EF3461 The Economies of Mainland China and Hong Kong Tutorial 4 Hong Kong’s productivity and competitiveness City University of Hong Kong Dr. Isabel Yan

1. The Productivity of HK (Li(2002) Ch3) Definition of Total Factor Productivity (TFP) Total factor productivity measures the overall efficiency of production. In a neo-classical production function, the aggregate output (Y) depends on the quantity of capital (K), the quantity of labor (L) and the total factor productivity/level of technology (A). “A” is a catchall term that captures the total production efficiency. The production function is specified as follows :

Productivity Accounting – How to Measure Total Productivity Growth? Differentiating the production function with respect to time and dividing through by Y: Define, In other words, productivity growth is the “residual” growth after we subtract the growth of capital and labor (each weighted by its share of factor payment) from the output growth. Usually a constant returns to scale is assumed, which means that.

Classification of industries: Before looking at the data, we need to know how the industries are classified into various sectors based on their tradability: Goods sector Services sector Tradable goods sector Nontradable goods sector Nontradable services sector Tradable services sector Manufacturing, Mining and quarrying Construction Electricity, gas and water Real estate Hotel Air/water Transportation Storage Financial services, business services, insurance and real estate services Wholesale and retail trade Restaurants Communication Community, social and personal services

An alternative classification of the services sector is made by Richard Wong and Zhigang Tao(2000). They classify services according to the production activities: Services sector Services sector In the last two decades, HK’s manufacturing firms relocated to Mainland China. Hence, HK transformed itself from an industrialized city into a service hub dominated by producer services, which provides supports to the manufacturing production base in Mainland. Producer services are knowledge intensive. Consumer services Services for final consumption Producer services Services output of the industries that produce intermediate inputs. Producer services add values to the output of other economic units Government services Services provided by the government Restaurants Hotels Community & Personal Services Financial services, business services, insurance and real estate services Government Services

Discussion Question 1 1. Based on the data in table 3.6, analyze the changes in the productivity of HK in the various sectors. 1a. Which sector had the highest total productivity growth during ? Does this industry belong to the tradable or nontradable sector? 1b.What do you think are the factors that contribute to the rapid total productivity growth of this industry? 1c. Which sector had the lowest total productivity growth during ? Does this industry belong to the tradable or nontradable sector?

Lowest TFP growth in

Highest TFP growth in

1a. The financial services/insurance/real estate services/business services industry had the highest TFP growth in This industry belongs to the tradable services sector, or the producer service sector based on Richard and Zhigang’s classification. 1b. Reasons for the high technological growth in the tradable sector/ producer service sector: 1. The tradable services sector is a competitive sector which faces keen competitions from foreign suppliers. For this reason, higher technological growth is necessary to keep up with parallel competitors. 2. The economic integration with the Mainland China gives rise to the demand for producer services in HK, because Mainland China hinterland is actually home to 2/3 of HK’s relocated industries. The higher demand provides incentives for the introduction of new technology to lower cost and improve efficiency. 1c. The electricity, gas and water industry had the lowest TFP growth in This industry belongs to the nontradable goods sector.

2. The Competitiveness of HK Two Measures of Competitiveness: 1.Productivity -- Total factor productivity (TFP) 2.Unit Labor Cost One measure of the production cost is the unit labor cost, which is measured as the ratio of payroll per person and labor productivity: unit labor cost = payroll per person/ labor productivity payroll includes wages, overtime pay, shift allowance, bonuses etc. where payroll includes wages, overtime pay, shift allowance, bonuses etc. Labor productivity is the ratio of real output and the number of persons engaged in the production. persons engaged in the production. Based on the definition, we can see that the unit labor cost is inversely related to the labor productivity.

Discussion Question 2 2. Based on the data in table 3.9, analyze the changes in the unit labor cost of the various sectors in HK during a. Which sector had the largest increase in unit labor cost during ? 1b. Which sector had the largest decline in unit labor cost during ?

Nontradable Tradable

Based on the data in table 3.9, we observe the following characteristics of HK’s competitiveness during :   The competitiveness of HK’s nontradable sector fell, as indicated by the increase in the unit labor cost. This supports the hypothesis that the high monopolistic power in the nontradable sector shields them from international competition, resulting in higher costs in this sector and hence erodes its competitiveness   The tradable goods industries (mainly manufacturing) showed the largest increase in competitiveness as indicated by its large decline in the unit labor cost