. Anyway, the increase in quota utilization in 1990 indicated the General Labour Importation Scheme was well accepted by employers. Impact of the Scheme as at 1992 What are the impacts of this sudden influx of labour to the industry and labour market? In order to find out the impact to the industry, in 1990 the Government surveyed 290 firms which had imported labours according to the 1989 labour importation scheme. The survey result showed that 95% of the firms believed imported labours were helpful and Hong Kong should continue the labour importation scheme. The detailed survey result is as follows: Percentage of firms agreed with following Production volume Production cost Productivity

Increase

No Change

77% 15% 73%

20% 80% 23%

Decrease

3% 4% 1%

Don't Know

3

Source: Legislative Council Reference, file EMB CR 7/3051/87 Pt. 20(92)

Above results show that import labours are welcome by the employers. It also means that the benefit in employing imported labour is greater than the additional cost incurred, for example, manpower to process the application, waiting time, training, etc.

44

Chapter 4. Finding: General Labour Importation Scheme

The foreign workers are obviously not welcome by the local workers. The most concerned issue of unionists is not increase in productivity or production capacity. They are mostly concerned about whether the imported labour would deprive the rights of the local workers.

Although one of

the

Government's objectives to import labour is to relieve the upward pressure on wage, the Government has publicly denied any attempt to turn the import labour into a subject of exploitation at the expense of local workers.

Protection for the Local and Imported Labours In order to protect the local and imported labours, the Government has implemented a series of

controlling measures in the General Labour

Importation Scheme, for example: • Wage In the 1989 scheme, employer had to pay the market wage. However, this proposal was very difficult to exercise because employers and Labour Department would engage in a dispute on the value of the market wage. The dispute eventually slows down the whole process. In the 1990 scheme, Labour Department published a minimum wage list which was complied according to the nominal wage of every occupation for employers' reference. Employer should pay the nominal wage less a levy of HK$400 to the imported labours. • Levy

45

Chapter 4. Finding: General Labour Importation Scheme

The Government recognizes the Hong Kong economy is undergoing a structural change. Some workers who are affected by this structural change should be retrained so that they can change their occupation. In the long run, the vacancies filled up by imported labour should be given to local workers who were made redundant by the structural changes.

The

employers who get benefit from imported labour have a responsibility to help retraining the local workers. Hence, employers are levied HK$ 400 monthly for every worker they imported. These levy formed a fund which is used by the Vocational Training Center to retrain the local workers. Prevention of Abuse In order to prevent some despicable employers from secretly paying lower than market wage, the Government has stipulated that all wages must be transferred through bank accounts. The boarding fee deducted from wage should never be more than 10% of the total wage. Any employers found abusing the General Labour Importation Scheme will have their quota for imported labour canceled and the right to apply for quota in the future deprived. The Government also allow those imported labours who have their contract prematurely terminated,

if

they complain about their

employers of abuse of the labour importation scheme, to stay in Hong Kong for two months to look for a new employment.

46

Chapter 4. Finding: General Labour Importation Scheme

Implication of the Expansion of the Scheme in 1992 Legislative Council's decision in January 1992 to continue with the General Labour Importation Scheme was a step forward to further open up Hong Kong's labour market. At least the legislators believed Hong Kong was continuously in short supply of labour in certain sectors due to structural change of the economy, and this shortage of labour would continue in years to come. Since shortage of labour only occurs in certain sectors, the quota must be allocated to the sectors in short supply only. The Government set the quota by reviewing the employment vacancy profile, and consulting the Labour Advisory Board. The Government at the same time also announced a plan to increase resource in the employees retraining programs in order to solve the structural unemployment in the long run. In summary, Hong Kong Government started the Labour Importation Scheme in 1989 with a quota of 2,718. In 1990 the quota was enlarged to 12,700. In 1992, the Government determined to continue with this scheme with a quota of 25,000. In order to protect the local workers and prevent the imported labours from falling victim of exploitation, the Government stipulated employers to pay a nominal wage which was determined by the Government. The quota for imported labour was carefully allocated to the industry sectors which continuously had very high vacancy rate. At the same time, more resources were injected into the employee retraining program to help the unemployed local workers.

