Economic Analysis of the Minimum Wage Ordinance ...July 2003 IVS launched May 2004 Opened to the...

Economic Analysis of the

Minimum Wage Ordinance

& Individual Visit Scheme David Chow and Fred Ku Department of Decision Sciences & Managerial Economics, CUHK Business School

Programme for Economic Education, HKIAPS, CUHK

Economic Analysis of the Individual Visit Scheme in Hong Kong

Background of IVS

• Slow real GDP growth

• Unemployment rate rose to 7.9%

• IVS to stimulate the economy

2003 SARS, economic downturn

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

HK

$ M

illio

n 港幣百萬元

實質本地生產總值Real GDP

Background of IVS

• Slow real GDP growth

• Unemployment rate rose to 7.9%

• IVS to stimulate the economy

2003 SARS, economic downturn

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

1997 1999 2001 2003 2005 2007 2009 2011 2013

Un

em

plo

yme

nt

Rat

e 失業率

Background of IVS

• Permanent residents from selected mainland cities

• Allowed to visit Hong Kong and Macao in their individual capacity

• Covers 49 cities from 18 provinces

• Guangdong Province, Beijing, Shanghai, Chongqing…

Individual Visit Scheme (IVS)

July 2003 IVS launched

May 2004 Opened to the whole Guangdong Province

2005, 2006, 2007 Extended to more cities

and provinces

April 2009 M-Permit

introduced

April 2015 One-Trip-Per-Week Permit introduced

Importance of IVS

Source: Hong Kong Annual Digest of Statistics, various years

• 54.3 million

• an increase of 11.7% when compared to 2012

• 350% of the figure in 2003

Total number of visitor arrivals in 2013

• Taking a larger proportion over time

• Mainland visitors >50% since 2003

• IVS > non IVS since 2007 (67.6% in 2013)

• IVS accounted for 50.6% of total visitor arrivals in 2013

Mainland visitors

-

10,000

20,000

30,000

40,000

50,000

60,000

1997 1999 2001 2003 2005 2007 2009 2011 2013

Vis

tors

(1

,00

0)

Non-Mainland China

Mainland China (Non-IVS)

Mainland China (IVS)

Importance of IVS

75%

2%

4%

4%

7%

4% 4%

Sources of Inbound Visitors Year 2013

The Mainland of China

USA

Europe, Africa and the Middle East

Japan and Korea

South and Southeast Asia

Taiwan

Others

29%

8%

9% 14%

13%

18%

9%

Sources of Inbound Visitors Year 2000

The Mainland of China

USA

Europe, Africa and the Middle East

Japan and Korea

South and Southeast Asia

Taiwan

Others

Source: Hong Kong Annual Digest of Statistics (2001 and 2014)

The Mainland of China is the major source of visitor arrivals

Properties of IVS: Where do they from?

• Majority from Shenzhen

• Followed by cities of Guangdong Province

• These two districts accounted for 80%

• Relatively few from more distant cities like Beijing and Shanghai

Source of IVS visitors

Shenzhen 49%

Guangdong Province

31%

Shanghai 4%

Beijing 3% Others

13%

Source of IVS visitors in 2013 (Jan – Jun)

Source: Hong Kong Tourism Board

Properties of IVS: How long they stay?

• IVS visitors tended to stay shorter but with higher frequency

• Proportion of same-day visitors increasing since 2003

• Same day visitors: 64.9% in 2013

Overnight vs. Same Day


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Pro

po

rtio

n o

f Sa

me

-day

Vis

ito

rs a

mo

ng

All

IVS

Vis

ito

rs

不過夜旅客佔「個人遊」旅客總人次比例

Properties of IVS: How much they

spend?

• On average, IVS visitors spent more than non-mainland visitor

• Major spending: Shopping + Hotel Accommodation

Spending of overnight visitors


HK$0

HK$500

HK$1,000

HK$1,500

HK$2,000

HK$2,500

HK$3,000

HK$3,500

HK$4,000

過夜非內地 Overnight Non-

Mainland

過夜個人遊 Overnight IVS

HK$1,970

HK$3,593

Average Spending per Day

73%

12%

9%

6% 購物 shopping

酒店住宿 hotel

accommodation

酒店以外膳食 meals

outside hotels

雜項服務 miscellaneous

services

Benefits of an Industry

• Value-added

– the net output, i.e. the value of gross output less the value of intermediate consumption (the value of goods and services used in the course of production)

