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8. The labour market is no longer as competitive as it was (large firms claim to have few problems at the moment in recruiting additional labour); the annual upward movement of wage rates will probably be slowed down so long as these conditions persist. Whether and for how long they last is anybody's guess. Further increases in Hong Kong's exports must be dependent on the effect on her export markets of disturbed economic conditions deriving from the oil crisis and possible protective measures that countries may take in difficult times to protect their domestic markets from too high a degree of penetration. Since, as the Financial Secretary told Legislative Council on 29 November, the level of money wages is not responsive to consumer prices, a further fall. in the real wages of industrial workers (already apparent) may continue during 1974.
9. There is no mechanism in Hong Kong at present by which this situation, if it occurs, can be rectified. (Any attempt to control prices was tacitly rejected in the speech quoted earlier). It would be a new and unpleasant experience in Hong Kong for the industrial worker to suffer more than a very temporary and modest set-back to his standard of living. Nevertheless it is believed by Department of Labour officials close to worker opinion that there would be a patient understanding of the situation on the part of those that might be hit and that, in any case, many Chinese employers would voluntarily take steps to improve wages and/or fringe benefits. (It is not, of course, a situation peculiar to Hong Kong. Korea and Singapore, for example, face pressures at this time on the living standards of the lower paid worker - not to mention Japan. But wages are not determined in those countries almost wholly by market forces as in Hong Kong).
10. And if things go wrong? Collective bargaining in a formal sense exists in only very limited areas of employment. Trade union pressure might have some small effect - particularly in those factories where the communist controlled unions are strong, but it would seem unlikely that this would have more than localised effects, There exists an out-dated Trades Boards Ordinance dating from 1940 which provides for the fixing of minimum wages - but this has never been used. Such legislation is in any case so opposed to the orthodox local view regarding intervention that its use in any current difficulty would obviously encounter the strongest opposition. It is worth spelling out the prevailing official
view i.e. that the raising of wages by any mechanism which is not part of the ordinary market forces would make Hong Kong manufacturers less competitive and produce internal deflation. This in turn it is said, would reduce the pressure of demand on labour and consequently, unless wages could fall, give rise to unemployment. Not everyone would accept this argument since it assumes such a narrow margin of return by exporters that there is no margin whatsoever to absorb higher labour costs a most implausible proposition.*
/Prices
It might be useful to provide some framework of comparison for Hong Kong, wages. Marks and Spencers in UK provide a wide range of cheap, good quality knitwear and garments. It is not generally realised that 9% of the goods they sell are made in the UK. The
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CONFIDENTIAL