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Kong Hung 04012259 Applied Economics Major An Honours Degree Project Submitted to the School of Business in Partial Fulfilment of the Graduation Requirement for the Degree of Bachelor of Business Administration (Honours) Hong Kong Baptist University Hong Kong April 2007
I would like to thank my classmates for their helping hand and my beloved parents for their gracious support. His encouragement helped me through hard time. His invaluable advice and genuine support guided my way in doing research. Finally. Tang Shu Hung. Ng Ying Chu for her precious comment and patient in answering all my questions. I would also like to thank Dr.Acknowledgement I would like to express my sincere gratitude to my supervisor Prof. His supervision is very important for me to complete the project. 2 .
The present study uses Hong Kong 1996 ByCensus and 2001 Census datasets. which reveal that the link exists but is rather weak. During the same time period. The empirical findings suggest that except working industry. It has been proposed that income inequality can be attributed in great part to disparity in returns to educational attainment. Hong Kong transformed from a manufacturing-based economy to a service-oriented economy and further to a knowledge-based economy. and the Mincerian equation to estimate the relevance between income inequality and economic transformation. working industry. 3 . the other three do not completely support the relevance. age and gender.Abstract The persistence of rising income inequality in Hong Kong has provided economists a hot topic for debate.
1 Empirical Findings 5.2 Discussions Chapter 6.2 Limitations and Recommendations References 2 3 4 5 5 6 8 8 9 9 9 10 11 14 14 17 19 19 19 21 4 . Introduction 1. Concluding Remarks 6.2 Economic Transformation in Hong Kong Chapter 2.2 Effect on Income across Sectors 2.3 Effect on Income to Elderly 2. Results 5. Data Description Chapter 5.4 Effect on Income to Gender Earning Gap Chapter 3.Table of Contents Acknowledgement Abstract Table of Contents Chapter 1.1 Effect on Income to Education 2. Methodology Chapter 4.1 Widening Income Inequality Trend 1.1 Summary 6. Effect of Economic Transformation on Income 2.
Denmark (at 0. The summary report of World Development Indicators (The World Bank. there are raising concerns on income inequality internationally. Many researchers have discovered a negative relationship between income inequality and economic 5 . Table 1. Official Gini Coefficient 1981 1986 Gini Coefficient 0.518 2001 0. for example. 1997) pointed out that there is increasing income disparity between the rich and the poor in Hong Kong. A quick glance at the official Gini Coefficient calculated by the Census and Statistics Department (see Table 1) tells that it has been rising gradually.249) rank at the top while Hong Kong (at 0. Income disparity may affect social stability negatively through increasing crime rate etc. Introduction 1. 2004) aroused an urge to explore income inequality in Hong Kong. it rose sharply from 0.525 According to the World Bank (2004).1 Widening Income Inequality Trend In the past several decades. Lui. Not only is the Gini Coefficient for Hong Kong much higher than other developed countries but also higher than China (at 0.476 1996 0. Hungary (at 0. Nigeria (at 0. Especially after the year 1986.525) is one of the economies which has the widest income disparity.247) and Japan (at 0.451 0. Many studies (see.525 in 2001. for instance.453 Source: Census and Statistic Department 1991 0.Chapter 1. It was more shocking that its value is close to third-world economies. 1993. when comparing Gini Coefficient for 127 economies in the world.447).506) and Mexico (at 0. Tsang.453 in 1986 to 0.546).244).
Hong Kong has to cope with it and make the best of it.. other countries imposed an embargo on commerce with China.. Ultimately.. Immediately after the postwar period in the 1950s.. economic growth will also be influenced." A brief history of economic transformation in Hong Kong will be presented in the following section. Mr. This forced Hong Kong to transform from an entrepot trading center for China into an export oriented light manufacturing center. The second economic transformation started at 1978 because of China's open door policy. For instance. 1. 1998). This allowed the manufacturers to migrate their production base to China. the Chief Executive of Hong Kong Monetary Authority. Politicians have long been attributed income disparity to structural transformation and claimed that this phenomenon is inevitable in the period of economic restructuring evidenced in many other developed economies. Deininger and Squire. for example. has made a speech in 2003 saying that "I believe that this development is one reason why the measured distribution of income in Hong Kong has become more skewed . Yam. the current process of marketled structural change in Hong Kong is not something that can be resisted or reversed. in 6 .2 Economic Transformation in Hong Kong Hong Kong has been undergoing economic transformation since 1950s....growth (see.. ...