47

Chapter 4. Finding: General Labour Importation Scheme

Turning Point in 1995 Despite the above mentioned measures to protect the local workers, unemployment rate rose from 2.0% in 1992 to 3.6% in the third quarter of 1995. An unemployment of 3.6% is the historic peak in the past 10 years. In his policy address on October 11, 1995, the Governor admitted that concerned departments of the Government had brought together business and labour leaders to identify what laid behind the sudden rise in unemployment. The Government then identified the two most pressing concerns. They were: • More foreign workers were taking up jobs illegally, thus reducing the work available for local workers. A vigorous campaign against illegal employment had to be launched. • The employee retraining programs had to be further strengthened to give workers more marketable skills. Despite admitting the seriousness of foreign workers taking up jobs legally, the Governor still affirmed the contribution of the General Labour Importation Scheme. He drew the following conclusion: • The General Labour Importation Scheme helped the industry to overcome bottlenecks in key, high-growth sectors or shortages of specific skills.

4g

Chapter 4. Finding: General Labour Importation Scheme

• There is a need to retain the policy options which allow Hong Kong to respond rapidly to sudden rises in the demand for particular types of worker in our open and highlyflexibleeconomy. • There is a very strong case for significant changes in the existing General Scheme, both in its operation and its quota sizes.

Ending the General Labour Importation Scheme The Governor then announced a proposal to bring the General Labour Import Scheme to an end. It would be replaced by a new Supplementary Labour Scheme to start on January 1, 1996. The quota ceiling will be 5,000 instead of 25,000 of the General Labour Importation Scheme. Moreover, employers have to prove that local workers are not available before their application for importing labour be processed. They have to first advertise their vacancies for a specific period of time. They are also required to register their vacancies with the Labour Department and participate in a job-matching scheme, which also involves the Employees Retraining Board, for at least two moths. Undoubtedly the unemployment rate by the end of 1995 has reached an unacceptable level. What was the root cause of this phenomenon? Unionists pointed their fingers to the foreign workers.

49

Chapter 4. Finding: General Labour Importation Scheme

Post

People Post

People

Sales Assistant

2119

Food Processing Worker

102

Waiter/Waitress Security Guard

1866 810

HairStylist Hair Stylist Computer/Key Punch Operator

98 96

Junior Cook Care Home Attendant

656 637

Presser Room Attendant

94 93

General Sewing Machine Operator 513

Bookkeeping / Accounting Clerk

91

General Office Clerk

412

Aircraft Maintenance Tradesman 80

Teller Computer Paging Operator

385 378

Press Operator Mechanical Technician

75 74

Warehouseman Stock/Purchasing Clerk

340 333

Vehicle Mechanic Electric Arc & Gas Welder

70 70

Hand Stitcher

187

Semi-skilled Machine Operator

69

Tally Clerk/Cashier Machine Operator/Attendant

170 154

Welder Merchandiser

64 64

Washer and Presser Overhead Linesman Machinist

148 117 115

Assembler Qualify Inspector Electronics Technician

63 63 62

Others Total

3848 15344

111 111 Receptionist 111 Fork Lift Truck Driver Source: Education and Manpower Branch

50

Chapter 4. Finding: General Labour Importation Scheme

Situation in Third Quarter of 1995 In September 1995, there are 15,344 foreign workers under the General Labour Importation Scheme in Hong Kong. Details are shown in the table in the previous page. The quota ceiling was 25,000. That means only 61% of the quota is used. Also, the seasonally adjusted unemployment rate has risen from 2.0% in late 1994 to 3.5 % in the third quarter of 1995. The Education and Manpower Branch surveyed the labour market and found that in the second quarter of 1995 there were 90,600 unemployed workers and 52,000 vacancies. Such situation reflects a high degree of mismatch in the labour market. It is also an indicator of structural unemployment. The break down of vacancies by skill and sector is shown in the following charts. Vacancies By Skill Level 3773 (7.3%) Craftsman ~

11948 (23.1 %) Clerical & Secretarial

16235 (31.4%) Operative

8475 (16.4%) Supervisoiv & Technical

7585 (14.7%) UnsWIIed

3675 (7.1 %) Managerial & Professfona;

Source: Education and Manpower Branch

5J

Chapter 4. Finding: General Labour Importation Scheme

Vacancies By Industry Sector 5922 (115^ Wholesale & Retail

3450 (6.7% Construction (M arud Workers Oriy) 129 (0.2^ Bectricity, Gas & Water

9649 {18.7*9 Swport / Export 7637(14.8^ Manufacturing

3 (0.0*) Mining & Quarrying 4489 (8.7^ Restaurants & Hotels 8030 (15.999 Community, Socisi & Personal Services

