EF3461EF3461The Economies of Mainland The Economies of Mainland

China and Hong KongChina and Hong Kong

Tutorial 4Tutorial 4Hong Kong’s Hong Kong’s

productivity and competitivenessproductivity and competitiveness

City University of Hong KongCity University of Hong KongDr. Isabel YanDr. Isabel Yan

1. The Productivity of HK (Li(2002) Ch3)1. The Productivity of HK (Li(2002) Ch3)

Definition of Total Factor Productivity (TFP)Definition of Total Factor Productivity (TFP)

Total factor productivity measures the overall efficiency of production. Total factor productivity measures the overall efficiency of production.

In a neo-classical production function, the aggregate output (Y) In a neo-classical production function, the aggregate output (Y)

depends on the quantity of capital (K), the quantity of labor (L) and 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 the total factor productivity/level of technology (A). “A” is a catchall

term that captures the total production efficiency. The production term that captures the total production efficiency. The production

function is specified as followsfunction is specified as follows::

KALYfunctionproductionDouglasCobbge

LKAFY

:..

),,(

Productivity Accounting – How to Measure Total Productivity Growth?Productivity Accounting – How to Measure Total Productivity Growth?

Differentiating the production function with respect to time and Differentiating the production function with respect to time and

dividing through by Y:dividing through by Y:

DefineDefine , ,

In other words, productivity growth is the “residual” growth after we subtract the 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) fromgrowth of capital and labor (each weighted by its share of factor payment) from

the output growth.the output growth.

Usually a constant returns to scale is assumed, which means that .Usually a constant returns to scale is assumed, which means that .

))(())((L

L

Y

LF

K

K

Y

KFg

Y

Y LKA

)(),(Y

LFs

Y

KFs L

LK

K

inputlaborin

growth

outputtotalinpayment

factorlaborofshare

L

inputcapitalin

growth

outputtotalinpaymentfactorcapitalofshare

K

outputingrowth

progressicaltechno

growthtyproductivi

A L

Ls

K

Ks

Y

Yg

log/

1 LK ss

Classification of industries:

Before looking at the data, we need to know how the industries Before looking at the data, we need to know how the industries

are classified into various sectors based on their are classified into various sectors based on their tradabilitytradability::

Goods sectorGoods sector Services 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 An alternative classification of the services sector is made by Richard Wong and Zhigang

Tao(2000). They classify services according to the Tao(2000). They classify services according to the production activitiesproduction activities::

Services sectorServices sector

In the last two decades, HK’s manufacturing firms relocated to Mainland China. Hence, HK 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, 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 which provides supports to the manufacturing production base in Mainland . Producer services are

knowledge intensive.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 1Discussion Question 11. Based on the data in table 3.6, analyze the changes in 1. Based on the data in table 3.6, analyze the changes in

the productivity of HK in the various sectors.the productivity of HK in the various sectors.1a. Which sector had the highest total productivity growth during 1a. Which sector had the highest total productivity growth during

1996-2000? Does this industry belong to the tradable or 1996-2000? Does this industry belong to the tradable or nontradable sector?nontradable sector?

1b.1b. What do you think are the factors that contribute to the rapid What do you think are the factors that contribute to the rapid total productivity growth of this industry?total productivity growth of this industry?

1c. Which sector had the lowest total productivity growth during 1c. Which sector had the lowest total productivity growth during 1996-2000? Does this industry belong to the tradable or 1996-2000? Does this industry belong to the tradable or nontradable sector?nontradable sector?

Lowest TFP growth in 1996-2000.

Highest TFP growth in 1996-2000.

1a. The financial services/insurance/real estate services/business services 1a. The financial services/insurance/real estate services/business services industry had the highest TFP growth in 1996-2000. This industry industry had the highest TFP growth in 1996-2000. This industry belongs to the belongs to the tradable services sectortradable services sector, or the , or the producer service sectorproducer service sector based on Richard and Zhigang’s classification.based on Richard and Zhigang’s classification.

1b. 1b. Reasons for the high technological growth in the tradable sector/ Reasons for the high technological growth in the tradable sector/ producer service sector:producer service sector:1. The tradable services sector is a 1. The tradable services sector is a competitivecompetitive sector which faces keen sector which faces keen

competitions from foreign suppliers. For this reason, higher competitions from foreign suppliers. For this reason, higher technological growth is necessary to keep up with parallel technological growth is necessary to keep up with parallel competitors.competitors.2. The 2. The economic integration with the Mainland Chinaeconomic integration with the Mainland China gives rise to gives rise to the demand for producer services in HK, because Mainland China the demand for producer services in HK, because Mainland China hinterland is actually home to 2/3 of HK’s relocated industries. The hinterland is actually home to 2/3 of HK’s relocated industries. The higher demand provides incentives for the higher demand provides incentives for the introduction of new introduction of new technology to lower cost and improve efficiencytechnology to lower cost and improve efficiency..

1c. The electricity, gas and water industry had the lowest TFP growth in 1996-1c. The electricity, gas and water industry had the lowest TFP growth in 1996-2000. This industry belongs to the 2000. This industry belongs to the nontradable goods sectornontradable goods sector..

2. The Competitiveness of HK2. The Competitiveness of HKTwo 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

where payroll payroll includes wages, overtime pay, shift allowance, bonuses includes wages, overtime pay, shift allowance, bonuses etc.etc.

Labor productivityLabor productivity is the ratio of real output and the number of 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 2Discussion Question 22. Based on the data in table 3.9, analyze the changes in 2. Based on the data in table 3.9, analyze the changes in

the unit labor cost of the various sectors in HK during the unit labor cost of the various sectors in HK during

1995-2000.1995-2000.1a. Which sector had the largest 1a. Which sector had the largest increaseincrease in unit labor cost during in unit labor cost during

1995-2000? 1995-2000?

1b. Which sector had the largest 1b. Which sector had the largest declinedecline in unit labor cost during in unit labor cost during 1995-2000? 1995-2000?

Nontradable

Tradable

Based on the data in table 3.9, we observe the following characteristics of HK’s competitiveness during 1995-2000:

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