• Employment opportunities created

VA of Inbound Tourism

• Tourism in the 4-pillar industries

– Smallest in the 4 pillar industries

– Contribute about 5% to GDP in 2013

Tourism 5%

Financial Services

17%

Trading and Logistics

24%

Professional Services and

Other Producer Services

12%

Others 42%

Value Added of the 4 Pillar Industries in 2013

Source: Hong Kong Annual Digest of Statistics

VA of Inbound Tourism

Tourism Value Added (TVA) • value added by industries providing

goods & services directly to visitors • Inbound tourism: 2.5% - 4% to the

nominal GDP

In 2012, IVS • around 50% of all visitors

• 33% of inbound tourism

industries total value-added

Contribution of Tourism in 2012: 4.7% of GDP Inbound Tourism: 3.9% Outbound Tourism: 0.8%

Source: Sung (2014)

Tourism is not an industry!? instead of fitting into a single product or service category, the expenditure on tourists brings benefits to various sectors of the economy.

VA of Inbound Tourism 4 Major Tourism Industries in HK:

Retail Trade Food & Beverage

Services Passenger Transport

Accommodation Services

36%

29%

11%

13%

11%

Retail Trade


Food and beverage Services

Cross-Boundary Passenger Transport Services Others

Proportion of TVA of major tourism industries in 2013

Source: Hong Kong Annual Digest of Statistics (2014)

Employment of Inbound Tourism

• Tourism in the 4-pillar industries

– Rank 3rd in the 4 pillar industries (followed by Financial Services Industry)

– Contribute about 7% to employment in 2013

7% 6%

21%

13%

53%

Contribution of Employment

Tourism

Financial Services

Trading and Logistics

Professional Services and Other Producer Services

Others

Source: Hong Kong Annual Digest of Statistics (2014)

Employment of Inbound Tourism Employment Opportunities

In 2012, • 250,900 employment opportunities

are created by tourism • 6% of total employment • 2.4% contributed by IVS alone (Sung

2014)

% Share in Total Employment of Inbound Tourism, 2000 – 2013

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00% Cross-Boundary Passenger Transport Services

Food and beverage Services


Retail Trade

Others

Source: Hong Kong Annual Digest of Statistics (various years)


• Labour intensity (ratio of employment to the value-added)

• the number of jobs existing in the sector per unit of value-added or product of the sector

• The larger the ratio, the more labour intensive an industry is.

-

1.00

2.00

3.00

4.00

5.00

6.00

Source: Census and Statistics Department

Ratio of Employment to Value-Added (in million HKD) of the Four Pillar Industries, 2012

Characteristics of Employment in tourism


• Eurostat (2008)

– Relatively a larger number of young (aged under 35) and female workers

– workers with lower educational qualifications – a higher proportion of temporary jobs

• Higher accessibility: relatively low educational attainment,

age, and recruitment requirements

• Higher flexibility: more workers are employed in a part-time basis



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Retail Trade Food & Beverages Whole Economy

65+

55 - 64

45 - 54

35 - 44

25 - 34

15 - 24

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Retail Trade Food & Beverages Whole Economy

Part time

Full Time

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Retail Trade Food & Beverages

Whole Economy

Teritary or above

Senior High Sch

Junior High Sch

Primary or below Source: Report on Annual Earnings and Hours Survey (2012)


Costs of Inbound Tourism 1. Opportunity Cost

Land

Sports complex Hotel

Opportunity cost of providing accommodation services = Cost of hotel construction + Value of sports complex

Costs of Inbound Tourism 2. External Cost

Externalities (界外效應) arise when third parties are affected by a transaction or an activity uncompensated

A typical example of external costs (or negative externality) is pollution – by-standers or even the society as whole are adversely affected when there is air pollution as a result of factory production.

Costs of Inbound Tourism

External costs of inbound tourism

Gago and Labandeira (2006) attempted to explore the external cost associated with tourism and analyzed the impacts of imposing tourism tax to relieve the negative effects of inbound tourism.

Costs of Inbound Tourism External Cost • Overproduction

• SMC > SMB • DWL

Price

Quantity

Demand (Private Marginal Benefit)

Supply (Private Marginal Cost)

Social Marginal Cost

Market Q Social Optimal Q

External Cost

Deadweight Loss


In theory, the problem caused by external costs could be solved if the government imposed a corrective tax (修正租稅) However, in practice it is very difficult to estimate the size of external cost.