3218 {6.2*9 Transport, Storage; & Communication 9•65(17.7'^ Financing, insurance. Red Estate & Business

| Total: 516911

Source: Education and Manpower Branch

Matching above vacancies with unemployed people yields the following diagrams. Surplus / Shortfall Of Vacancies By lndustryr£oata*ha% at 2 Q 1 9 9 5 -15

10

-10

Manufacturing Construction sites

-3583

VWiole sales & Retail

-3776

X

'-Jj 3 3 6 3

Import / Export -5566

Transport, storage, & C o m m u n i c a t e Finance, Insurance..

Wm

Community, Social, & Personal Servi

671

Hotel. Boarding Hse & Restaurants

3789

•T'J"1' " 111 111 Shortfall of vacancies

$034

Source: Education and Manpower Branch

The above diagram indicates that: • There is a shortfall of vacancies in the following industries: - manufacturing

52

Chapter 4. Finding: General Labour Importation Scheme

- restaurants and hotels - transport, storage, and communication - whole sales and retailing - construction There is surplus of vacancies (cannot find the employees) in following industries: - import and export -financing,insurance, real estate and business services

Surplus/Shortfall of Vacancies By Occupation as at 2Q1995

Thousands I

"

Mgr & Administrators Professional "" Associate profession

I -3305 |

; I

Shortfall of vacancies :

I 3054

Clerks

-2214 I

Services & Shop Sales Workers Craft & Related Wbrtens

1 1535

-7021 L.„.. -10312

Operators (plant & Machine) Elementary

-7156 1 -7954

;;

Source: Education and Manpowr Branch

Above diagram indicates that: • There is a short fall of vacancies at the following job levels: - managers and administrators - clerks

53

Chapter 4. Finding: General Labour Importation Scheme

- service workers and shop sales workers - craft and related workers - plant and machine operator and assemblers - elementary occupations • There is a surplus of vacancies at following job levels: - professionals - associated professionals Above data cannot pinpoint exactly what specific job post is in surplus or shortage. It only demonstrates that employers are still not able to find qualified employees for some jobs, despite the high unemployment rate. It is because of this fact, the Government insisted on maintaining flexibility in importing labour even though the General Labour Importation was put to an end. That is why a Supplementary Labour Scheme is implemented. Supplementary Labour Scheme The Education and Manpower Branch in the end of 1995 proposed to replace the General Labour Importation Scheme by a Supplementary Labour Scheme starting from January 1, 1996. The objective of this Supplementary Labour Scheme is to allow limited number of foreign workers to take up jobs that cannot befilledlocally. The quota size is set at 5,000. There will not be subquota allocated by industry. Employers who want to import foreign labour under this scheme must go through a series of procedures to prove the job

54

Chapter 4. Finding: General Labour Importation Scheme

vacancy cannot befilledby local workers. The application procedures for the employers are: - Advertise the vacancies for 2 weeks - Submit a preliminary application to Labour Department after 4 weeks of proven unsuccessful recruitment - Labour Department to screen out frivolous applications, e.g. those with unreasonable low wage and education and skill requirement - Publicize the screened-in applications again. The application will be put into the Job Matching Program for two months - When the job matching result is known, Labour Department will assess whether the application is justified. If the answer is positive, Labour Department will make a recommendation to the Secretary for Education and Manpower branch. - Upon approval, the employer can apply to Immigration Department for working Visa. Imported labours are allowed to have an employment contract no longer than 24 months. Labour Advisory Board will monitor the operation of this scheme. Quarterly reports will be submitted to relevant Panels of the Legislative Council. The General Labour Importation Scheme will be put to an end and be allowed to run down naturally. Workers imported under the General Labour Importation Scheme will leave Hong Kong when their contracts expire. The estimated run-down schedule is shown in the following chart:

55

Chapter 4. Finding: General Labour Importation Scheme

[Estimated Run-Down Schedule 25

20

£ 15 c

H Nunrtoer of People

3

O 10

APR95 SEP95

JUN96

FEB97 APR97

JUN97

Source: Education and Manpower Branch

Argument on the Labour Importation Scheme In the week of Januaiy 7, 1996, Legislative Council officially approved the Supplementary Labour Importation Scheme, but the quota was reduced to 2,500 instead of 5,000 as proposed by Education and Manpower branch in October 1995. The new Supplementary Labour Importatiqn Scheme includes a six-week review by the Labour Advisory Board after the 2,000 working visas have been issued. The arrangement of the six-week review set a truce between the business and labour leaders.

