The dilemma between pay rise and inflation

By George Chen
May 4, 2011

By George Chen
The opinions expressed are the author’s own.

First, we were worried about inflation in mainland China. Now it seems Hong Kong’s inflation situation in coming months looks no better. I blame the worsening problem partly on the city’s first-ever minimum wage law, effective May 1.

As I study international political economy at the University of Hong Kong, my professor and classmates do know I am a free market fan and don’t believe a minimum wage will help Hong Kong’s economy and boost employment, as some Hong Kong lawmakers assert.

The sad truth is I went to buy my favorite Pearl Milk Tea on May 1 and found it was 2 Hong Kong dollars (about US$0.26) more expensive. Then I went to check out McDonald’s — prices for some of its burgers and drinks have also risen about 2-3 percent. And last night, local media said taxi and tram fares were going to rise in the former British colony too!

A friend of mine reported that the property management fee for his apartment building was going to increase about 30 percent, mainly because of the minimum wage law. Otherwise, the tenants may have to decide whether to lay off some staff to keep the management costs unchanged.

Local media said some small and medium-sized enterprises also planned to reduce headcounts in response to the minimum wage law. If so, Hong Kong’s economic growth may also take a hit.

Before the minimum wage law went into effect, some pro-democracy Hong Kong lawmakers insisted it would protect grassroots workers and help them fight inflations, but they may have forgotten that workers are also consumers.

Today they work and are slightly better paid, at least HK$28 per hour now. Tomorrow, they are going to buy food, ride the subway, and so on, and the price levels of all these services and products are apparently going to rise even faster than before, partly thanks to the rising human cost.

Why do I care about this? In short, I believe that what is happening in Hong Kong could happen in mainland China.

We’ve learned that several state-owned enterprises plan to increase staff wages in response to a call by Beijing for “redistribution and balance of social wealth” and to help the working class become more prosperous. Will people actually feel poorer in terms of individual purchasing power even though they are better paid?

About 450,000 people working for local restaurants in Wuhan, a second-tier Chinese city, now expect to see pay rises after recent tough negotiations between the local government and the city’s workers’ union, the official China Daily reported. If successful, those restaurant workers will earn at least 1,170 yuan (about US$180) a month. I hope the food prices on the restaurant menus won’t change too much.

If mainland inflation really climbs to 6 percent or more in the coming months, as some analysts have warned, I don’t think a national pay rise can match the pace of inflation growth. Meanwhile, we face the risk of seeing retail prices rise because of rising costs, including staff pay.

If consumers offer the final solution for companies to cope with the pressure from pay rises, will you be happy to see such pay increases take place? The dilemma between pay raises and worse inflation may be worth some serious consideration for investors’ money-making decisions.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A cabbage seller smokes a cigarette as he waits for customers at a fruit and vegetable market in Beijing in this December 17, 2010 picture. REUTERS/David Gray

2 comments

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I could not agree more. Minimum wage laws are just politicians pandering to voters to get themselves re-elected. The same people who think setting a minimum wage is a good idea would scoff at setting the minimum wage very high, but if you believe the idea works at all then you should believe that $1000.00 hour as minimum wage would help the economy by making everyone rich, that is if anyone would be hiring at those rates.

Posted by zotdoc | Report as abusive

Wrong – completely wrong. The problem is not with minimum wage laws, but with minimum wage uniformity. You see, if you have a low minimum wage in Hong Kong, jobs will logically go to another city with no minimum wage. Therefore, you need a trade restriction preventing trade with those who have lower minimum wages – uniformity, in other words, or the minimum wage will not work.

Furthermore, yes, inflation does occur, but with it comes empowerment of the workers. Yes, you as a consumer pay more, but it also means workers make more. More money to buy those goods.

If you do not have a cap on CEO pay with a minimum wage (tax breaks for companies who hire more workers in proportion to company earnings is another idea of mine), companies will fire workers intentionally, going to automation and the cheapest-possible work force, whether overseas labor or illegal immigrants, to reduce company payroll so they can boost their own salaries. You will thus get a bare minimum of workers employed and paid almost nothing.

You should stop ignoring the effects of inflation, and instead compare them to their logical counterpart, job wages. After all, it does not matter what inflation is or isn’t, if the average consumer has little or no income to buy it with, due to A) no job, or B) a low wage.

Posted by Jzyehoshua | Report as abusive