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Essay/Term paper: The unemployment rate

Essay, term paper, research paper:  Economics

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The Unemployment Rate


The unemployment rate became a hot topic in the past few months when it rose to
3.5 per cent, a recent high for almost 10 years. The jobless rate was higher
than the 3.2 per cent unemployment rate recorded in the May to July period. The
underemployment rate in the June to August period rose to 2.5 per cent from 2.3
per cent in the May to July period. Until recently, most workers who lost their
jobs were from the manufacturing sector. They were middle-aged factory workers
with few skills and little education. But in recent months a large number of
employees have been laid off in the retail and restaurant businesses.
Unemployment has spilled over to the service sector from manufacturing sector.
Hong Kong is facing a prolonged economic downturn.

The high unemployment rate has raised many social and economic problems. For
example, the number of people who commit suicide is increased. It is because
more people had lost their jobs for a long time. It is a serious threat to the
lives of the poor. The unemployed people may also feel that it is unmeaningful
to live. As a result, they will commit suicide to solve the problem. Moreover,
the high unemployment rate results in the increase of the rate of crime. There
was an unemployed man who stole rice because he was too hungry and he did not
have money to even buy food! We can know how serious the unemployment rate is.

By the way, higher unemployment rate causes lower purchasing power of people. A
lot of kinds of business are affected. Many people lose confidence in economics
of Hong Kong. They do not believe unemployment will be improved. Some say that
the Government should provide immediate assistance for the jobless. Some also
say unemployment is due to the attraction of cheap labor across the border. The
Government can no longer play the role of a bystander.

All of these above show the influence of the unemployment. In spite of how many
people who have talked about the topic of unemployment, everyone will be
concerned about this topic. The following sections will analyze this hot topic.
Reasons for unemployment in Hong Kong

1. Faster growth in total labor supply relative to that of total employment

In 1993 and 1994, the increase in Hong Kong labor force is 2.9% and 3.5%
respectively. At the end of 1993, the total labour supply is 2 970 000. Change
in the total labour supply is determined by the population growth, total
employment and the emigration condition. If the population growth and the total
employment is stable, the extra labour supply will increase the total labour
supply. This extra labour supply are mostly from the influx of illegal
immigrants from China, imported labour ( 30,000 ), hiring of expatriates ( net
increase is 40,000 from 1992 to 1994 ) and the returnees from overseas. Thus,
the supply of labour is greater than the demand and gives pressure on employment.
From March to May of 1995, the total labour supply had risen 4.4% but the total
employment had just increased 3.6%, so this aggravated the unemployment rate.
However, this is just a superficial reason. The following reasons can explain
the reason of unemployment in a deeper way.

2. Change in the economic structure

The economic structure in Hong Kong has changed from labour intensive to high
technology and large capital intensive. Also, it changes from manufacturing
oriented to service oriented industries. Therefore, the manufacturing factories
move to China for cheap labour. From 1988 to 1994, there are 60,000 jobs lost
each year. Of the total employment of different sectors, the portion of the
manufacturing industries drops from 27.4% in 1990 to 17% in 1994. Many labour
are released from the manufacturing industries. Though there are a great demand
of labour in the service sector, many of the unemployed still cannot find their
job because of job matching problem. They do not have the skills demanded in the
job market, so there are both a lot of vacancies of jobs and a lot of unemployed
labour. This kind of unemployment is called the structural unemployment which is
a kind of involuntary unemployment.

3. China Policy

Recently, the Chinese government tries to control the economy by macro policy
such as implementing the contractionary monetary policy , inflation control
policy. This leads to the slow down in the Chinese economy. The flow in of the
Chinese capital to Hong Kong for speculation and investment reduce. This affects
Hong Kong's economic growth simultaneously.

In the past, the prosperous China-Hong Kong trade motivated the purchasing power
in the service sector of Hong Kong. However, there are some changes in the
investment environment in China recently. Firstly, it is the high inflation rate.
For the past two years, the inflation rate was about 20%. Under the macro policy,
the recent figure is 18.5% which is still quite high. Secondly, the government
begins to raise the property tax. With these two factors, the profitability of
investing in China decreases. Therefore, the purchasing power of Hong Kong's
service sector is directly affected and so many labour are being dismissed.

