Salaries in Hong Kong – the gap is widening….

Two weeks ago, Shards in China, wrote an interesting piece about the Gini coefficient, a statistical means to measure income distribution within a society. And just last week, there was a piece in Hong Kong’s South China Morning Post showing the development of the average household income in Hong Kong. The results are indeed shocking.

What you see on the chart is the monthly household income in Hong Kong. “Household” refers to all persons living in the same flat. So if you’re  single it’s just your income. If you’re married and both you and your spouse are working it is the combined salary. What is astonishing is the development on both ends of the spectrum.

The number of households making more than HKD 50K a month (around USD 6,400 / Euro 4,900) increased from just around 10% to more than 15% of the population from 1996 to 2011. That in itself is good news, after all you want everyone to move up the ladder.

However, the number of households making less than HKD 4,000 a month (USD 515 / Euro 390) increased from around 4% to more than 7%! And that doesn’t count in inflation! 15 years ago, you could get a lot more for HKD 4000 compared to now.

Generally, when comparing both charts you will realized that the middle part comprising of the household income of 10K to 25K in 1996 is drifting to both sides. Part will go to the lower end and part to the higher end. That means that Hong Kong’s society is drifting apart. You have one part that is doing well and one part that can’t make ends meet.

Why is that the case? The main factors at work here are a) China and b) Education.

Hong Kong is officially part of China. However, it is still separated to Mainland Chin by a border. Mainland Chinese need a visa to live and work in Hong Kong. This arrangement was agreed to prevent thousands of Mainland Chinese coming to Hong Kong and driving down local wages.

But if workers can’t come to a country, the companies just relocate. Just look what has happened to manufacturing in the United Stages. Part of it moved next door to Mexico. The same is happening in Hong Kong. More and more work in Hong Kong is outsourced to China.

Hong Kong is hardly producing any “real stuff”. Hong Kong’s products are normally service related in the area of banking, insurance, accounting, logistics and sourcing. Granted, some of this work is hard to relocate. However, simple back-office work can be done cheaper over the border. Accounting offices already outsourced most of the simple tasks to China. The logistics industry is moving more and more staff to China as well. Since more and more products are shipped directly from China to overseas, without going through Hong Kong, it also makes sense.

This development puts huge strains on the employment market. As a society, there are two ways to adapt to this trend. You can either lower wages to remain competitive or try moving “up the market” with your products and be able to charge a premium. Looking at Europe you can see how it works. Germany, for example, is doing well as she produces high-tech industrial niche products sold at a high price. Other countries, Portugal for example, struggle as they have to compete with countries that are more efficient and cheaper. Portugal’s traditional goods, garments and shoes, are being threatened by cheap imports from China.

Hong Kong’s situation is similar. So what can Hong Kong do? Currently it seems Hong Kong’s chosen path is to compete on price. But that won’t work – China will always be cheaper. The solution sounds simple on paper, put for some reasons Hong Kong’s leaders are not able to execute it. Maybe because they are no leaders but just bureaucrats with no vision.

First of all, invest in education and teach people to think and use their brain. “Think” in this context doesn’t mean learning stuff by heart and reproducing it during an exam. That works well if you need an army of monkeys doing stupid work. If there is no stupid work anymore, you need to make sure your stupid monkeys stop being stupid and become smart.

Second, invest money in areas where it can generate more growth. It’s hard to believe, but building additional shoe boxes with single-glassed windows doesn’t do much for the long term growth. Yes, it will create huge profits for the buddies of Hong Kong’s political class (the property developers), but it won’t create stable growth. So far, Hong Kong relied on banks, financial services and the tourism and retail sector (rich Chinese spending their money in Hong Kong). But these industries only generate jobs on either side of the income, either highly professional jobs or low-paid jobs.

Hong Kong still hasn’t found an area where it can create well-paid jobs for the masses. Maybe it could learn from Singapore and its focus on the high-tech sector.

How about taking a lead in the environment? As a rich city with pathetic air quality there is great potential to work on solutions to clean up air, water and provide recycling solutions. And the biggest market for these kind of services is right next door – China and her massive cities.

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