James Tien, a Liberal Party

legislator and the vice-chairman of the General Chamber of Commerce, said his party would support the scheme only if the Government would increase the quota in accordance with manpower shortage.

56

Lee Cheuk-yan, a

Chapter 4. Finding: General Labour Importation Scheme

legislator and the chief executive of the Confederation of Trade Unions, threatened to work to scrap the plan if the quota goes beyond 2,000 after the review. The business leaders accused the Government of making secret deals with the unionists because both the Government and the unionists are the winners in the above case. The unionists achieved their primary goal, i.e., bringing the General Labour Importation Scheme to an end. The Governor avoided exercising his power to veto a private member's bill. The unionist had threatened to put forward a private member's bill to stop all Labour Importation Schemes, including the Airport Labour Importation Scheme which had a quota of 17,000. The last thing the Governor wanted to do was exercising his veto power to veto a bill, because so doing he would also crush the very democratic institution for which he often claims credit. By giving up the General Labour Importation, the Government lured the Unionists to give up their private member's bill. Eastern Express on newspaper on January 15 reported that Francis Lui, the director of the Center for Economic Development, and two other economists at the Hong Kong University of Science and Technology saw the Labour Importation Schemes only created minimal effect on Unemployment. Lui argued that without the Labour Importation Scheme, high overheads and the lack of suitable or cheap labour might lead businesses to relocate to China, resulting in the loss of jobs in Hong Kong.

57

Chapter 4. Finding: General Labour Importation Scheme

However, hotels cannot be relocated. Will stopping importation of labour reduce the unemployment rate of the hotel industry?

5g

"

Chapter 4. Finding: General Labour Importation Scheme

Chapter 5. Finding : Hong Kong Hotel Industry Summary This chapter discusses the importance of the hotel industry to the economy of Hong Kong, and explores how serious is the problem of shortage of labour in the hotel industry. The Importance Of Tourism To Hong Kong Tourism is a very important source of income for the Hong Kong economy. It constituted 5% of the GDP in 1995. On average, tourists spend 30% of their expense in hotel. Can The Hotel Industry Grow Fast Enough Hong Kong needs a healthy hotel industry to accommodate the increasing number of visitors. Otherwise, Hong Kong will lose its competitiveness as the commercial hub in Pacific Rim. Since 1992, the number of visitors has been increasing at a rate of 8% yearly. Unfortunately, the number of hotel rooms ceases to increase starting from 1993. The Priority Issues Of Hong Kong Hotel Industry The senior executives of some large hotels pointed out that the priority issues of the hotel industry are to maintain reasonable profit and find appropriate staff to run the operation. What Determines The Room Rate and Occupancy Rate We find that the Hong Kong hotel market is a buyers' market. The price (room rate) is a demand follower. The hotel operator must keep the price (room rate) at the average level of the hotels in the whole region to be competitive, while at the same time control the cost to be profitable. The Cost Structure of Hong Kong Hotel Industry Labour cost is the largest single expense of the Hong Kong hotel industry, unfortunately it is increasing. The Run-away Labour Cost Before 1991, the labour cost is less than the non-labour cost. However, starting from 1991, the labour cost became larger than the non-labour cost. The labour cost is becoming uncontrollable.

59

Chapter 5. Finding: Hong Kong Hotel Industry

Summary Hotel Industry's Motive to Import Labour According to economic theory, high cost is due to short supply. We surveyed many hotels by questionnaire to investigate the hotel operators' motive for importing foreign labours. We found that the hotel operators imported labour because of shortage of labour supply. They all denied that the wage of the foreign labour is lower than the wage of local labour. Expatriate Managers In the Hong Kong Hotel Industry Our survey also found that most of the foreign workers were operative staff and managerial staff. Most multi-national hotels employed expatriate managers from their home countries long before the Hong Kong government implemented the General Labour Importation Scheme, and they are in small amount in comparison with the operative staff. We believe the expatriate managers do not affect the unemployment rate. The Categories of Staff Mostly Needed The statistical data from the Vocational Training Board confirmed that the mostly needed category of labour was operative staff. The Benefit In Importing Labour Despite all hotel operators said that they were not paying below market wage to employ imported labour, they did enjoy some extra benefits, for example, they evaded the retirement benefit, they could forecast and control the cost more easily, they have plenty of choice, and the imported labour were very stable. Will these benefits motivate the hotel operators to give priority to imported labour? We shall derive the answer in the next chapter.