Hong Kong. From the table.21 1986 0. Table 2 presents the share of the manufacturing and services sectors in total GDP. the share of services sector increased sharply from 66% to 84% during the same period.21 1991 0. In recent years. Hong Kong gradually transformed from a manufacturing-based to a service-oriented economy. Given its impact. Table 2.06 0. Hong Kong is evolving further towards a highly service-oriented economy that serve as the close trading partner for China with the rest of the world and a knowledge-based economy. At the same time. Globalization refers to the increasing economic dependence among countries through import and export of goods and services.73 1996 0. Share of manufacturing and services sector in total GDP 1981 Manufacturing 0. The huge change in the shares of both sectors in total GDP is a clear evidence of economic transformation in Hong Kong.05 0. Hong Kong's financial sector began to emerge to be one of the important financial centres in the world. to enjoy lower labour cost. then.82 2001 0.66 0. free flow of capital. In reverse.particular to the Pearl River Delta area in Guangdong Province. the word "globalization" is gaining popularity. transformed to be the management and coordination center serving the manufacturing base that had moved.14 0.84 Services 0.67 Source: Census and Statistic Department 7 . and diffusion of information and technology. we can see that the share of manufacturing sector diminished considerably from 21% to 5% from 1981 to 2001. In the second stage of economic transformation.
Bartel & Lichtenberg (1987) and Suen (1995) suggested the reason of discrimination against less educated labour is that highly educated labour are more adaptable to changes.Economic transformation (sectoral shifts) of the Hong Kong economy may affect elderly and unskilled labour negatively and lead to social problems that range from labor shortage to unemployment. especially financial) industries. It affected income through four channels.1 Effect on Income through Education Transforming from a labour-intensive (manufacturing) industry towards educationintensive (services. could economic transformation explain the trend of widening income inequality? Chapter 2. there will be arising demand on skilled and educated labour. The present study aims at examining (1) What were the effect of economic transformation on income? (2) In terms. The growing demand for educated labour will raise their returns relative to labour with low education level. widen income inequality. 2. Ultimately. Their flexibility is important and thus highly rewarded because rapid change is foreseen around the period of economic transformation. 8 . these will affect income distribution. Effect of Economic Transformation on Income Economic transformation of Hong Kong can be summarized as an evolvement from a manufacturing center to a service center or from a labour-intensive economy to a knowledge-based economy. and more specifically.
we can expect returns to the expanding (services) sector will rise relative to returns to the shrinking (manufacturing) sector.3 Effect on Income through Elderly Suen (1995) stated that senior people are less adaptable and less willing to change when compared to younger people. senior people will not be able to cope with the swift change. On the contrary. then. there will be a reduction in gender earning gap. inadaptable and unwilling to change). On the other hand.e. Fan & Lui (1999) and Galor & Weil (1996) found that when an economy transforms from a labour-intensive economy to a knowledge-based economy. 2. senior people will suffer from decreasing returns from employment relative to younger people because of reduction in returns in the declining sector that they stayed. the reduction in labour supply will raise its returns.4 Effect on Income through Gender Earning Gap By assuming that male and female are equally endowed with mental labour with the difference that male is endowed with more physical labour than female. if sectoral shifts from the manufacturing-based economy to service-oriented economy are in consequence of the change in final demand. when decreasing number of people are willing to work in the declining (manufacturing) sector. The reason behind is that man may have advantage in physical 9 . younger people are less willing to enter this sector. Therefore. On one side.2 Effect on Income across Sectors Suen (1995) pointed out the two-sided argument on impact of economic transformation to sectoral returns. In the period of economic transformation.2. 2. They have less intention to leave the shrinking (manufacturing) sector if they are already working in it (i.
