Hong Kong&rsquo;s unemployment rate increased to 4.5 per cent between last December and February, affecting those in construction, retail, hospitality, the arts, entertainment and recreation the worst.

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A one-off relief subsidy of HK$10,000 will be given to individuals recently put out of work during the fifth Covid-19 wave, the Hong Kong government has announced.

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A government platform will open for applications next Wednesday and close on April 12. Applicants must have worked for at least one month between October and December last year, and earned between HK$2,700 and HK$30,000. They must have been unemployed for at least 30 consecutive days before submitting their application, hold HKID cards, ordinarily reside in Hong Kong and be 18 years of age or over before October 1 last year.

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The scheme will cost the government HK$3 billion and is expected to benefit some 300,000 recently unemployed workers, the city&rsquo;s Chief Executive Carrie Lam said on Friday morning. &ldquo;A lawmaker described the unemployment rate of 4.5 per cent announced yesterday was a &lsquo;wave in a tsunami,&#39;&rdquo; she said, adding that she hoped the relief would help the city &ldquo;brave winds and waves.&rdquo;

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The Head of the Policy Innovation and Coordination Office, Ms Doris Ho (centre); Deputy Director of Home Affairs Ms Eureka Cheung (left); and Partner of PricewaterhouseCoopers (appointed agent of the Government for the Temporary Unemployment Relief Scheme) Mr Sam Sze (right) brief the media at the Central Government Offices this afternoon (March 18) on the Temporary Unemployment Relief Scheme launched under the sixth round of the Anti-Epidemic Fund. Photo: HK Gov.

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People who were previously self-employed or worked part-time are also eligible to apply. The scheme excludes beneficiaries of other relief measures in the sixth round of the Anti-Epidemic Fund or those receiving Comprehensive Social Security Assistance from the government.

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Individuals may supply proof of unemployment such as their termination letters. Workers in informal employment who do not have documentary proof can instead make a personal declaration on their application form.

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Meanwhile, those placed on unpaid leave by employers in sectors ordered to shut down under Covid-19 law Cap 599F &ndash; such as beauty parlours or gyms &ndash; will also be eligible even though they are not officially unemployed.

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For all applicants, their last work day must be at least 30 days prior to when they applied for the fund.

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Head of the Policy Innovation and Coordination Office, Doris Ho, said during a press briefing on Friday afternoon that people who took up temporary work less than 30 days prior to application will not qualify. &ldquo;If you did a gig for a day or two, maybe you&rsquo;d earn a little bit of income. But would you [prefer to] lose eligibility for that bit of income?&rdquo; Ho said. &ldquo;We would suggest that these people submit their applications anyway, and we will handle it leniently.&rdquo;

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The scheme was first announced in early February as part of the sixth round of the Anti-Epidemic Fund. Applicants could expect to be paid by bank transfer within three to four weeks, Ho said.

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If the applicant applied for the government&rsquo;s HK$10,000 cash handout in 2020, the application platform will retrieve their bank details and ask whether those details should be used to receive the unemployment relief.

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Individuals may apply whether or not they have a Mandatory Provident Fund account, although those who do not have one will be asked to submit more documentation as proof of former employment.

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4.5% unemployment

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Hong Kong&rsquo;s unemployment rate increased from 3.9 percent between last November and January to 4.5 per cent between last December and February. The number of unemployed individuals rose by about 22,700 people to 157,900 during this period, while the city now counts around 86,900 underemployed.

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&ldquo;[A]lmost all major economic sectors saw an increase in both the unemployment rate (not seasonally adjusted) and underemployment rate,&rdquo; a government spokesperson said in a statement released on Thursday.

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The construction, retail, hospitality, and the arts, entertainment and recreation sectors were the hardest hit.

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Hong Kong has recorded 1,016,944 Covid-19 cases and 5,401 deaths as of Friday

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Figure#1 illustrates the economy before the unemployment-subsidy. Initially, the economy is at full-employment, with a General Price Level (GPL) of Ple and real GDP at Yf. However due to the fifth-wave, business and consumer confidence plunged, and spending decreased exceptionally within &ldquo;The construction, retail, hospitality, and the arts, entertainment and recreation sectors&rdquo;. As confidence falls, consumption and investment spending fall alongside (both components of AD), causing AD to shift inwards to AD1. Thus, real GDP fell to Yrec and a GPL of Pl1 was offered, indicating that the current-unemployment within the HKeconomy was below full-employment. With the increase in unemployment from &ldquo;3.9% to 4.5%&rdquo;, cyclical unemployment occurs, where less spending by consumers in a period of economic downturn forced producers to lay-off workers to reduce total costs as their profitsfell. This, and decreasing inflation rates, results in a recessionary gap as HK economic growth falls.

