Random thoughts of an economist

True or False: The increase of tourists has cost Hong Kong 3.5% GDP.

Posted in Econometrics, Economics, Hong Kong, Population, Research, Statistics/Econometrics, teaching by kafuwong on March 4, 2014

First, there is an i-Cable story which uses the statistical analysis of a colleague. Second, there is a column written by a friend. They are both about the extra waiting time due to the influx of tourists.

In the i-Cable story, the reporter took the MTR trains from Tai Wai Station to Wan Chai Station. It showed the amount of waiting to get on a train at every interchange. Then, the reporter interviewed a colleague of mine. He showed that the number of MTR passengers was highly positively related to the number of tourists. Therefore, an increase in the number of tourists would cause an increase in the number of MTR passengers, and consequently the amount of waiting to get on trains, and the amount of time one has to spend on commuting. My colleague’s analysis was not about how the number of tourists would impact on the commuting time. But, audience will get the impression.

In her article, my friend estimated the amount of loss of GDP due to waiting. She used the extra 10-minute commuting time by LegCo member’s experiment during rush hour and deduce a loss of 3.5% of GDP. Suppose all employees has to work 47 hours per week on average and suppose each of them wastes 10 minutes commuting. The extra 20 minutes round trip (10 minutes x 2) is equivalent to a loss of 3.5% of GDP. Striking! The story certainly catches eyes of a lot of people, including me. Unfortunately, striking stories are often wrong — if you are willing to check their calculation or deduction.

I would like to raise two questions:
(1) Is the “extra” waiting time of 10 minutes an upper bound, lower bound or median? I took MTR today and did not have to wait for the next train to get in. Imposing the upper bound on all employees will yield a very unreasonable exaggerated number. I think it is actually much less than 3.5% of Hong Kong’s GDP.
(2) Given it is indeed extra 10-minute waiting, how much of it is due to the tourist or our increase in population and government policy to divert the flow of traffic from buses to MTR (for cleaner air, perhaps)? I do not think most tourists would take the MTR during rush hour. Of course, there are exceptions.
I am waiting for some serious researchers to provide good answer to my questions. Yes, data could be a big problem.

If you are interested in seeing the i-Cable story, here is the link to the video:
http://cablenews.i-cable.com/webapps/program/newslancet/videoPlay.php?video_id=12178031
If you are interested in the column, here is the link to the article:
http://news.mingpao.com/20140304/fad1.htm

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Dreaming of a more efficient allocation of birth quota

Posted in China, Economics, Population, Regulation, teaching by kafuwong on November 16, 2013

China has the one-child policy. The constraint seems to be binding to most families. Casual observation says that almost all married couples want to have two or more. Some would have them illegally, risking the penalty on the extra child. The one-child policy has also caused a gender imbalance due to the traditional preference for boys.

Today, it is reported that the one-child policy may be relaxed, giving the high hope to some of my younger mainland friends to have a second child. The still-in-the-air discussion of two-child policy aims at creating a sustainable population growth, essentially at slowing down the aging process of the population. I can see that some families want to have two or more children and some less than two. Thus, the policy may not achieve the goal of slowing down the aging of the population.

I dream of making the quota tradable as a solution. Give two birth quota to all adult women. They can use it themselves or sell it to someone else. Make a national market of quota trading. By allowing the quota to be tradable, the quota will be used efficiently. That is, the quota will be translated into the population growth as desired.

A forecast of labor shortage in Hong Kong

Posted in Economic growth, Economics, Forecasting, Population by kafuwong on March 11, 2012

Recently, the Hong Kong government released a forecast of manpower supply and demand to 2018. February 09, 2012 (http://www.legco.gov.hk/yr11-12/english/panels/mp/papers/mp0216cb2-1010-1-e.pdf). Some key findings were summarized below.

• The overall manpower supply is projected to be 14,000 people short of the overall manpower requirement in 2018 due to the ageing population.

• Releasing its preliminary key findings today on the manpower projection to 2018, the Labour & Welfare Bureau forecast manpower supply in 2018 to be 3,582,400, while the manpower requirement will be 3,596,400. The manpower requirement is forecast to grow at an average annual rate of 1.1%.

• It said the shortfall is due to slower growth in supply, mainly attributable to the ageing population.

• The manpower requirements of the four pillar industries are projected to increase, with tourism being the highest industry at 2.9% and financial services at 2.5%.

• The three economic sectors expected to grow fastest are financial services, at an average annual rate of 2.5%; and, construction, information and communications, which will grow at 1.9%.

• The Government will continue to upgrade the competitiveness and employability of low-skilled workers through training and retraining, the bureau said.

How do we understand such projection?

