A basic principle of public policy design is that any policy to be implemented must bring greater benefit than cost. If the policy has several dimensions, then the parameter for each dimension should be increased as long as the marginal benefit is still larger than the marginal cost.

In determining the minimum wage, which is to be introduced in Hong Kong shortly, we need to make sure that the benefit of higher incomes for the working poor is higher than any cost in terms of jobs lost.

The risk of job loss is real, because to be effective the minimum wage needs to be set above the market-clearing wage. To be sure, many workers will be retained even though the wage is raised. But there will be some marginal employers who may lay off workers if the wage goes up. The higher the percentage of workers whose market wages fall below the minimum wage, the greater will be the risk of job losses.

In the United States, some 13.4 percent of workers (both sexes) paid hourly were employed at or below the federal minimum wage back in 1979. But over the years, the legal minimum wage has lagged behind inflation. By 2007 only 2.3 percent of workers on hourly wages earned the federal minimum wage or less. The unemployment rate in 1979 was about 5.9 percent. Over the years, it rose above 10 percent in 1982-83, largely because of the severe recession following the sharp interest rate hikes when Paul Volcker, the former Federal Reserve Chairman, launched a tough battle against inflation. The unemployment rate started falling after that, dipping below 6 percent by 1987, and continuing to fall to around 4 percent by 2000. In 2000, the percentage of workers at or below the federal minimum wage had fallen to 3.6 percent.

The experience in the United States suggests that if the percentage of workers below the minimum wage is around 5 percent or less, any adverse effect on employment appears to be tolerable. According to the Census and Statistical Department, 469,400 workers were paid less than HK$33 an hour while some 130,200 earn less than the HK$24 that many business groups are demanding. With the working population at about 3.5 million, the HK$33 would affect 13.4 percent of workers. This is almost certainly too much. On the other hand, a HK$24 minimum wage would affect about only 3.7 percent of workers. It does appear that a minimum wage at around HK$26-27 an hour, as suggested by some people, is a nice middle ground that should not risk too many job losses.

We can start from such a level and monitor how the economy responds. The minimum wage should be adjusted by small increments if job losses are found to be negligible.

The author is a director of the Centre for Public Policy Studies, Lingnan University

(HK Edition 04/09/2010 page2)