4. High rent and high inflation rate

8 years continuous high rent and high inflation rate make the production cost of
the Hong Kong enterprises, especially the labour cost , increase tremendously.
On one hand, this encourages the enterprises move their labour-intensive
industries to other place where the labour cost is cheaper. On the other hand,
these enterprises try to dismiss labour or reduce the engagement of work force
but change to more capital and technology dedication in order to reduce the
production cost, increase standardization and productivity. Also, many
enterprises could not stand the high rent and closed down, such as the Japanese
department store, Mitsubishi. A lot of labour are then released out and become

5. Non-intervention government policy

The Hong Kong government lacks long term planning in the economy. They just try
to adopt a non-intervention policy to the economic problems. In fact, in 1980s,
the economic structure was changing. The manufacturing industries were declining.
However, the government did nothing to help.

Also, the government, for a long time, ignores the research and development of
the high technology application. Thus Hong Kong's industrial technology cannot
not catch up with the other three dragons. This explains why the productivity of
the Hong Kong people is reducing recently. In 1990-1994, the productivity of
Hong Kong labour is 3.8% but Taiwan and South Korea is 4.8% and Singapore is
4.5%. From this , we can see that the competitive power of the Hong Kong
industries is weakening and high unemployment rate is inevitable.

Government carries out high land policy which leads to a tremendous rise in the
property price, so the rent of the shops and factories increases. The widespread
implementation of the sewage treatment charges also increase the production cost.
This is also a reason why the factories move to the north or close down.

6. Labour importation scheme

Is it the main reason responsible for the rising unemployment rate in Hong Kong?

a) The viewpoint of the government Government economist Tang Kwong-yiu said that
the labour importation scheme is not the main responsible for the rising
unemployment rate in Hong Kong. He attributed it to the faster growth in total
labour supply relative to that of total employment. Students looking for summer
jobs have aggravated the unemployment problem during the last three months. Also,
the influx of illegal immigrants from China, the return of overseas Chinese and
the hiring of expatriates also aggravated the job shortage. However, Mr. Patten
proposed replacing the Labour Importation Scheme with a Supplementary Labour
Scheme that would aim to cut the number of imported workers from 25,000 to 5,000
from January.

b) The viewpoint of Democratic Party Though the labour importation scheme is not
the main reason, it's implementation aggravates the unemployment problem. They
believe that the change in the economic structure is the main reason. The
problem became obvious in the mid 80s as many factories moved to the north.
However, the government did not intervene. They still want a termination of the
scheme so that the problem can at least be lessen at the mean time.

c) The viewpoint of the labour union They believe that the this scheme should be
stopped at once. They were disappointed by the Governor's failure to scrap the
imported labour scheme for the new airport project. Construction workers would
continue to see their jobs being taken by foreign laborers. Unionist Lee-Cheuk-
yan said that in Hong Kong, we don't need any imported labour, not even 5,000.

d) The viewpoint of the economists

i) Mr. Lui from the Economic Development Research Center of HKUST A research has
been done and the result is that the change in the economic structure contribute
60% for the rising unemployment rate. The labour importation scheme is just a
minor factors and the influence to the labour market is not significant. The
scheme is not just carried out in Hong Kong but also in USA and Germany. But we
cannot see that imported labour has significant influence on the unemployment
rate. This is because imported labour though take away the job of the local
labour, at the same time they create job opportunities for them. If the company
employees imported labour, the production cost can be reduced. This will keep
the enterprises from moving to other places or even will attract more investors
to Hong Kong. This will benefit the local labour.

ii) Mr. Wong from the Management Department of Lingnam College He does not agree
with the research of Mr. Lui. He believe that though the importation scheme is
not the main reason , it is the root of the sin. The influence that bring to the
economy is not insignificant. What's wrong with this scheme is that the
government officials ignore the opinion of the public and make this scheme as a
long term policy. Also, the imported labour are widely employed in all kinds of
job, so the government has not considered the employment problem of the labour
released out from the declining manufacturing industries.

Despite the effect of the labour importation scheme, this economic argument has
changed to a political issue for difficult political party to gain votes in the
election and support. They all try to bargain with the government officials and
propose bills to debate in the Legislative Council for a termination of the


In previous parts, we have explore the reasons of high unemployment rate
recently, how we will begin the part that describe the situation of Hong Kong's
unemployment. It includes description about the current unemployment situation
and the changes on unemployment rate in the past 10 years, as well as the
underemployment rate. Also, we will analyze the change in our labor force.