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The HKGovernment is granting a one-off unemployment-subsidy for the unemployed to maintain their living standards and potentially increase spending. In Figure#2, this initial injection into the circular-flow of income known as the Multiplier-effect shifts AD1 slightly to AD2. Thus, the GPL will rise from Pl1 to Pl2, indicating a rise in inflation and economic growth as unemployment decreases from Yrec to Y2. However, this will not reduce the output-cap completely because of the propensity to save within a recession and automatic stabilisers.

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Nevertheless, the unemployment-subsidy induces spending within the economy and unemployment continues to fall from Y2 to Y3 due to the Multiplier-effect that results in a chain reaction of further expenditures, causing a bigger final increase in real GDP. As producers hire more workers to meet the increase in consumer demand, unemployment falls. This stimulus creates an income for producers, their employers and even suppliers whilst having the potential to aid the deflationary-gap by raising real GDP and employment, as producer and consumer confidence rises.

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Expansionary-fiscal policy allows the HKGovernment to target specific sectors of the economy based on current economic priorities. The HKeconomy is experiencing cyclical unemployment due to contractions in the business cycle caused by the fifth-wave. To offset the drop in consumer spending, firms cut production and lay-off workers to decrease total costs. Thus, the unemployment-subsidy provides temporary-relief for those who became unemployed during the recession, maintain living standards and promote economic recovery through induced consumer spending and raising AD. This shifts the current-unemployment closer to full-employment, as workers are being hired, whilst reducing cyclical employment as AD shifts closer to Yfe. The unemployment-subsidy may also reduce worker&rsquo;s reliance on HK&rsquo;s Government support by encouraging them to return/search for employment to maintain their current living standards, lowering the unemployment rate.

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However, a by-product of the choice made to reduce unemployment by increasing Government &nbsp;spending may result in higher inflation (Pl1 to Pl2), which worsen income-inequality as the loss in real-value of income reduces low-income individuals&#39; purchasing-power and decreases their living standards, despite unemployment falling. The opportunity cost of the HKGovernment spending HKD$3billion towards the targeted&ldquo;HKD$2700 &ndash; HKD$30000&rdquo; income group could have been used on alternative policies such as education or retaining of workers to develop the knowledge and skills needed to obtain and sustain a job in the long run, as they become more employable. Moreover, this unemployment-subsidy denies those outside of this income group and those who don&#39;t have a &quot;HKID (Hong Kong Identity Card) and be unemployed for 30+ days&rdquo;, discouraging and leaving them vulnerable as their purchasing-power decreases.

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Overall, this article outlines the key concept of choice where the HKGovernment had to choose to use its budget to fund a HKD$3billion unemployment-subsidy scheme or on competing alternatives. The decision to provide a one-off unemployment-subsidy helped maintain living standards and potentially decreased unemployment levels in the short run. In the long run, as HK economy is experiencing a recession, consumers might save the money instead of spending due to low consumer confidence, which negates the unemployment subsidy&#39;s goal of encouraging consumption and maintaining living standards. Ultimately, if this choice occurs, it denies the HKGovernment from fulfilling the objective to support unemployment, stimulate AD and reduce unemployment. Yet, to shift AD closer to equilibrium, the HKGovernment has to consistently monitor the situation and choose whether to implement a similar or alternative measure to decrease the unemployment rate further.

This HKFP article illustrates the key concept of choice, where the HKGovernment is choosing between spending its budget on a one-off unemployment-subsidy of HKD$10000 to unemployed individuals or on competing alternatives. Fiscal policy involves the Government manipulating expenditures and taxes to influence aggregate demand (AD) to achieve the macroeconomics objective of full-employment, price-stability and economic growth. In this case of a deflationary-gap, due to Covid-19 and high unemployment, Expansionary-fiscal policy through Government spending on an unemployment-subsidy is utilised to increase AD.