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THE UNEMPLOYMENT RATE OF HONG KONG: THE EFFECTS OF AGGREGATE AND SECTORAL CHANNELS

I. INTRODUCTION

The unemployment rate has stayed at low levels since mid-2011. Our previous analysis 1 suggested that the resilience of the labour market was due partly to restrained supply of and strengthened demand for lower-skilled labour. In particular, the booming inbound tourism over the past years played an important role in creating more jobs in the retail and other tourism-related sectors, which tended to hire more lower-skilled labour.

However, with inbound tourism experiencing a downturn since 2015, the unemployment rate for the tourism-related sector has picked up in recent months, posing headwinds to the overall labour market. Meanwhile, the overall unemployment rate has continued to stay at the low levels of 3.3–3.4%. This raises the questions of why the rise in the unemployment rate of the tourism-related sector has not lead to an overall increase in the unemployment rate, and whether this situation would be sustained. Even if the weakness in the tourism-related sectors represented mainly a sectoral phenomenon (i.e. the sectoral channel), the reallocation of labour from these sectors to other sectors may not happen in an instantaneous manner. Moreover, the weakness might also be part of an aggregate phenomenon facing all sectors (i.e. the aggregate channel). Against this backdrop, this study analyses the effects of aggregate and sectoral channels on the overall unemployment rate, with an aim to shed light on the near-term outlook for the labour market.

Our statistical factor analysis suggests that sector-specific shocks were relatively more important than aggregate shocks in driving the weakness in the retail and wholesale sector. While the reallocation of labour from these sectors to other sectors can pose headwinds to the overall unemployment rate (the sectoral shifts channel), our analysis using a vector auto-regression model indicates that historically, sharp changes in the overall unemployment rate were mainly driven by aggregate shocks (the aggregate channel).

The rest of the paper is organised as follows. Section II looks into the sectoral unemployment rates. Section III tries to investigate the role of sectoral or aggregates shocks in affecting different economic sectors. Section IV analyses an index of sectoral shifts and examines its relation with the overall unemployment rate. Section V estimates a vector auto-regression model and compares the relative importance of the sectoral and aggregate channels to the overall unemployment rate. The final section discusses the implications for the short-term labour market outlook.

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1. See Box 2 separately in the September 2012 and March 2014 issues of the Half-yearly Monetary and
Financial Stability Report by the HKMA.

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Content provided by Hong Kong Monetary Authority
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