X is a vector of relevant characteristics that affect income and ε is an error term. including age and gender. Chapter 3. industry (manufacturing. the returns to female will increase relative to the returns to male over time. but that would make no difference when working in a knowledge-based (service) industry. Human capital theory tells us that education increases the productivity of an individual so that we expect the coefficients to be positive. marital status (now married or single).strength to benefit himself when working in a labour-intensive (manufacturing) industry. Therefore. His model has several variant forms. construction. lower secondary. Methodology Mincer (1974) developed a schooling model to estimate returns on the number of years of schooling across individuals by a set of individual characteristics. upper secondary or university). primary. age. The coefficient of the age 10 . This specification assumes that an individual's monthly income are determined by the endowments or characteristics. the one which are applicable to this study is written as lnY = βXi + ε (1) where lnY is the natural logarithim of main employment income. financial or community services). age squared. gender (male or female). transport. and whether the person was born in China or Hong Kong. including education (no education. wholesale. This model has been widely used in the subsequent studies.
variable should be positive while the coefficient of the age squared variable should be negative. This is because an individual can accumulate human capital through job experience with his/her age. LOWSEC. Only employees of age between 15 and 64 with positive monthly income from the main employment are included in the analysis. Chapter 4. industry dummy variables 11 . POSTSEC and UNIV) with the reference group being people with no education. such as gender. we take monthly income from main employment as the income measure. Data Description The present study uses Hong Kong 1996 By-Census and 2001 Census datasets with 26360 observations and 27751 observations respectively.e. the expected signs should be the same as that of experience and experience squared. Individual workers in agriculture. Other relevant characteristics. fishing. people not born in Hong Kong or China) were excluded in the sample. mining and quarrying industries and those industries that are not classified are excluded from the sample. thus. Other dependent variables include education level completed (PRIM. will have their own effects on income independent of schooling. The dependent variable in the Mincerian equation used is the natural logarithm of monthly income from main employment (lnMEARN). foreigners (i. Throughout this paper. marital status. To focus on the local employees as well as to eliminate the influence of identical income of domestic helpers from abroad. UPSEC. place of birth and industry that works.
202 (0.018 (0. Table 3. WHOL. age and age squared.273) 12 .264) 0.290 (3.769) 10.081 (0.143 (0.890) 20.575 (0.586 (0. FIN and SER) with the reference group being the manufacturing industry.68 (838.41) 9.84 (779.663 (10.494) 35.959 (10.117 (0.089) 552.433) 0.402) 0. the place of birth (CHINA).357) 0.391) 0.10 (14968.070 (0.142) 0.490) 0.161 (12.183 (0.284) 2001 (real) 15426.133) 0.209) 0.378) 0.159 (0.149) 0.151 (0.495) 0.950) 20.416 (0. TRAN.493) 0. the marital status (MARRIED).598 (0.707) 9. the gender of an individual (MALE).671 (12.188 (0.023 (0.286 (0.020 (0.755) 1408.91 (17023. Sample statistics by year 1996 MEARN lnMEARN SCH EXP EXP2 MALE age age2 MARRIED CHINA NOEDU PRIM LOWSEC UPSEC POSTSEC UNIV MANU CONST 13102.279) 1449.452) 0.493) 0.606 (555.87) 9.250 (0.431 (0.505 (3.351) 0.499) 36.358) 0.321 (0.321) 0.274 (628.699) 0.256) 0.450) 582.523 (0.(CONST.172 (0.193 (0.394) 0.365) 0.089 (0.
restaurants and hotels TRAN = transport.424) 0.2 over the five-year period.310) 0.367) 26360 2001 (real) 0. real estate and business services COMM = community. gas and water WHOL = wholesale. electricity. social and personal services Table 3 provides the sample statistics of the variables by year.234 (0.108 (0. retail and import/export trades. while labour market experience remains stable. storage and communication FIN = financing.168 (0.387) 27751 0.433) 0.142 (0.518 Note: Standard deviations are in parentheses.9% while the percentage of workers completed post secondary or below showed a downward trend.310) 0.107 (0.161 (0.525 Official Gini Coefficient 0. The monthly income from main employment in 2001 sample is adjusted by consumer price index to obtain the real amount in 1996 dollar.349) 0. 13 .1996 WHOL TRAN FIN COMM N 0.183 (0.374) 0. Completed years of schooling increased by 1. where MEARN = monthly income from main employment lnMEARN = log of MEARN SCH = number of years of schooling completed EXP = potential years of experience = age – SCH – 6 EXP2 = EXP * EXP age2 = age * age CHINA = whether the person is born in China NOEDU = no education PRIM = primary LOWSEC = lower secondary UPSEC = upper secondary POSTSEC = post secondary UNIV = university MANU = manufacturing CONST = construction. insurance.249 (0. the percentage of workers completed university level or above had increased dramatically from 2% to 15. Take a closer look into the educational dummy variables would provide the reason for increment in average years of schooling.
