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Completing the Wage Revolution

Today  20 April 2012

Low-income wage earners in Singapore are today stuck at a very low base-wage and raising it incrementally by associating it with productivity improvement will hardly make a difference in mollifying the hardship many are in.

A substantial step-up adjustment is, therefore, not only necessary and equitable but also long overdue.


During the '70s and '80s, Singapore’s industries were more capital intensive and the labour shortage was more in terms of quantity than quality. Singapore workers were then in their prime and foreign workers were brought in to supplement, not to supplant them. In the end, the influx of foreign workers helped to raise wages across the board.


By the ’90s, Singapore’s economy was moving towards a more technology intensive focus and foreign workers that came were more technical and skill-based.


By the turn of the century, Singapore again upgraded its economic structure to focus on knowledge- based and innovation-driven industries. Foreign talent with the right skills and knowledge became hotly sought-after assets.


Depressed Wages


At that point, the floodgate for low-skilled foreign workers destined for non-tradeable services sector — such as retailing and construction — should have been closed so that the jobs in that sector could go to the dislocated and other older Singaporean workers.


The fact that more low-skilled foreign workers continued to stream in to help keep costs low worked to the disadvantage of our low-income workers.


So while the PMETs — professionals, managers, executives and technicians — were paid more over time, the low-skilled Singaporean workers faced depressed wages.


The practice benefited especially the higher-income workers, as they enjoyed not only rising wages but also lower cost of living made possible by the low-cost foreign workers.


An appreciating Singapore dollar helped to constrain imported inflation but it was the use of low-cost foreign labour that helped to maintain price stability in the domestic sector. Inflation averaged about 1 per cent between 2000 and 2007 but that impressive low inflation was arguably achieved in part at the expense of the low-income wage earners.


In short, globalisation and advancement of technology contributed to structural unemployment but it was the foreign labour policy that exacerbated the plights of the dislocated low-income wage earners.


Had the strength of low-cost foreign workers been reduced in tandem with the pace of economic restructuring, the wages of Singaporean workers in the domestic sector would have undoubtedly risen along with the tide.


Calibrated Reduction

While rapid pay increase for high-income wage earners were allowed to be effected through the working of market forces, selective intervention through in-sourcing of foreign workers in the lower-end labour market prevented similar rise in pay for low-income workers.


Hence, even if the costs of adjustment are going to be substantial, the pay for low-income wage earners has to be substantially adjusted to a more equitable level before its future movements can be capped by corresponding movement in productivity.


Notably, the Government has begun a process of “calibrated reduction” of foreign workers. From July 1, foreigners will be reduced from 65 per cent to 60 per cent of the workforce for manufacturing companies and 50 per cent to 45 per cent for the services sector.


That rate of reduction, however, may be too conservative. For selected industries in the domestic non-tradeable sector providing non-critical services, the pace of repatriation of foreign workers can be boldly quickened.


With fewer low-cost foreign workers to do cleaning and to drive public buses, for example, the reduced labour supply will drive wages upward and attract more workers from other industries to take up jobs in the cleaning and transport sectors. The resultant labour shortages created in other industries will push up wages for low-income wage earners in those sectors.


Over time, a new equilibrium wage level based on market forces can be reached across the non-tradeable services sector.


Burden Sharing


There will no doubt be adjustment pains and strong Government actions are needed to mollify those pains.


Firstly, Government can provide subsidies to small and medium enterprises (SMEs) to help share the burden of higher wage costs. At the same time, a thorough review of the overall cost structures can be carried out to help reduce business costs for SMEs.


It may also be necessary to look into how gains in the value creation process are currently distributed between other stakeholders.


To prevent the Government and SMEs from being disproportionately burdened, these other stakeholders within the value chain must help share the adjustment costs. It may, therefore, result in redistribution of profits between stakeholders within the value chain.


A small amount of the costs may also be passed on to consumers, especially those earning a higher income while any inflationary impact on the low-income wage earners can now be better met with their higher wages.


Painful but Manageable

In the end, some SMEs may fail to adjust and are forced to close down or relocate. The Government may also have to bear with a few years of fiscal deficits during the adjustment phase while new revenue sources are being sought to cover the higher fiscal layouts and the lower foreign worker levy collections.


The low-income wage earners should not be denied of a long-overdue big adjustment in wages just because costs would go up. Rapid increase in income for other income groups has also raised costs in the past.


Detractors may also voice their opposition on the ground of the difficult external environment. On the contrary, we should bite the bullet now so that Singapore is ready to take on new opportunities when the external environment improves.


Given the exceptionally strong political leadership and foundation this country has, the impacts of the adjustments will be painful in the short term but diffusible and totally manageable in the long term.


More importantly, by working to distribute instead of redistribute income more equitably over the next 10 years, Singapore can emerge as a unique and truly sustainable, inclusive and cohesive society.


The alternative will be the increasingly divided, welfare-oriented, and eventually, debt-laden society we see in the West. Make the right choice, not the easy one.

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