Wednesday, March 28, 2007

Full Employment

On March 25, the SCMP had an article titled "Jobs for all in reach for first time since handover." This was written in response to the latest unemployment statistics for Hong Kong, which showed a decline in the unemployment rate to just 4.3%. Based on an estimate of the natural rate of unemployment of 3.9%, the article argues that HK is close to "full employment." (See an earlier discussion of the unemployment data here:

As the following graph makes clear, the unemployment rate is still far above low historical levels. In 1989, the unemployment rate was as low as 1%!

So what has changed between 1989 and 2007? First, the structure of the economy has changed. In the late 80's, the backbone of the economy was manufacturing. To put numbers on this, in 1989 there were 52,475 manufacturing establishments employing 829,000 workers. There was high demand for low skill jobs, and almost anyone could find work. By 2005, there were only 14,050 manufacturing establishments employing a mere 164,000 workers.

The decline of the manufacturing sector has been matched by massive growth of the services sector. Over the same period, "Wholesale, retail and import and export trades, restaurants and hotels" has grown from 119,000 establishments to 184,000 and from 770,000 employees to 1,050,000 employees; the story is similar in "Financing, insurance, real estate and business services" (see for details).

The difference between manufacturing and services employment is that employee-specific characteristics are more likely to be crucial in the services sector. The provision of services usually requires the employee to interact with the consumer. In contrast, in manufacturing there are typically several layers (wholesalers, retailers) separating the producers of the goods from the consumer. As a result, hiring someone with the right interpersonal skills is typically more important for a services sector job than a manufacturing job. The result of this is to drive up the level of frictional unemployment in a services based economy, as employers screen hires more carefully.

There is another adjustment going on in Hong Kong that may drive up the natural rate of unemployment as well. As a result of the decline of manufacturing, there remain a large number of relatively unskilled workers in Hong Kong who may be too old to consider undergoing retraining to prepare themselves for a job in the services sector. These individuals are likely to face longer and more frequent unemployment spells, driving up the level of structural unemployment until these individual retire.

The overall effect of these factors would increase the natural rate of unemployment. However, the Government estimate of 3.9% is just an estimate (or " good guess") of this level. If the mainland economy continues its rapid growth, which is the main engine of HK's growth, then I would expect the unemployment rate to continue falling in Hong Kong, maybe below 3.9%.


curiousangela said...

Is it an universal phenomenon that the natural unemployment rate will rise in most countries? I just wonder if the improvement in productivity(fewer workers needed) can offset the increasing demand(more workers needed).

James Yetman said...

As economies become more developed, the proportion of the workforce engaged in unskilled work will fall, driving up frictional unemployment. So, Yes.

The problem of structural unemployment depends on the rate of sturctural change in the economy. If the economy continues to evolve at a rapid pace, then this may remain higher as well.