In the second part, the unemployment rate in specific sectors will be analyzed
so that it can help to study the structural change in the unemployment rate.
Also, the reason of the structural change will be analyzed.

A. Unemplopment, Underemployment and duration of unemployment

1. Unemployment in HK

The recent unemployment figure in the 2nd quarter of 1995 is 3.2%. It is the
highest figure in the past nine years. Many people as well as the government are
announced of this significant increase in unemployment rate.

It is concluded that unemployment in HK changed from short-term to long-term.
The unemployment in 1989 is 1.2%, it gradually jumped to 3.2% in 1995, there is
continuous increase year to year, but no decrease in this 7-year period. Before,
problem of higher unemployment rate only extended from 2 to 3 years. This
description of figures show how unemployment change from short to long term.

Also, a graph is presented to show the changes of the unemployment rate in the
past 10 years.

2. Underemployment in HK

When a person who work for pay less than 35 hours in a month, he is said to be
under-employed. In the 2nd quarter of 1995, the underemployment rate reached
2.1%. There are about 589,000 people who are under-employed. There, we will also
present the figures in the past 10 years in a graphical form which can help to
detect the degree of changes.

3. Duration of unemployment

In 1994, there are 21,000 persons unemployed for more than 3 months , it
contributed 26.2% of the total number of unemployed workers. The figure jumped
to 31,000 in 1995, the contribution also increased to 31%. The data help to
conclude that the duration of person who are unemployed extended very much.

Before, they are temporarily unemployed, but they can soon find a new job within
a short period. But now, they have to face a permanent problem of losing job. A
set of data further illustrates the worse situation. The number of persons
unemployed for more than 6 months in 5 recent quarter are presented in a table.

B. Structural change in unemployment

According to the statistical data, the nature of unemployment rate changed very
much. Before, labour in manufacturing sector suffered most from economic
slowdown and change in economic structure. However, the retail and service
sector also face this problem. The unemployment problem extended from
manufacturing sector to nearly all industry in HK.

In this part, we are going to analyze the structural changes and explore the
reasons leading to these changes, particularly in the manufacturing, retailing,
service and construction industries.

1. Manufacturing sector

In 1987, the manufacturing sector employed about 800,000 workers, but it
gradually drop to 395,000. In the sector, there is an average decrease of 50,000
to 60,000 persons employed.

The unemployment rate particular in the manufacturing industry from 43.9% in
1989 to 53.6% in 1994. There are several reasons explaining the increase.
Firstly, owing to economic slowdown and structural change, the manufacturing
industry is badly affected, many firms were closed. To save cost, the factories
move their production line to mainland China to take advantage of cheap labour.
It left many local workers unemployed. In addition, the workers in the
manufacturing industry are of low skills, and they are incapable to find other
job requiring special skills. Another reason is which is controversial is the
importation of labour. Because their wages are lower, local workers are replaced
by them because the manufacturers want to save cost. As a result, unemployment
become more serious in this sector.

2. Retailing sector

Before, local retailing industry prosper from 1980s due to economic growth and
full confidence of investors to make investment in HK or in China. But in recent
years, retail industry also suffer a slowdown.

According to statistical data, in the past 3 years, the retail industry has an
average 1.9% growth in sales volume. However, in April 1995, the figure
decreased for 2% compared with the same period in last year. Also, unemployment
rate in this sector increased.

In first quarter in 1995, the total unemployment in retail industry contribute
30% of the economy's total, which it the second highest share, while the largest
share is the manufacturing industry.

3. Service industry

Service industry continuously grow in the 1980s and early 1990s. Many people are
employed in this sector. However, it also suffered from the economic decline in
recent years. Service sector includes the hotel service, transportation service,
food and beverage, financial and asset management, etc.

In the service sector, there are about 15,000 people unemployed in 1995, which
represents an 21% increase compared with last year. It is higher then the total
unemployment figure in the manufacturing industry.

The reasons are basically the same in explaining high unemployment rate in both
the retailing and service industry. Again, economic slowdown lead to reduced
investment and consumption of goods and services. Also, economic decline in
China also reduced investment projects in the Mainland, thus demanding less

With high inflation rate, people are more sensitive on the way they spend money.
Now, they spend less on buying goods and consuming service which are unnecessary.
Therefore, large service corporation such as HK Telecom begin to cut the labour
force to fit with the demand.