occurred in the percentage of workers completed post secondary. Average age of the sample increased by nearly 1 year.19***) lnMEARN 2001 lnMEARN 14 . which cohered with ascending Gini Coefficient Index.44***) 0.5% of the sample are male in 1996 to that of 52.13712 (5. Chapter 5. The standard deviation of average income also go up. Regression results 1996 Dependent Variable Independent Variables intercept PRIM LOWSEC UPSEC 6.39***) 0. with slightly more male (ranging from 57.The largest decline. and community and personal services both rose by about 2%.7%) while that in financial.88***) 0. which is consistent with the growing aging population trend. but the difference is narrowing.1 Empirical Findings Table 4.19***) 0. The average real income increased by more than $2300 in five years. Results 5.1% to 7%. from 15.60926 (25.90***) 0.8% to 11. The gender makeup within the sample is almost equal.62773 (24. The percentage of labour who are married or born in China remains rather stable throughout the five-year period.85***) 0.14334 (5.09***) 6.29202 (11.32723 (12.3% in 2001) than female.21917 (122. The industry dummy confirms the fact that labour engaged in the manufacturing industry was declining (from 18.80464 (151.
37914 (33.1996 POSTSEC UNIV CONST WHOL TRAN FIN SER MALE MARRIED CHINA age age2 N R 2 2001 1. 1% levels respectively.42362 (38.34.58***) 0.25 Adjusted R2 F-value Pr > F < 0.0001 Note: T-values are below each coefficient and in parentheses.03016 (40.72***) 0.53***) .48***) 27751 0. education.30135 (20. As expected.87***) 0. working industry. *** indicate statistical significance at the 10%. age and the birth place are important determinants of earnings in Hong Kong since all of them are significant at 1% level.22000 (17.19463 (14. 5%.99 1.0001 < 0.24***) 0.52976 (47.24***) .07314 (33.83***) 26360 0.29351 (47. **.08***) 0.00110 (.15.4557 1549.89***) 0.04665 (36.3928 0.66***) .3925 1136.28957 (28.0. gender.4560 0.0.81***) 0.13043 (.28***) 0.39 in the 1996 model.37132 (51.15.91***) . indicates that 39 percent of the 15 .65***) 1.0.0. Table 4 presents the results of the regression of the earnings model described in Chapter 3.11904 (13.07***) 0. The adjusted R2 of 0.12666 (.3***) 0.09671 (39.44700 (39. The asterisks *.18***) 0.31340 (24.11609 (13.21389 (22.00087 (.84***) 0.22***) 0. marital status.16***) 0.52***) 0..51630 (44.74***) 1.38***) 0.31.33042 (45.
for both models. except for labour completed a degree or above.7% : 13.2% : 14. 16 .7% for 2001).variation in the lnMEARN is explained by the independent variables included in the model. The returns to education level is rather stable in the five-year period. all industries' return enhances corresponding to the reference group during the five-year period.7% in 2001). Relative to manufacturing industry. which is 38% and 45% higher than it in 1996 and in 2001 respectively. returns to upper secondary education is nearly a double to the returns to lower secondary education (60.7% : 32.9% : 29. The findings suggest that while completing primary education only provides around 14% more of income relative to those without education. This implies that the returns to other industries continue to outpace the returns to manufacturing industry. earnings to community services ranks number one in both years.456.2% for 1996 and 62. There is an interesting finding that. In line with our expectation. this group of people suffer a reduction of approximately 20% in earnings relative to the reference group across the five-year's time. The explanatory power of the 2001 model is higher with the adjusted R2 reported is 0. the high F-values confirm that the independent variables used are jointly significant and different to zero. which is 42% and 53% higher than it. returns to lower secondary education also equal nearly two times of the returns to primary education (29. and with a faster and faster pace. completing post secondary education or above would enhance an individual's income by more then 100% relative to those with no education. For both models.3% in 1996 and 32. Likewise. financial industry ranks second.
