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The Hong Kong Council of Social Services (HKCSS) has proposed a family allowance scheme that closely resembles what I proposed in this column over the past two years. I strongly encourage the government and legislators to consider this proposal seriously.

People might ask why we need a family allowance on top of minimum wages. Is it not straightforward simply to mandate that employers have to pay a livable wage - one that is adequate to support a family?

The problem with directly interfering in the labor market is that the social cost of intervention increases quickly as the minimum wage is raised beyond some point. I have always supported a minimum wage, but have cautioned that because each increment brings both benefits and costs, the minimum wage should not be increased further if the cost of raising it exceeds the benefit.

Wages are essentially determined by supply and demand. They cannot be arbitrarily raised without causing some side effects. But if wages are lower than needed to nurture and properly educate children, the children of poor parents suffer, and that is not only unfair, but also risks leaving otherwise highly capable children underdeveloped.

I proposed that if wages after self-maintenance were inadequate to support dependents, a subsidy should be given to make up the difference. I also argued that in order not to affect work incentives, some subsidy should still be paid even though the "personal surplus" - income after self-maintenance - may have exceeded the basic livable income for the dependents. That is, I argued that subsidies should be given on a sliding scale, gradually declining and vanishing to zero only when the personal surplus has reached a level that is considered comfortable.

Assuming that the poverty line is defined as 50 percent of the median income, the HKCSS recommended that those below the poverty line will receive a subsidy amounting to roughly 10 percent of the median household income. For those having an income over the poverty line, the subsidy will be reduced by 50 cents for every HK$1 increase in income over the poverty line. The break-even point stands at 70 percent of the median income. That is, no more subsidy will be received by those making more than 70 percent of the median income. The subsidy stands at roughly 10 percent of the median household income, ranging from HK$1,600 to HK$3,230, depending on the size of the household.

The subsidy is conditional on the household having a member holding a full-time job. The subsidy is expected to reduce Hong Kong's poor population by 190,000, so the poverty rate will decline to 14.3 percent.

A matter of crucial concern lies in the calculation of household income. According to my earlier proposal, a family living in public housing should be taken as having an additional income over and above earned income equal to the implicit subsidy associated with the low rent. I had also proposed that each household be allowed to subtract a standard housing cost from the total income in order to derive the notional "surplus" over personal maintenance and housing cost available to support the dependents. Although we cannot be very precise over these numbers, in particular because market rent varies from location to location, assuming the same notional rent for households of similar size may not be very fair, the imprecision is worth tolerating.

Any imprecision arising from local variation of rent will certainly be small compared to that arising from ignoring the vast difference in effective disposable income between households who have to pay market rent and those who need only pay public housing rent.

It is likely that the HKCSS, as well as the SAR government, will have a rough time trying to factor in the implicit income enjoyed by public housing tenants. Pressure groups will try to make the point that the implicit income is not only difficult to work out accurately but also that any attempt to do so is divisive and disruptive of the lives of tenants. However, given that rents for private housing are so much higher than those paid by public housing tenants, ignoring the vast differences will do private housing tenants great injustice. Since there is normally a long wait before those in the queue can be assigned a flat, the financial needs of those in private housing and those in public housing are vastly different. Giving them a higher subsidy while they are waiting will go a long way to helping them. If we ignore these differences, then what is adequate for non-public housing tenants will be more than adequate for public housing tenants.

The author is director of Center for Public Policy Studies at Lingnan University.

(HK Edition 09/03/2013 page1)