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Helping the Lower-Rung Households Escape the Low-Wage Trap

The implementation of a minimum wage has to fit into a bigger scheme of things. If anything, inclusive growth is more about building a vibrant economy than just about increasing wages. As the wages of the lower rungs are being pushed up by the minimum wage due to the cascading effect, a vibrant economy is needed to withstand the higher wage cost. Success of implementing a legislated minimum wage therefore depends on also making changes to a host of public policy. But most of all, building a genuinely inclusive society requires more than just a switch to a minimum wage. For Singapore, true inclusive growth demands nothing short of the Government coming up with a new vision backed by a new social contract because the existing ones are fast becoming obsolete in the face of new challenges Singapore faces both internally and externally. The top political leadership has displayed commitment and resolve in its plans to tackle challenges presented by climate change. The problem of inequality is no less critical and therefore demand no less resources and efforts as well as long-term commitment and iron-willed determination from the political leaders. 

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9 September 2019

It will be foolhardy to think that the current inequitable wage system is socially and politically sustainable.

 

The true extent of relative inequality is much higher than what the Gini coefficient depicts not only because of the inherent shortcoming of the index but also because of the way the index is calculated in Singapore. The picture is even worse if we look at absolute inequality which is not measured by the Gini Coefficient.

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

Comparison of SG, US & Sweden Wage Syste

Adopting the unique hybrid system allows Singapore’s policymakers to avoid both the contentious minimum wage system of the US and the union-led collective bargaining of Sweden. But the difference in wage outcome of the three systems clearly demonstrates that low-wage workers in Singapore are not getting a fair deal.

So what can Singapore do to help workers in the lower rungs escape the low-wage trap?

 

The choice for policymakers is really between instituting a bona fide collective bargaining process involving only the employers and an empowered union without any interference from the government (i.e. the Swedish/Nordic model) or legislating a minimum wage supplemented by the WIS (i.e. the American model).

 

Why not Sweden’s Model of Collective Bargaining?

 

For collective bargaining to work, there must be a long history of independent union movement with union leaders and workers not only knowing their rights but are also able to conduct effective negotiation with employers. To have bargaining power, unions need to be armed with the threats of industrial actions. Negotiations can easily turn irrational and confrontational unless there is an environment of trust between the stakeholders. Such environment of trust, however, takes time to nurture and can only come possibly through an extended period of social and economic disruptions during which both sides seek out the opposing side’s baseline of negotiation.

 

In the case of not only Sweden but Europe in general, unionism began more than a century ago in the late 19th century. The outcome today is a result of a long process of trials and tribulations by generations of Swedes who first struggled, at times violently, for a better life as envisioned by socialism and Marxism, then survived the traumas of the Great War (WWI), only to be thrown into the economic chaos of the Great Depression a decade later, following which Fascism and Nazism dragged Europe back into an even more devastating Second World War, before lasting peace finally returned and social democracy took root.

 

By the 1950s, the mindless killings and destruction of the two continental wars and the economic hardships brought about by the Great Depression had helped Western Europe galvanize a strong and broad postwar social consensus among all stakeholders that the forces of capitalism must be tempered so that the markets serve the people. Western European nations started to construct a new order that could ensure economic growth while protecting societies from capitalism’s destructive consequences. In that new order, states would become the guardian of society rather than of the economy.

 

Comparatively, Singapore’s unionism has a very much shorter history. Moreover, given the dominant role of the Government in the union movement, Singapore’s top-down version of unionism differs fundamentally in structure and dynamism from the Sweden’s bottom-up movement. There is no tradition of collective bargaining union leaders can fall back on to help guide negotiation. The high business cost environment today also makes it infeasible for the burden of higher wages to be shouldered solely by businesses without any assistance from the Government. More importantly, given the State’s extensive direct interests in the economy, it is unrealistic to think that negotiation can even take place without involving the Government.

 

In short, Sweden’s model of bona fide collective bargaining between independent unions and employers without interference from the government is unlikely to work in Singapore’s context, at least in the short or even medium term.

Why Legislated Minimum Wage is the Way to Go?

 

This leaves Singapore with the choice of implementing a legislated minimum wage, payable by employer, augmented by the workfare income supplement (WIS), payable by the Government – a wage model similar to that of the US. Given Government’s dominant influence and extensive interests in the economy, it is in the best position to decide how the economic pie is being sliced to benefit the different stakeholders. A top-down approach is therefore the best bet for Singapore.

 

To be meaningful, the legislated minimum wage, regardless of whether it is across the board or sector specific, should be pegged to either living costs or to a fraction (e.g. half) of the median wage. The former approach guarantees workers a socially-inclusive standard of living while the latter ensures that workers at the bottom automatically enjoy relative wage growth with the rise of the median wage and are therefore not left behind.

 

Of course, an even better alternative is to combine both approaches so that minimum wage is pegged to living costs to begin with and will float according to the median wage so that final wage is set at whichever level is higher.

 

To be sure, there are great challenges in implementing a legislated minimum wage. Any misstep caused by rash implementation or mismanagement can be costly for the economy. A case in point is when President Moon of South Korea increased minimum wage 16.4% in 2018 and 10.9% in 2019 to make good his campaign promises of lifting wages at the lower rungs. In the end, the spike in wage costs led to layoffs of low-income workers and failures of small businesses.

 

Moreover, the impact of a minimum wage is more far-reaching than involving only the households in the lowest rung. Just as a wage spike in top-rung pulls up wages in the rungs beneath it, an increase in minimum wage also has a similar cascading effect that will invariably push up the wages of households in the rungs above. The implementation of a minimum wage therefore has serious cost implications and challenges for the long term development of the economy.