First, we have to understand that from economic perspective, without regulations, markets tend to clear by adjusting prices and quantities. Shortage cannot happen if prices are allowed to adjust freely. If one predicts a shortage of manpower, one must have assumed that the prices are not allowed to change. In fact, in economics, a shortage results whenever the price is regulated at a level below the equilibrium wage. That is, a more correct statement is “If wage is now regulated or kept at the current level, the change in supply and demand condition will result in a shortage of manpower of x  number of workers.” The corollary is that “If wage is allowed to adjust to clear the market, the change in supply and demand condition will result in an increase in wage by y  percent.”

We need to read similar reports with a grain of salt. Have we seen any manpower report that forecast a surplus of manpower? Of course not. Why not? Such report is meant to accomplish something. Let’s think about it. If you tell me you forecast a labor shortage, I will probably follow you logic that the labor shortage will hinder economic growth and thus a relaxation of immigration policy is justified. My problem is: Why don’t you describe your forecast as that the wage is going to increase. Is an increase in wage bad news? It is bad news to capitalist who would like to enjoy low-cost labor. However, it is in fact good news for workers! In short, we should understand the conclusion of a labor shortage (instead of an increase in wage) helps the capitalists. Why should we help the capitalists?

If we were start from scratch to produce a similar forecast report, we would have to think about how we can forecast labor shortage using different approaches. Can we produce forecast of labor shortage using historical shortage? In a free-market economy like Hong Kong, manpower shortage is theoretically zero at any given point in time. Thus, if we want to use the historical shortage to forecast future shortage, the best forecast is zero shortage. That is, we will not get anything that is nonzero.

The alternative is to forecast the labor supply and labor demand separately. Labor supply can broadly be estimated as the population between 15 to 65. In a close economy, we can produce a pretty accurate forecast based on population pyramid, taking into account the mortality rate and birth rate. The forecast can become slightly more complicated when immigration and emigration are taken into account. Immigration and emigration depends on the economic opportunities of Hong Kong relative to the rest of the world. When Hong Kong offers better opportunities than the United States, then some Americans will come to Hong Kong. Similarly for the flow between Hong Kong and mainland China. Of course, mainland China will be the major inflow. The flow from mainland has been driven by differences in economic opportunities, welfare, freedom, and re-union (cross-border marriages). To forecast this flow, we need to forecast the difference in economic performance of Hong Kong relative to many other countries. This task is daunting but we can always focus on a handful of countries from which we have more flow of people (both in and out). If we can produce a labor supply forecast, we definitely want to have a forecast by age group and education background. To do this kind of forecast, one will need to do extensive research. The easier alternative is to sit in an armchair and guess some reasonable numbers.

Labor demand is complicated. If we want to forecast labor demand using historical demand, we only have one data point at each given month. That data point is in fact the equilibrium quantity of labor, the result of an interaction of labor supply and demand. Thus, unlikely this quantity will be useful to forecast labor demand. One possibility is to do a survey and ask firms how many more workers they will hire in the coming 10 years — at the current wage rate. How many firms will be able to tell us such number? Unlikely any. Thus, one boils down to sitting in an armchair and trying to make some “reasonable” assumption of labor demand growth by sectors. How do we get those numbers? Likely by gut feelings. Sometimes, we will make an assumption of 2% growth in a sector, and let the computer to simulate what happen after many years.

In fact, what we are doing here is called scenario analysis. There is a popular way to do similar scenario analysis — computable general equilibrium (CGE) models. Here is an excerpt from wikipedia, http://en.wikipedia.org/wiki/Computable_general_equilibrium

Computable general equilibrium (CGE) models are a class of economic models that use actual economic data to estimate how an economy might react to changes in policy, technology or other external factors.

Given all this armchair forecast, how accurate will this forecast be? Highly inaccurate. It could be the case that when we adjust an assumption slightly, we can get a forecast of labor surplus. Will we report the labor surplus when we forecast one? Of course not! We are given the task to write a report that serves the hidden agenda. Only a forecast of a big labor shortage will cut it!

If I were going to do similar work (very time-consuming) with adequate freedom, I would want to report the set of parameters and models from which a given forecasted labor shortage will result. At least, it gives the readers a sense how reasonable (or unreasonable) my underlying assumptions are. I would also put my codes on the web so that other researchers could replicate my work, change the assumptions and produce new set of forecast.

Finally, we must note that an increase in wage in Hong Kong (i.e., better opportunities) will attract inflows of people from other countries. Even if there is an increase in demand for labor, it is likely filled by inflow from the other countries. That is, nothing to worry about. Let the market guide us. Do not use the highly inaccurate forecast that is led by a hidden agenda to help the capitalists.