60

Chapter 5. Finding: Hong Kong Hotel Industry

Chapter 5. Finding: Hong Kong Hotel Industry The Importance of Tourism to Hong Kong Economy Tourism is the second most important foreign currency earner of Hong Kong. In 1995, the revenue of tourism is HK$ 72,939 million which constitutes 9.5% of the GDP. The total revenue of tourism and its relation with the GDP from 1985 to 1995 is depicted in the following diagram.

Total Recipt Of Toruism 80

10

7.1

60

7 2

7.2 —Q—

46.7 37.5

40

39

40

90

91

33.5 26 20

18

15

85

86 •

87

88

Total Receipt of Tourism (hK$ ,000 million)

92

93

94

95

As a % of GDP

Source: Hong Kong Tourist Association and Census & Statistics Department

From above diagram, we can see that the total yearly receipt of tourism increased almost 5 fold in ten years. Its proportion in terms of percentage of the GDP also increases from 5.6% in 1985 to 9.5% in 1995. These figures reflect that tourism is still a very important contributor of the Hong Kong

61

Chapter 5. Finding: Hong Kong Hotel Industry

economy, despite the significant growth in domestic export and re-export trades. The growth in tourism receipt is a result of increasing numbers of visitors. The number of visitors visiting Hong Kong yearly is shown in the following diagram. Visitors Arrive Hong Kbng By Nationality

•

China

E3 T a i w a n •

Japan

52 S E A s i a E3 "W Europe

85

86

87

88

89

90

91

92

93

94

0

USA/Canada

0

AUS/NZ

•

Others

95

Source; Census & Statistics Department

From the above diagram, we can see that the number of visitors surged from 6 million in 1991 to 8 million in 1992, then remained at a level above 8 million up to 1995. This increase in number of visitors is mainly fueled by the travelers from China and Taiwan.

62

Chapter 5. Finding: Hong Kong Hotel Industry

On average, Hong Kong's visitors spent about 30% of their expenses on hotels. North American and West European tourists tend to spend more on accommodation while tourists from South-East Asia, Japan, and Taiwan only spend 25% of their expenses on hotel accommodation. Following is Hong Kong Tourist Association's statistical review of tourism in Hong Kong in 1992 : Visitor Spending Pattern (per cent) 1992

Origin

Meals Shopping Hotel bills Outside hotels

Tours Other

SEAsia

55.2

24.1

12.5

2.2

6.1

Japan

57.4

25.3

9.6

2.5

5.2

USA/Canada

38.3

41.6

10.8

2.2

7.1

Western Europe

38.7

39.2

12.2

2.7

7.2

Aus/NZ

44.3

35.9

10.7

3.1

6.0

Taiwan

65.3

17.5

10.1

1.5

5.6

Other

48.7

30.8

11.4

2.0

7.1

Source: Hong Kong Tourist Association

Hotel expense is the visitors' biggest expense second to shopping. Hong Kong needs a healthy hotel industry to accommodate the increasing number of visitors, and more importantly, to support the tourist industry.

Can The Hotel Industry Grow Fast Enough Hong Kong's competitiveness as a tourist destination concerns its ability to promote or impede hotels and related travel industry business, by shaping the

63

Chapter 5. Finding: Hong Kong Hotel Industry

appropriate context in which corporations can compete. (Frank M. Go, Head and Professor of the Department of Hotel and Tourism Management at Hong Kong Polytechnic University, 1995). Can Hong Kong promote its hotel industry to sustain its competitiveness as a hub of the South East Asia? Can Hong Kong's hotel industry grow fast enough to cope "with the increasing number of visitors, and the changing tourist profile (now there are large proportion of visitors from China and Taiwan, who need grade B and grade C hotels) ? Following diagram depicts the growth of Hong Kong hotel industry.

64

Chapter 5. Finding: Hong Kong Hotel Industry

Hotel Supply

100

40

32542 30478 30

31256

31393

80

27613, 60