164 E. Cohn, Y.C. Ng Economics of Education Review 19 2000 159–168
2 we observe negative coefficients for the interaction of experience with ADSCH and OVERSCH, indicating that
more experienced male and female workers tend to have a lower rate of return to adequate schooling or over-
schooling. These results might represent a vintage effect: more recent graduates received schooling that is more
useful in current production, hence more recent school- ing is rewarded more generously. The results for over-
schooling, moreover, are consistent with the notion that extra
schooling might be
a good substitute
for especially early labor-market experience. What the
present findings suggest, however, is that the wage bene- fits of overschooling decline as one gains more labor-
market experience.
In addition, we find positive coefficients for the inter- action of experience with UNDERSCH. The negative
coefficient for UNDERSCH is reduced as one gains more experience, suggesting that experience is a substi-
tute for schooling in so far as wages are concerned, albeit an imperfect substitute 43.3 [50] years of experience
are required to fully offset the negative coefficient on UNDERSCH for males [females] in 1986; for 1991, the
respective figures are 40 and 46.7.
4.4.2. Returns to being over- and underschooled Results in Table 5 show the returns to actual school-
ing, and for being overschooled and underschooled. As emphasized in Cohn 1992, results from this table
should not be used to compute rates of return to over- and underschooling. Rather, as Sicherman 1991 points
out, one can determine from these regressions whether overschooled or underschooled workers have wages that
are lower or higher than the wages they would have earned in a job for which they are adequately schooled.
Results using Model 1 are generally consistent with those of other studies Verdugo and Verdugo, 1989;
Sicherman, 1991; Cohn and Khan, 1995: overschooled underschooled workers have wages that are lower
higher than the wages they would have earned in a job for which they are adequately schooled. The difference
between earlier results for the US and the present find- ings for Hong Kong is the magnitude of these wage dif-
ferences: in Hong Kong these wage differences are quite substantial.
Concerning Model 2 results, negative interactions are found for all of the coefficients of SCHOOLEXP and
OSCHEXP as well as for the coefficient of USCHEXP for females in 1986. The interpretation of the results for
the first two interaction terms follows the explanation in the preceding section. The negative coefficients of
USCHEXP for females in 1986 is puzzling, especially since the opposite effect has been found for 1991.
Interestingly, calculations based on the 1 Census sam- ple [N 5 10,661] produced a positive and significant
coefficient for USCHEXP for both 1986 and 1991. 4.4.3. Pooled data for 1986 and 1991
To test whether regression results for 1986 differ sig- nificantly from those of 1991, we pooled the two cross
sections and ran the regressions shown in Model 1 of Tables 4 and 5 with the addition of interaction time
dummies each of the relevant variables times T91, where T91 is 1 for 1991 and 0 for 1986. To save space,
the full regressions are not reproduced here they are available from the authors upon request.
To test
the null
hypotheses that,
for each
modelspecification, by sex, the 1986 and 1991 models produce identical coefficients, we conducted a series of
Chow F tests. The results indicate that all of the null hypotheses are rejected at the 5 level, suggesting that
running separate equations for 1986 and 1991 or pooled equations with time interactions was justified.
Corresponding to Model 1 of Table 4, all of the rel- evant interaction coefficients are significant and positive,
except for OVERSCHT91 for females which is nega- tive 2 0.01. The results suggest a slight increase over
the period in rates of return to adequate schooling, over- schooling and underschooling for males 0.02 for
ADSCHT91, 0.006 for OVERSCHT91, and 0.003 for UNDERSCHT91. For females, the results suggest a
fairly large increase 0.07 for adequate schooling and a small increase for underschooling 0.01.
Corresponding to Model 1 of Table 5, all of the inter- action coefficients are statistically significant. Relatively
modest positive coefficients were found for males, regarding actual schooling 0.01 and being under-
schooled 0.02. The respective coefficients for females are also positive, but larger in absolute value 0.03 for
actual schooling and 0.10 for being underschooled. Finally, for being overschooled, both for males and
females,
we find
negative interaction
coefficients 2 0.04 for males and 2 0.14 for females, consistent
with the results shown in Table 5.
