Comparing Singapore's Wage System with that of the Neoliberal US and Social Democratic Sweden

In effect, Singapore adopts a hybrid system comprising of the US combining the US' Earned Income Tax Credit programme, which Singapore calls Workfare Income Supplement (WIS), and of Sweden's collective bargaining system which resembles, but is fundamentally different from, Singapore’s Progressive Wage Model (PWM).

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19 November 2018

We have just learned that as a relative measure of inequality, Gini coefficient has the shortcoming of not reflecting absolute inequality. So long as the wages at the lower rungs grow relatively as fast (i.e. in term of percentage) as those at the upper rungs, Gini coefficient will stay the same, even though the difference in wage increase in absolute amount (i.e. in term of dollar value) from a 1% growth for low-wage workers versus a 1% growth for high-wage workers can be significantly in favour of the latter because their increment is a percentage of a larger base amount.

 

Hence, even though Gini coefficient has moderated from its peak, wage gap in dollar term continues to widen at an accelerating rate. An absolute inequality gradient gap now exists between the top and bottom rung households (See figure below). The households at the bottom are caught in a low-wage trap because their monthly wages are so low that their annual increment fails to translate into meaningful amount in absolute term.

Low Wage Trap Graph Gradient Gap copy.jp

It’s not that the Government has done nothing to help the low-wage workers. In 2008, the Government implemented the Workfare Income Supplement (WIS) to top up the salaries of low wage workers. This was followed in 2012 by the Progressive Wage Model (PWM) developed by tripartite committees consisting of unions, employers and the government to help uplift low-wage workers in specific sectors by mapping out a clear career pathway for their wages to rise along with training and improvements in productivity and standards. However, the Government’s efforts have so far failed to help the low-wage households escape the low-wage trap.

 

The PWM, for example, has failed to lift wages of workers at the lowest rung to a “fair starting pointfrom which subsequent increments can be meaningful. The WIS, on the hand, also fails to narrow the diverging wage trends (i.e. the absolute inequality gradient gap shown above) between wage earners in the top and bottom rungs. Wages at the top are still racing ahead unrestrained while low-wage workers struggle to keep up with the rising living costs.

 

A case in point is the cleaning industry’s announcement on 12 November 2018 that, based on the PWM, cleaners will finally be getting a 3% annual wage increase from 2020 onwards. With their month salary now at about S$1,000 a month, the monthly increment they get every year will be just $30, a puny amount that will hardly make a difference. It shows the cleaners’ serious lack of bargaining power despite being represented by a government-dominated and -led union.

 

Today, it has been estimated that 20% of the households in Singapore is afflicted by poverty.[1] The implementation of the WIS and PWM has not stopped voices clamouring for a legislated minimum wage.

To understand why Singapore wage system has failed to lift households at the lower rungs from poverty, it may be instructive to compare it with the wage system of the US, a country that is not only the flag bearer of the now discredited neoliberal economic regime but also the most unequal among the OECD countries, and of Sweden, a Nordic country that stood for social democracy since the 1930s and is today among not just the least unequal (most inclusive) countries but also the most competitive economies in the world.

 

Singapore’s Wage System Compared to that of the Neoliberal US and Social Democratic Sweden

The American wage system is one made up primarily of a minimum wage supplemented by the Earned Income Tax Credit (EITC). The federal minimum wage was first signed into law by Franklin D. Roosevelt in 1938 while the EITC was enacted in 1975. The EITC is basically an anti-poverty tool within the US tax system to subsidize work by the poor so that a low-income family with earned income gets a payment from the government to supplement its wages. It is business friendly because it helps to raise the earnings of the workers without adding more burdens to the employers. At the same time, the higher earnings may also help to increase labour supply by enticing more to return to work.

 

But minimum wage is by no means the only way to go. The Nordic countries, of which Sweden is one, do not have a minimum wage. Instead, wages are set by collective bargaining between the unions and the employers without interference from the government. The negotiated floor wages vary between industries.

The Nordic trade union organisations vehemently oppose a statutory minimum wage because of the countries’ high union density and high collective agreement coverage. Nearly all Swedish citizens, for example, belong to one of about 60 trade unions and 50 employers' organizations that negotiate agreements guaranteeing a floor wage differentiated by age, skill or seniority. Individual wages, however, vary between enterprises and among employees. At the enterprise level, supplements based on bargaining will be added to the minimum level. The average wage level is therefore usually above the minimum rates defined by the collective agreements. Usually, the final minimum wage tends to hover near 60-70% of the average wage.[2]

Comparison of SG, US & Sweden Wage Syste

Unlike the US and Sweden, Singapore adopts neither the former’s minimum wage system nor the latter’s collective bargaining conducted directly between the unions and the employers free from government’s interference. In effect, Singapore has adopted a hybrid system combining the American EITC programme, which Singapore calls WIS, and the Swedish collective bargaining system which resembles, but is fundamentally different from, Singapore’s PWM. Unlike the hands-off Swedish approach, Singapore's trade union is dominated and led by the Government.

In adopting the unique hybrid system, policymakers are able to avoid both the contentious minimum wage system of the US and the union-led collective bargaining of Sweden. Instead, wage adjustments for low-wage workers in different clusters of industries are determined based on recommendations by the tripartite committees for each cluster using the cluster-specific PWM that the respective committees developed. Their proposed adjustments to wages are in turn bounded by recommendations set by the National Wage Council (NWC) which is another tripartite body established to formulate wage guidelines so as to ensure that wage increments are in line with Singapore’s long term economic and social development, taking into consideration factors such as productivity growth, employment situation, international competitiveness, and economic growth and prospects. This, in effect, leaves very little room for collective bargaining through the PWM and any wage adjustment is first and foremost capped by the NWC’s recommendations. In other words, the real bargaining is already done at the NWC not at the sub-sectors through the PWM.

In short, wages are in the end determined more as a administrative review process based on pre-set guidelines rather than by bona fide bargaining led by independent unions armed with threat of industrial actions.

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REFERENCES

[1] See  Straits Times. (2018). “Tackling inequality vigorously: Academics give their views.” 11 May, 2018.

[2] See Claire Boyte-White. “5 Developed Countries without Minimum Wages.” Investopedia.