1. The Widening Income Dispersion in Hong Kong: 1986 – 2006 LUI Hon-Kwong Dept of Marketing & International Business Lingnan University (March 14, 2008)

2. Economic Background “The Death of Hong Kong”, Fortune, June 29, 1995 Before the handover, Hong Kong recorded significant economic growth The collapse of the Thai Baht on July 2, 1997, marked the beginning of the Asian Financial Crisis Since 1998 Q3, Hong Kong experienced six consecutive years of deflation Thanks to the help of the Chinese Mainland, Hong Kong bottoming out from recession in 2003. “Oops! Hong Kong is Hardly Dead”, Fortune, June 28, 2007

3. Table 1 Main Employment Income and GDP Per Capita 19861991199620012006 Median Income2,5735,1709,50010,000 GDP (HKD Billion)319.2690.31,229.51,298.81,472.3 GDP per capita57,784120,015191,047193,440214,710 GDP Deflator (2000=100) 49.477.2106.398.284.9 Population (Million)5.405.526.226.716.86 Note: All figures are expressed in Hong Kong Dollars at current market prices. It should be noted that monthly main employment income does not include new year bonus and double pay. Sources: Census & Statistics Department (1997; 2007a; 2007b).

4. Economic Background (cont’d) Before the expansion of tertiary education in the early 1990s, tertiary education was largely restricted to elites A large supply of low-skilled workers fitted well with the demand in the 1980s The rapid economic restructuring required better educated workers Strong government commitment in education was well supported by changing environment Would sectoral shifts increase inequality?

5. Educational Attainment19861991199620012006 Degree5.37.413.316.820.7 Post-secondary5.76.76.24.99.4 Matriculation4.95.76.710.66.3 Upper Secondary26.830.632.530.630.9 Lower Secondary20.021.120.419.819.0 Primary29.222.918.115.212.2 No Schooling8.15.62.92.01.6 Note: All figures are in percentage. The classification of educational attainment has changed over time and data have been adjusted to enable direct comparison Sources: Census & Statistics Department, Population Census report, various issues. Table 2 Working Population by Educational Attainment

6. Income Inequality: An Overview Gini coefficient (household income) stood at 0.453, 0.518, and 0.533 in 1986, 1996, and 2006 respectively C&SD (2007a) analyses the household income distribution in Hong Kong, which makes a number of strong assumptions This paper focuses on the working population

7. Table 3 Income Distribution of the Working Population 19861991199620012006 Gini Coefficient0.3900.3890.4160.4220.432 Theil Index0.3240.3130.3510.3400.354 Atkinson Index0.2320.2270.2540.2600.271 Variance of log earnings0.4570.4340.4950.5400.569 P 50 /P 10 2.0831.8332.0002.2002.011 P 90 /P 50 2.4002.2732.5002.7272.983

8. Income Dispersion by Industry Between 1986 and 2006, the employment share of the manufacturing sector fell from 35.8% to 9.7% In the past, manufacturing industries mainly employed low-skilled workers and the income dispersion was less uneven In 2006, services sectors recruited 82.7% of the labour force Employment share and income dispersion of the construction sector were rather stable

9. Table 4(a) Employment Share by Industry Industry 19861991199620012006 Manufacturing 35.828.218.912.39.7 Construction 6.26.98.17.66.8 Wholesale and retail trade, restaurants and hotels 22.322.524.926.227.2 Transport, storage, and Communication 8.09.810.911.311.6 Financing, insurance, real estate and business services 6.410.613.416.117.0 Community, social and personal services 18.419.922.325.526.9 Others 2.92.11.51.00.8

10. Table 4(b) Income Dispersion by Industry (variance of log earnings) Industry19861991199620012006 Manufacturing0.39240.40390.46530.48000.5250 Construction0.38890.37100.40330.37310.3775 Wholesale and retail trade, restaurants and hotels 0.37760.36350.41000.44740.4740 Transport, storage, and communication 0.25500.27080.33750.37630.3841 Financing, insurance, real estate and business services 0.41860.47850.57790.57310.6032 Community, social and personal services 0.53890.52640.59210.70330.7688 Others0.77600.59790.70590.75100.7630

11. Sectoral Shifts and Inequality Employment shifts from low inequality manufacturing to high inequality services It is tempting to put a link between sectoral shifts and rising inequality Decompose the variance of log earnings

12. Table 5 Decomposition of Change in Earnings Variance Period Total Change Within IndustryBetween Industry VarianceCompositionVarianceComposition 1986 – 20060.1130.141–0.004–0.0250.000 1991 – 20060.1350.1370.004–0.0050.000 1996 – 20060.0740.0730.005–0.0060.002 2001 – 20060.0300.0340.003–0.0090.001

13. Sectoral Shifts and Inequality (Cont’d) Between 1986 and 2006, composition change reduced the earnings variance by 3.5% Sectoral shifts did not cause rising inequality Changes in within-industry variance explained the increasing earnings variance

14. Table 6(b) Income Dispersion by Occupation (variance of log earnings) Occupation1991199620012006 Managers and Administrators0.52760.55050.51390.5339 Professionals0.47460.49260.46780.4896 Associate Professionals0.32550.33540.32980.3633 Clerks0.15890.17830.22040.2262 Service Workers and Shop Sales Workers 0.27840.29800.34970.3593 Craft and Related Workers0.26340.28280.27620.2707 Plant and Machine Operators and Assemblers 0.25920.26480.25940.2282 Elementary Occupations0.24390.25820.28620.3242 Others0.67950.88580.81820.6158

15. Income Dispersion by Occupation Economic restructuring was associated with sharp reduction in the proportion of production related workers Increasing earnings variance for 3 groups: (i) clerks, (ii) service workers; and (iii) elementary workers The employment shifts from low inequality occupations (craft and related workers; and plant and machine operators and assemblers) to high inequality occupations (professionals; and associate professionals) The changing composition, within-occupation variance, and between occupation variance explained 40.0%, 32.6% and 27.4% of the overall increase in earnings variance

16. Table 7 Estimated Returns to Education Educational Level19861991199620012006 Degree1.28791.26981.35531.36111.2442 Post Secondary1.12920.97051.04591.12000.9079 Matriculation0.76660.78100.83990.81120.7642 Upper Secondary0.57490.55970.63770.63200.5612 Lower Secondary0.34120.30360.33160.31230.2504 Primary0.17210.14140.16280.12350.0761

17. Income Dispersion by Education The increase in the supply of post-secondary and degree graduates was more than offset the increase in demand for better educated workers The estimated earnings premiums for upper secondary graduates and matriculants were largely unchanged Workers with lower secondary or primary education experienced a significant drop in returns to education during the period from 1986 to 2006

18. The Increasing Working Poor? 0 5 10 20 25 30 19861991199620012006 Year Employment Share (%) Based on Minimum Allowable Wage Relative to Median Income

19. Conclusions All inequality measures employed in this paper show widening income dispersion. The decile ratios indicate that while the income dispersion of the upper income class has widened substantially, the income dispersion of the lower income class has narrowed. Although changing industrial composition was named as the prime suspect that caused rising income inequality, it actually helped reducing the earnings variance by 3.5 per cent. The results show that increasing within-industry variance was responsible for the increasing earnings dispersion.

20. Conclusions (Cont’d) The employment shift from low inequality occupations to high inequality occupations explained 40 per cent of the overall increase in earnings variance. The increase in the supply of post-secondary and degree graduates was more than offset the increase in demand for better educated workers. As a result, their earnings premium experienced a decline. ~ The End ~