the diminishing rate of returns speed up from – 0.6% in 2001. University level workers face a large drop in earnings. from 7. it shows that for every year you grow up. Wage inequality (an approximation of income inequality) can be decomposed into changes in workers' characteristics and their equivalent changes in the returns. Married workers continue to earn more than single workers and remain stable at around 11 – 12%. The phenomenon of knowledge bias under economic transformation is not that serious as asserted. as well as a slight increment of 1 – 3% towards earnings to secondary and post secondary level workers.11%. From the table. the previous findings on deviation of returns to worker characteristics contribute to an important source of the rising income inequality during economic transformation in Hong Kong. Similarly. Hong Kong workers keep on to earn about 13% more than those who born in China. Although there is an increase in earnings to age. although show a small reduction of earnings to primary level workers from 14% to 13%. from 1996 to 2001. In other words.Males earn 33% more than females in 1996 and the gender earnings gap enlarged slightly by 4% to 37% in 2001. 5.08% to – 0. there will be a positive returns.2 Discussions The evidence on the diverging returns incorporated to worker characteristics are closely related to income inequality.3% in 1996 to 9. Coincide with the conclusions of Suen 17 . The empirical findings.
thus. while its shows some evidence that people with little education are less wellpaid than the others. In 2001. according to the Report on Manpower Projection to 2007. the link between structural change and broadening earnings gap against less educated cannot be clearly established. Different to the results of the study of Fan & Lui (1999) and Sung et al. (2001). The empirical results support the first argument of Suen (1995) such that the expected returns on the expanding (service) sector rise relative to that of the shrinking (manufacturing) sector.(1995). males earn 37% more than females. Other things being equal. The study of Ng (2001) may bring us an explanation to the unexpected change for workers that had completed firstdegree or above. Enlarging deviation of returns to workers working in different industries. They reasoned their outcome that the rising 18 . diminishing return to age worsens. The positive change of returns to age from 1996 to 2001 even indicates an improvement on the well being of them.e. The trend will endure and worsen in 2007. The gender earnings gap widens by 4 % in the five-year period. it does not show a significant deterioration on earnings of elderly. These two opposite changes leave the effect of economic transformation to the income of elderly remain question. they all found a narrowing gender earnings gap during economic transformation. return to education). oversupply would result in reduce in price (i. ceteris paribus. may be one of the source of the rising income inequality during economic transformation in Hong Kong Similar to the findings of Suen (1995) and Ng (2001). She stated that there is an oversupply of postgraduates recently. In contrast.
who are better paid. Despite a clear link exists between economic transformation – sectoral earnings – income inequality. senior people's earnings and gender earnings gap. Concluding Remarks 6. it is difficult to construct a trend from five year data only. through influence on sectoral earnings. 19 .educational attainment of females and transformation of the economy from manufacturing to services facilitates females to shift from crafts or operators to clerks.2 Limitations and Recommendations While the results show some evidence between economic transformation and the increasing income inequality trend. 6. Broadening earnings differential between male and female may be another source of the growing income inequality in the period of economic transformation in Hong Kong. the present study’s purpose is to establish the links between them. There are four possible channels that economic transformation can affect income inequality. Chapter 6.1 Summary Given the fact that Hong Kong has been undergoing economic transformation from a labour-intensive economy to a knowledge-based economy and the increasing income inequality trend. namely. the link through gender earnings gap is weak and the link through the rest two channels remains to be established. education returns.
but these information is not readily available. displaced workers would find difficulties in finding new jobs. the results may be biased. delete industry code 9501 instead of excluding all the foreigners. These variables are likely to influence an individual's earnings. Variables such as the quality of education and parental factors were not considered in this study. 1 Industry Code 950 refers to repair services. laundry. In the periods of fastening economic transformation. The future studies are recommended to include a broader sense data. domestic services and miscellaneous personal services 20 . It is recommended that the future studies may consider adding unemployment as an independent variable. this would lead to increase in frictional unemployment or industry-specific unemployment rate. those who are self-employed are not included. Lilien (1892) pointed out the relationship between sectoral shifts and cyclical unemployment in the United States. The sample of the analysis has excluded all the foreigners. The analysis focuses on employees only. dry cleaning and garment services.The sectoral shifts theory of unemployment holds that periods of accelerated structural change generate labor market mismatch and increase the extent of frictional unemployment. But in an international city such as Hong Kong. Future studies may consider using other method to exclude the effect of domestic helpers to minimize bias. For example.
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