5. Discussion
The Hong Kong labor market has experienced labor shortages since the mid 1980s. Several factors appear to
have contributed to this phenomenon. First, the “reach base” policy was abolished in 1980, which contributed
to a sharp drop in illegal migration from China, which was a main source of supply of semi-skilled or unskilled
labor Chiu, 1996; Lam and Liu, 1995. Second, the rate of natural increase in the population of Hong Kong has
been falling since the 1980s Lam and Liu, 1995. Third, with the institutionalization of a 9-year universal edu-
cation and the gradual expansion of the higher education system, the labor force participation rate has decreased
during the 1980s both for males and females Chau, 1993. Finally, emigration has increased as a result of
the rising political uncertainties following the Sino-Bri-
165 E. Cohn, Y.C. Ng Economics of Education Review 19 2000 159–168
tish Joint Declaration. The estimated annual number of emigrants increased from 22,000 in 1985 to more than
60,000 by 1990 Lam and Liu, 1995, Table 5. By the late 1980s, the labor shortage problem became acute, as
indicated by the decrease in the annual rate of unemploy- ment from 4.5 in 1983 to 1.1 in 1989.
To tackle the labor shortage problem, the Hong Kong government adopted the policy of importing foreign
workers. In contrast to a restrictive policy under which only 3000 skilled workers were allowed to enter in May
1989 Lam and Liu, 1995, the government relaxed its restrictive policy and allowed more workers to enter dur-
ing the 1990s. Consequently, labor shortages in semi- skilled and unskilled occupations were more acute in the
1980s than before or after Chiu, 1996.
During the same period when labor shortages were acute, the Hong Kong economy was also undergoing a
restructuring Greenwood, 1990; Lui and Chiu, 1993; Mok, 1993. One of the consequences of restructuring
was a shift in employment from manufacturing industries to the service sector. The rate of structural change in
Hong Kong surpassed that of other countries, such as Singapore, Korea and Japan, between 1987 and 1992
Suen, 1995. With the rapid change in the demand for different types of labor resulting from economic restruc-
turing, and the persistent labor shortages between the mid 1980s and the early 1990s, one might expect a sub-
stantial job mismatch over- and underschooling in the Hong Kong labor market. Moreover, the rapid change
in the Hong Kong economy and labor market could be expected to alter the returns to adequate, over- and
underschooling. Since several factors and policies e.g., labor shortages, emigration policy, worker retraining
programs were operating simultaneously, it is not clear what the a-priori direction of change in such rates of
return would be between 1986 and 1991.
As shown in Table 1, the incidence of adequate, over- and underschooling, by sex, did not change substantially
between 1986 and 1991, although one may notice a slight decline in the percentage of workers who were
overschooled in 1991. Further, as shown in Table 2, there was a reduction in the number of years of adequate
schooling for underschooled workers between 1986 and 1991, compared to an increase in the same variable for
adequately schooled and overschooled workers. Also, there is almost no change in the actual level of schooling
of underschooled workers, in contrast to an increase in schooling for both adequately schooled and overschooled
workers. These phenomena might reflect the high flexi- bility of the Hong Kong labor market: the supply of
skilled workers appears to have been unaffected by the restructuring of the Hong Kong economy and the labor
shortages which were more acute among the unskilled and semi-skilled workers. The greater opportunity to
attaining tertiary education, on the other hand, may have been responsible for the overall increase in the schooling
level of the workforce between 1986 and 1991. These arguments are reinforced by the data shown in Table 3,
indicating a reduction in the percentage of younger workers with potential experience of 10 years or less
who are over- or underschooled.
Concerning the effect of schooling on earnings in Model 1 of Table 4, we obtain high rates of return to
adequate schooling, lower but positive rates of return to overschooling, and negative rates of return to under-
schooling. Consistent with the earlier argument that the Hong Kong labor market may be highly flexible and with
Suen 1995’s findings that sectoral shifts in the Hong Kong economy did not affect relative earnings among
males, we find that the rates of return to over- and under- schooling remained relatively stable between 1986 and
1991. On the other hand, the rate of return to adequate schooling suggests an upward trend for the same period,
especially for females. These results probably reflect the greater opportunities afforded to females to attain higher
levels of schooling and the stronger commitment of females to the labor force in recent years data provided
by the Hong Kong Annual Digest of Statistics, 1993 indicate that the labor force participation rate of females
aged 25–34 increased steadily during the late 1980s.
When interaction effects between potential experience and the schooling variables are considered in Model 2
of Table 4, we find a complementary effect between underschooling and experience. The opposite is found
for over- and adequate schooling. The inclusion of inter- action terms also underscores the observed changes in
rates of return to over- and underschooling for females but not males. The lower rates of return to over- and
underschooling for females may be the outcome of the slow-down in the Hong Kong economy around 1990
which apparently had uneven labor-market consequences for males and females. As Suen 1995 points out, min-
ority groups and females are first to be affected by a disequilibrium in the labor market or changes in econ-
omic conditions.
6. Summary and concluding remarks