More importantly, service industry also start to operate in Mainland China. The
decline in the service industry cannot absorb the large labour force, especially
workers who leave from the manufacturing industry.

4. Construction industry

The unemployment rate in this sector is lower when compared with the
manufacturing, service and the retailing industries. In 1995, the unemployment
rate in

construction decrease, but the underemployment rate increased. There are some
large project that lead to greater labour supply in the construction sites. For
example, the New Airport project demands many skilled construction labour. On
the other hand, the demand of lower-skilled construction workers decreased
because of the decline in the estate market.

The large construction project are often technology oriented, and the machines
and equipment is more difficult to manipulate. So, unemployed construction
workers from the estate market cannot transfer to the large project because they
are not qualified to operate the high-tech machines. Therefore, some vacancies
are unfilled by the low-skill workers. Unemployment in this sector remains

C. Vacancies by different sectors in HK economy

The following chart is given to illustrate the portion of vacancies by different
sectors in 1995.

It is arguable that the unemployment in HK is not so serious, because there are
still many vacancies . However, the problem is that the unemployed workers
cannot find the job that fit to them or they refuse to accept a lower wage. On
the other hand, employers may not employ workers of lower skills. So, there is a
situation that the demand and supply of labour skill is not matched.

D. Relationship Between Unemployment Rate and Inflation Rate

A general belief tells that there is a negative relationship between
unemployment rate and inflation rate. Some economists claim that the
contemporary economic situation in Hong Kong, high unemployment rate associated
with a relatively low inflation rate, is a predictable result from periodical
adjustment of built-in economic mechanism. Since 1987, the persisted high
inflation rate had pushed the costs of production and operation up to a very
high level. Therefore, people suffered from a reduction of purchasing power and
negative wealth effect. Meanwhile, people tend to save more because of their
fear on the instability arising from the transition of sovereignty in 1997. On
the other hand, policy-makers tried to release the high inflation rate by means
of imposing a higher interest rate. By the way, the general price level begins
to fall after a continuous increase for eight years.

Inflation rate & Unemployment rate in HK, 85-95

Unemployment rate
Inflation rate
1995(qtr. 1)
1995(qtr. 4) (estimated)

As explained in the previous sections, the high unemployment rate is caused by
many factors, like change in economic structure, importation of foreign labor,
which will eventually lead to a negative wealth effect and a reduction in
general consumption level. The low inflation rate is traded off by a high
unemployment rate. On the other hand, the serious unemployment rate demonstrates
that our economy has moved from an economic boom period to a slump in which
accompanied with a low inflation rate.

1. Empirical observation in Hong Kong & Phillips curve

Just similar to what professor A.W. Phillips had practiced during 1950s, we have
plotted empirical observed quarterly data on unemployment and the rate of change
in (wages) inflation for the period between 1977 and 1995 in Hong Kong on a
scattered diagram. In the meantime, we have tried to sketch a curve which seems
to fit the data. By observation, the graph shows that the unemployment rate and
inflation rate is negatively related as long as the curve is downward sloping.

2. Validity

We have found strong evidence showing that professor Phillips' findings on the
relationship between unemployment rate and inflation rate is very much
applicable to the real situation in Hong Kong.

3. Implication

Spotting the optimal combination of unemployment and inflation level is a
difficult task. Generally, the governmental policy, people's expectation, the
stage of economic cycle and the built-in economic mechanism will all contribute
effort in such determination. Cost of Unemployment

Unemployment is costly to society. It affects Hong Kong's economy directly and
indirectly. We may consider the costs of unemployment in different ways. Firstly,
there is a loss of real output in our economy. When the economy does not
generate enough jobs to employ all those who are willing to work, a valuable
resource is lost. Protential goods and services that might have been enjoyed by
consumers are lost forever. This is the real economic cost of high unemployment.

