Sources of Employment Growth in Hong Kong
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FEATURE ARTICLE Sources of employment growth in Hong Kong by Frank Leung, Kevin Chow, Wendy Woo and Dickson Tam of the Research Department This paper analyses the sources of employment growth and assesses the contribution of Mainland China’s demand to job creation in Hong Kong. Contrary to perceptions, this analysis suggests the import/export sector, instead of the financial sector, is the major contributor to employment creation in Hong Kong in recent years thanks to the fast-growing re-export trade. Increasing service demand in Mainland China will continue to boost domestic employment in areas like trade and financial services, while the construction boom in Macao is expected to create more new jobs for Hong Kong’s construction workers. However, if the headline unemployment rate continues to ease, a tightening labour market may put upward pressure on wages and inflation. Overview Despite higher employment, a sectoral breakdown Employment expanded at an average rate of 2-3% shows that unemployment rates remained high in the per annum from 2004 to 2006 after the economic construction, restaurants/hotels and wholesale/retail downturn in the preceding years. Since the trough in sectors.1 Increased infrastructure spending by the 2003, some 318,000 jobs have been created by the Government and the construction boom in Macao second quarter of 2007, mainly in the service sector. are expected to create more jobs for domestic Disaggregated data show structural shifts in construction workers, while growing household employment across different service sectors in recent spending and inbound tourism will boost employment years. Growing trade and financial activities between in retail trade, restaurants and hotels, which will help Hong Kong and Mainland China have boosted lower the overall unemployment rate. employment growth in the import/export and financial services sectors. Sources of Employment Growth From 2001 to 2005, about a quarter of the In recent years, stronger growth in employment employment growth in Hong Kong was derived from relative to the labour force has driven down the growing service demand in China, particularly in unemployment rate from the peak of 8.5% in mid- areas like trade and financial services as a result of 2003 to a nine-year low of 4.2% in the second China’s strong economic performance. This helped quarter of 2007. Distribution of employment by mitigate the negative impact on the domestic labour economic sector shows that growing labour demand market during the cyclical downturn in Hong Kong’s in the service sector has been the key driver of economy. employment growth over the past few years, as 1 Except for hotel services, of which the unemployment rate has declined to the pre-1997 level. 16 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN SEPTEMBER 2007 FEATURE ARTICLE SOURCES OF EMPLOYMENT GROWTH IN HONG KONG domestic manufacturing industries continued to The import/export sector has been the main downsize their operations in Hong Kong and contributor to output and employment growth in the subdued residential investment restrained labour recent economic upturn. During 2003-06, when demand in the construction sector (Chart 1). The employment in the import/export sector grew at its expansion in service sector employment has been fastest annual pace of 7.7%, nearly one quarter of broad-based, with job creation mainly concentrating output was attributed to external trade activities. As in import/export trade, and personal, financial and a result, the share of the import/export sector in total business services (Chart 2). employment increased to 15% in 2006 from 10% in 1996, the highest among the key economic sectors CHART 1 (Table 1). This was followed by the real estate and Employment by economic sector business service sector, where employment Person (’000) Person (’000) increased by an average annual rate of 4.2% during 800 3,200 2003-06, mainly reflecting strong job growth in 700 3,000 accounting and legal services. Over the same Manufacturing (lhs) Services (rhs) period, employment in the financial and insurance 600 2,800 sector rose by an annual rate of 3.4%, marginally higher than the overall growth rate in service sector 500 2,600 employment. Employment growth also turned 400 2,400 positive in wholesale/retail trade, restaurants and hotels sectors, due to the strong revival in consumer 300 2,200 spending and inbound tourism. However, labour Construction (lhs) demand remained weak in the construction sector, 200 2,000 94 95 96 97 98 99 00 01 02 03 04 05 06 while manufacturing employment continued to shrink. Source: C&SD. CHART 2 Contribution to service sector employment growth % 6 5 4 3 2 1 0 -1 -2 97 98 99 00 01 02 03 04 05 06 Wholesale & retail Import/export Restaurants & hotels Transport & communications Finance & insurance Real estate & business services Social/personal services Service sector employment growth Sources: C&SD and staff estimates. HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN SEPTEMBER 2007 17 FEATURE ARTICLE SOURCES OF EMPLOYMENT GROWTH IN HONG KONG TABLE 1 Employment growth by economic sector Share in total employment Average annual growth (Unit: %) 1996 2006 1996-2003 2003-2006 Manufacturing 16 6 -8.2 -6.9 Construction 9 8 -0.7 1.2 Service sector 74 85 2.2 3.1 Wholesale & retail 12 10 -1.6 1.2 Import/export 10 15 5.2 7.7 Restaurants & hotels 8 7 -0.5 0.7 Transport & communications 11 11 0.3 2.4 Finance & insurance 5 5 1.6 3.4 Real estate & business services 7 10 5.2 4.2 Social & personal services 22 26 3.4 1.9 - Public administration 4 4 0.5 -1.9 - Education & medial 7 8 2.5 2.2 - Other personal services 11 15 4.9 2.8 Total employment 100 100 0.6 2.2 Sources: C&SD and staff estimates. What has driven the current CHART 3 employment growth cycle? Output growth and employment growth % yoy % yoy 16 8 The strong revival in aggregate demand has been the Real GDP growth (lhs) main factor behind the recent expansion in service 12 6 sector employment. Historical data show there is a 8 4 strong positive relationship between employment growth and output growth, with the former being 4 2 driven by the latter with a time lag of about one quarter (Chart 3). During 2003-06, real GDP grew 0 0 at an above-trend rate of 7.7% per annum, turning -4 -2 the output gap to positive in 2005 and 2006. The Employment growth (rhs) broad-based economic upturn and growing -8 -4 profitability have supported business owners to 94 96 97 98 99 00 01 02 03 04 05 06 Sources: C&SD and staff estimates. expand their workforce and investment. While service sector employment has generally benefited the most from the recent economic upswing, disaggregated data show that employment growth varied substantially across different service 18 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN SEPTEMBER 2007 FEATURE ARTICLE SOURCES OF EMPLOYMENT GROWTH IN HONG KONG sectors. Chart 4 compares output growth and CHART 5 employment growth of key service sectors during Output per labour in the financial services sector 2003-06. Employment growth in real estate and HK$’000 business services was shown to be more responsive 1,800 to output growth, as these sectors were more labour- 1,600 intensive and the scope for labour-capital 1,400 substitution was limited. In contrast, employment 1,200 growth in communications, restaurants and hotels, 1,000 wholesale/retail trade remained subdued, and stayed 800 below their output growth. One striking development 400 is that despite the strong expansion in financial 600 activities in recent years, employment growth in the 200 financial and insurance sector has lagged behind 0 output growth. 2000 2001 2002 2003 2004 2005 2006 Financial & insurance Real estate Business services Sources: C&SD and staff estimates. CHART 4 Output and employment growth among key service sectors CHART 6 Employment Average annual growth (2003-2006) Per-labour IT investment in the service sector 9 Import/export HK$’000 8 100 7 6 80 Real estate & business services 5 Finance & Transport insurance 60 4 & storage 3 Wholesale 40 2 & retail Social & personal Restaurants & hotels 1 services Communications Output 20 0 0 2 4 6 8 10 12 14 16 18 20 0 Sources: C&SD and staff estimates. 2000 2001 2002 2003 2004 2005 Finance and insurance Transport and communications Real estate and business services One possible explanation for the tepid growth in Wholesale, retail, import/export, restaurants and hotels financial sector employment relative to output growth Social and personal services Sources: C&SD and staff estimates. is that financial institutions have been investing heavily in information technology (IT) and shifting their business mix to higher value-added services Contributions from Mainland such as financial planning and wealth management. China’s Demand These factors have helped raise labour productivity and led to higher output per employee (Chart 5). While the strong revival in economic activities has Compared with other service sectors, per-labour IT been the key driving force of employment growth spending in the financial and insurance sector is the in recent years, growing business activities with highest (Chart 6). The relatively limited labour supply Mainland Chinese enterprises and stronger in face of the booming demand may also explain the service demand from Mainland China have created moderate growth in financial sector employment in new job opportunities in the domestic labour recent years. market. This has also led to an increasing number of Hong Kong residents working in Mainland HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN SEPTEMBER 2007 19 FEATURE ARTICLE SOURCES OF EMPLOYMENT GROWTH IN HONG KONG China.