Price

Quantity

Demand (Private Marginal Benefit)

S1 (Private Marginal Cost before Tax)

S2 (Private Marginal Cost after Tax = Social Marginal Cost)

Market Q before Tax Market Q after Tax = Social Optimal Q

Correct Tax (t)


• The external cost of IVS is very difficult to quantify (e.g. over-crowded environment in some districts)

• Much of these costs of becomes significant when the number of visitor arrival is high, relative to the capacity to receive visitors.


• Traditional businesses and other small and medium enterprises (SMEs) were forced to close down or move to areas with lower rent.

• Multi-national and prestigious brands and corporations expanded their retail outlets and replaced the original local stores.


Industry

行業分類

Percentage Change

改變百分比

Cosmetics and personal care products化妝

品及個人護理用品 1500.0%

Wearing apparel and footwear成衣及鞋類 41.5%

Leather goods皮革製品 32.9%

Jewelry and watches珠寶首飾及手錶 30.5%

Audio and video equipment and

photographic equipment影音及攝影器材 21.6%

Food stuff食品 4.7%

Medicine, health supplements and Chinese

drugs藥物、健康補給品及中藥 4.7%

Non-specialized goods(groceries of Chinese

provisions and general household goods)

非專門貨品(一般糧油食品和家庭用品)

-29.5%

Books, newspapers and stationery

書報及文具 -25.4%

Change in Number of Retail Stores by Industries from 2004 to 2013

Source: Census and Statistics Department


• Many claimed that shop variety has been reducing due to large number of visitor arrivals.

– Daily lives of local citizens are affected

– Traditional stores and some SMEs are affected

– Heavy reliance on tourists

Income Redistribution Effect

• Rapid increase in shop rental rates – benefits landlords and chain stores especially

luxury brand

• Contribute to employment – especially for low skilled labour

• Overall impact? May not be as straightforward as it seems.

Macro Theory: AD-AS Model

Spending by visitors • included in export of services • X, AD

AD = C + I + G + (X – M)

Aggregate Demand - the total demand for goods and services in an economy


Inbound tourism stimulates I • capital investment on tourism • e.g. accommodation, restaurants

AD = C + I + G + (X – M)

Aggregate Demand

Inbound tourism stimulates C • disposable income • C

Multiplier Effect


Aggregate Supply - total supply of goods and services that firms in a national economy. The aggregate supply is constrained by the production capacity.

Price Level

Output

SRAS


The impacts of IVS will be different when the economic conditions are different

Price Level

Output

AD1 AD2

SRAS

Y’ Y

P

P’ e1

e2

Price Level

Output

AD1 AD2

SRAS

Y’ Y

P

P’

e1

e2

When there is room for expansion… When it is close to capacity…

Policy Analysis & Evaluation

(b) Lower-spending visitors • people from the second or third tier cities

1. in AD may be small

• Expand IVS to cover more cities

• Expand the scope of multiple-entry Individual Visit endorsement (M permit)

Policy:

(a) Visitor arrivals • slower expected income growth of mainlanders • rising price level in HK • Dropping exchange rate of other countries

Policy Analysis & Evaluation Aggregate Supply – are we getting close to the capacity constraint?

(a) Accommodation Service • extremely high room occupancy rates • inelastic supply of hotel rooms

(b) Public Transportation Service • MTR expansion

• constrained by the current infrastructure • constrained by the maximum train frequency

(c) Retail and Catering Services • retail premises for stores • labor constraints

Unemployment rate in recent years: 3.3% – 3.4% lowest level since 2000

Policy Analysis & Evaluation 2. SRAS

(a) HK is reaching production capacity • translated into inflationary pressure (P) • hardly significant increase in real output(Y)

(b) High rental rate of shops and labour cost • SRAS

depends on HK’s ability to produce

Policy Analysis & Evaluation Conclusion

Price Level

Output

AD1

SRAS1

Y

P e1

Y’

P’

AD2

e2

SRAS2

Y’’

P’’

e3

THE END

Thank you and questions are welcome!

Reference and Sources

• Sung, Yun-Wing (2014), Economic Benefits of the Independent Visitor Scheme for Hong Kong: How Large are They?, Shanghai-Hong Kong Development Institute, CUHK

• Cover photo: Patrick Cheung

• Images: Office.com

• Graphs: produced by author

• Data: Census & Statistics Department, HK Annual Digest of Statistics, HK Monthly Digest of Statistics, HK Tourism Board, Rating and Valuation Department, Report on Annual Earnings and Hours Survey

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