People's Republic of China-Hong Kong Special Administrative Region: Selected Issues

This Selected Issues paper focuses on diagnosis of decreasing labor force participation rate (LFPR) in Hong Kong Special Administrative Region. Cohort-based shift-share decompositions indicate that both the decline in youth LFPR and population aging—the rising weight of older cohorts with structurally low LFPR—have materially contributed to the decline in aggregate labor force participation. Household survey indicates that education is the predominant reason for delayed labor-force entry among youth. This finding is consistent with shifts in sectoral composition toward higher skill activities, the emergence of AI, and intensifying labor-market competition, which together raise the perceived returns to additional qualifications and skills upgrading. Although the continued pursuit of further education has lowered youth labor supply, it can enhance human capital formation, strengthening long-term productivity and potential growth. Policies should promote longer and healthier working lives through incentives to raise effective retirement ages, flexible and phased retirement options, targeted mid-career reskilling, and expansion of the capacity of overall elderly care services and childcare infrastructure as appropriate to help relieve the stress of their family carers, thus easing participation constraints. Policy priorities should focus on accelerating acquisitions of AI-complementary skills, strengthening occupational mobility, and reinforcing social protection systems to support workers during transition periods.