 

It would have been easier if Singapore had embarked on the process when economic growth was strong. Because of the procrastination, any meaningful adjustment today needs to be substantial and hence will be very painful particularly given the fragile state the economy is in, not to mention also the increasingly challenging and competitive external environments.

 

To minimize the adverse impacts on the economy, the Government can help to lessen the burden on the employers by continuing with the WIS. The supplement will also give Government the flexibility to step up its assistance to help employers tide over an economic slowdown.

 

Moreover, the implementation can be carried out in controlled stages based on a transparent timetable so that it can be accelerated during periods of higher economic growth but slowed when the economy faces headwind. A very good example of how this is done is the legislative efforts of the city of Anaheim in the US to first more than double the hourly minimum wage from US$7.25 to US$15, followed by adjustments to US$22 by 2022 before subsequent increments be capped by inflation.

 

Government can also take the lead by first implementing minimum wage policy through all government-linked companies and government agencies. Businesses on government contracts must also be required to pay minimum wages to their workers. In 2012, for example, the Obama administration signed an executive order to raise the minimum wage for all workers employed on federal contracts from US$7.25 to US$10.10 an hour.

 

More importantly, the implementation of a minimum wage has to fit into a bigger scheme of things. If anything, inclusive growth is more about building a vibrant economy than just about increasing wages. For without a strong and sustainable economy, any talk about minimum wage would be mere lip service. As the wages of the lower rungs are being pushed up by the minimum wage due to the cascading effect, a vibrant economy is needed to withstand the higher wage cost.

 

Success of implementing a legislated minimum wage therefore depends on also making changes to a host of public policy. For example, Government must be willingness to forego its vested interests so that all available resources can be garnered to help raise the minimum wage. That includes also suspending wage growth for top earners as proposed earlier by Professor Lim Chong Yah. To ensure that import of new workers do not depress wages of or take away jobs from Singaporean workers, the Government also need to review foreign worker policy and address the issue of wage dumping. Meanwhile, efforts to reduce business costs must be intensified so that SMEs can afford to pay their workers more. In particular, the Government needs to address the issue of high land costs and business rentals which have increased significantly over the past two decades.

 

But most of all, building a genuinely inclusive society requires more than just a switch to a minimum wage. The US is a good example. Even though it has a legislated minimum wage since 1938 and earned income tax credit (similar to Singapore’s WIS) since 1975, wages had been systematically depressed and workers had been taking home less since the 1970s despite rising corporate productivity and profitability during the period. It’s only after their society has been torn apart that the Americans are waking up to the true extent of income and wealth gaps and are now belatedly acting to narrow the gaps.

 

For Singapore, true inclusive growth demands nothing short of the Government coming up with a new vision backed by a new social contract because the existing ones are fast becoming obsolete in the face of new challenges Singapore faces both internally and externally.

 

The Government has pledged spending $50 billion to $100 billion over next 50 to 100 years to address challenges posed by climate-change. More importantly, the top political leadership has displayed commitment and resolve in its plans to tackle those challenges.

 

Compared to the risks posed by climate change to the long term wellbeing of Singapore, the problem of inequality is no less critical than and the task of tackling it is no less daunting. Building a truly inclusive society therefore demand no less resources and efforts as well as long-term commitment and iron-willed determination from the political leaders. 

 

In the weeks following the National Day Rally when the plan was make public, the Government spared no effort in educating the public on climate change through the mainstream media including airing television snippets repeatedly during prime time. The same commitment and resolve should be accorded by the top political leadership to implementing a minimum wage.

 

Government’s Position on a Legislated Minimum Wage

As aforementioned, the true extent of relative inequality is much higher than what the Gini coefficient depicts not only because of the inherent shortcoming of the index but also because of the way the index is calculated in Singapore. The picture is even worse if we look at absolute inequality which is not measured by the Gini Coefficient. Official data also shows that, even though Gini coefficient has moderated and stabilized for the past decade, households at the top are earning 20 times annually more than the bottom rung because of the absolute inequality gradient gap.

Low Wage Trap Graph Gradient Gap copy.jp

More importantly, Singapore’s current wage model of PWM plus WIS has failed to lift wages at the lower rungs to a “fair starting point” for any wage increment hereon to be meaningful. Today, low-wage workers in Singapore are one of the lowest paid among the developed economies.

Yet, the Government has repeatedly insisted that a legislated minimum wage is not the way to go. Why?

 

One simple reason is that they are holding absolute power and are in control of the unions and mainstream media. Other than when the issue is routinely and harmlessly broached during certain public seminars and forums, there is really no pressure to change. Moreover, implementing legislated minimum wage is a mammoth undertaking that requires fearless grit and iron-willed determination not only because of the deeply-entrenched vested interests that need to be tackled but also of the complexity involved. Maintaining status quo is therefore an easier and less risky option.

 

But a more uncomfortable truth may be that the root of many problems (not just wage inequality) we see today can be traced to the switch of Singapore’s focus in economic development, since the turn of the century, from generating income, which is broadly shared by all stakeholders based on their contributions to economic growth, to generating wealth, the gains of which narrowly accrue only to the minority of rentiers comprising of increasingly well-organized institutional capital and asset owners.

 

Keeping wages low at the lower rungs is a critical factor needed for the success of that switch from an income-generating economy to a rent-seeking economy. [See Part VI: Singapore's State Rentierism & its Impacts on Inequality]

 

If that is true, then inequality is no more just driven by environmental factor (i.e. globalization), as it was in the 1980s and 1990s. Rather, inequality today has become systemic because of deliberate government policies.

 

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