Secondly, unemployment leads to the decline of purchasing power and negative
wealth effect is resulted. According to the Keynesian Consumption Theory,
current consumption depends on current income. The permanent income hypothesis
also emphasizes how the future affects consumption today by pointing out that
people save in good years to carry them through bad years. Changes in
consumption will be affected by changes in wealth. As a whole, consumption
decreases under the negative wealth effect. The level of consumption and
investment gradually declines in sectors such as service industry, retailing
industry, food industry and manufacturing industry. Some industries may even
shut down. Employees lose their jobs as well. This becomes a spiral effect in
our economy. The costs of unemployment should also include the searching costs
for new jobs. In Hong Kong, there is a problem of frictional unemployment.
People leave jobs for all sorts of reasons, and they take time to find new jobs.
Inevitably we have a pool of people who are "f rictionally" unemployed while in
the course of finding new jobs. But in attempting to find a job (in most
favourable wage rate), the worker incurs search costs in terms of extra
time,effort and wages forgone. The wise worker will weigh the gain from extra
search against its costs. If some workers found that it is difficult to find a
new job, they may accept lower wages offered by the employers in order to save
the search cost. There may be a trend that the wage rate gradually decreases and
the negative wealth effect still appears. Also, when there is unemployment,
there is a loss of accumulated work experience, an invaluable asset to the
economy. Depreciation of human capital results. This is the social cost of

Moreover, high unemployment leads to higher incidence of psychological disorders,
divorces, suicides, mental anxiety and ill health. People's self-respect and
also their health are harmed as a result of unemployment.

Futhermore, the private cost of unemployment for an individual may be greatly
reduced if we consider the value of leisure (or of not working), and if
unemployment benefits are offered by the government.

Finally, unemployment is not only an economic aspect, it also becomes a
political conflict. As we know, conflicts are found between two sides. On the
side of general public, labor union and democratic parties, the influx of
foreign labor force is the main reason of unemployment. They urgently ask the
government to restrict their entrance. On the side of Hong Kong government, the
enterprises and the capitalist, it is not the main reason. Unemployment is
mainly caused by the structural change of our economy. However, the request and
discontent of the public forced the government to make a concession. That is to
make regulations to restrict the influx of foreign workers.


Finding ways to solve the unemployment problem is of utmost importance now.
Since the supply of labor is so much greater than the amount demanded, one way
is to let market mechanism to determine the relationship between labor supply
and labor demand. The Government can also implement some new plans to help lower
the high unemployment rate. According to the reasons of unemployment that we
have discussed, below are some suggested solutions:

1) Correct Hong Kong people's attitude on "full employment", to let them realize
that Hong Kong's unemployment level will be at a rather stable rate of 3-4%
these few years. So, by maintaining the unemployment rate at 2-3% can help to
control the increase in labor cost as well as the stability of the Hong Kong

2) The high unemployment rate of Hong Kong is partly attributed by the increase
number of imported labor. Therefore, the simplest way is to reduce the number of
imported labor. The Government should base on each year's economic growth rate
to adjust the necessary number of imported labor so that it can match with that
of the market labor demand. Actually, the increase in the number of imported
labor is due to their willingness to accept lower wages than local workers. But
does it mean that if the local workers are willing to lower their wages to a
level that is too low and harsh treatment at the same time, like working for
long hours and accepting a wage of only $4,000 a month. Their wage cannot
support their basic living needs. So, workers are not always passive, they
should voice their opinions and fight for their own rights like strengthening
the power of the labor unions and not just relying on the Government for
implementing new policies to combat unemployment.

3) The Government could lower the requirements for applying the unemployment
allowance to help workers solve their problem. However, the workers should not
just wait for the help from the Government. They should actively seek jobs and
can show their discontent to the Government for unfair treatment. Some companies
also employ illegal workers. The Government can also implement new laws such as
that in the United Kingdom. It will be a criminal offense if the employers
employ illegal workers. This can help to deter them from hiring those illegal

4) Increasing investment and production capacity can also be a solution. The
Government can do this by increasing its expense and decreasing the profit tax
rate so as to raise investment interest in the local industry. If there is an
increase in investment, there will be more employment opportunities, increasing
both the supply and demand. Increasing government spending can stimulate
aggregate demand and hence decrease the unemployment rate. By doing these can
also strengthen Hong Kong's competitiveness with other Asian countries.

5) It is important for the Government to manage the increase in labor cost,
increase employment as well as labor productivity. there should be strategies to
maintain economic growth in a steady rate, to control labor and labor cost form
growing too fast and to prevent the increase in inflation rate due to economic
growth. The Government can set up a committee to look into the cause of some old
industries since structural changes of the economy is the main reason for the
high unemployment in Hong Kong. People do not possess the necessary skills
needed to perform some specific task.



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