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Lower Rung Households in a Low-Wage Trap

Gini coefficient has moderated since it hit its peak but wage inequality, in absolute terms, is still widening in accelerated mode. Households at the lower rungs are now caught in a despairing low-wage trap.

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19 November 2018

Inequality is commonly measured by Gini coefficient but the index really provides only a specific and narrow perspective of the social gap depending on the different types of data used to generate it. Some countries, for example, use only earnings from work (i.e. wages) while others include also income from investments (i.e. interests, dividends, gains from sales of assets).[1]

 

In the case of Singapore, Gini Coefficient is calculated using only household earnings from work. It therefore measures only wage inequality but keeps track of neither income inequality, which is a broader measure driven by not only wages but also incomes from capital investments, nor wealth inequality, which in the long term is what really drives the stratification of society into social classes. While we are all busy debating about wage inequality, both of these two other forms of inequality are evolving enigmatically under the radar because they are not systematically tracked and debated.

 

But even as a narrow measure of wage inequality, Gini coefficient comes with a serious shortcoming. As a relative measure, it does not reflect absolute inequality. So long as the wages at the lower rungs grow relatively as fast as those at the upper rungs, Gini coefficient will stay the same, even though the difference in wages from a 1% growth for a low-wage worker versus a 1% growth for a high-wage worker can be significant in absolute amount.[2]

 

 

Fallacy of Looking at Inequality in Percentages

 

To see this fallacy in action, we look at the average monthly household wage by deciles from 2003 to 2017. The bottom decile households in Singapore saw their average monthly wage went up by a total $714 (i.e. $1,937 – $1,223) (See Table). The average annual increment of their monthly household wage was therefore only $51.

Low Wage Trap Table copy.jpg

In contrast, the monthly household wage of the top decile rose by $14,660 (i.e. $31,806 – $17,146) over the same period. That works out to an average annual increment of $1,047 to their monthly household wage or about 20 times that of the lowest decile households.

 

In other words, the wage trends of household at the top and bottom deciles were diverging at a high rate of about 20 times.

 

Observed over a longer time frame, the cumulative impact of this diverging trend of wage growth in absolute term will be astounding. On an annual basis, excluding bonus, the bottom decile household annual wage went up by $8,568 from $14,676 in 2003 to $23,244 in 2017. The top decile, on the other hand, saw an increase of $175,920 in their annual salary from $205,752 to $381,672 between 2003 and 2017.

 

Graphically, we can see that the bar chart for the bottom decile barely moved while that of the top decile shot up. So, even though the difference in the annual rate of wage increase in percentage between wage groups may look miniscule and the lower wage groups may even experience higher wage growth rate, the increase in actual dollar value works out to be much greater for the higher wage groups because the increment is a percentage of a larger base amount

 

In general, the lower the monthly household wage, the slower household wage will rise in absolute terms, as evidenced by the flatter trend line at the lower deciles.

Low Wage Trap Graph copy.jpg

In short, the different wage trends in dollar term points to the existence of an absolute inequality gradient gap among the different deciles (See Figure 2). As long as this gradient gap is not narrowed, the dynamics is such that wage inequality will continue to widen at an accelerated rate to the disadvantage of the households at the lower rungs.

Low Wage Trap Graph Gradient Gap copy.jp

Gini Coefficient Makes Inequality Seem Less Large

 

Notably, the deterioration of the wage gap happened even as Gini coefficient moderated from its peak and is now hovering near the level registered in 2003.

 

After the turn of the century, as the economy recovered strongly from a series of shocks, including the dotcom bubble burst, the New York 9/11 attack, and the SAR bird flu scare, wage inequality began to widen noticeably between 2003 and 2008 with Gini coefficient climbing from 0.457 in 2003 to a peak of 0.482 in 2007. It then fell marginally because of the effects of the Global Financial Crisis but still hovered around 0.47 until 2013 when it declined to 0.463, as a result of Government’s income-enhancing measures. Since then, it has remained relatively unchanged at 0.458 in 2016 and 0.459 in 2017.

Low Wage Trap Graph Gini Coefficient cop

The moderation of the Gini coefficient from its peak of 0.482 in 2007 gives a perception that inequality has been restrained and economic development for the past decade has become more inclusive. But as has been shown, when viewed in absolute terms, wage inequality has not only widened but it is also happening at an accelerated mode due to the wide gradient gap.

 

Assuming nothing is done to tackle the gradient gap and the current model is allowed to continue, it will not be hard to imagine what the graph portraying the absolute wage inequality will look like over the next 20 to 30 years.

 

Because Gini coefficient is a good measure of relative inequality but does not reflect absolute inequality, it makes inequality seem less large. Gini coefficient is thus prone to misleading us into thinking that economic growth is more “inclusive” than it is.

 

In reality, absolute wage inequality may continue to worsen even if Gini coefficient is maintained at the current level.  Clearly, the model is neither socially inequitable nor sustainable.

 

Caught in a Low-wage Trap

 

The root of the problem is that wages at the lower rungs are so low that even a higher wage growth rate would translate into a puny amount of increment in terms of dollar value. 

 

A case in point is the cleaning industry’s announcement on 12 November 2018 that, based on the Progressive Wage Model, cleaners will finally be entitled to an annual bonus equivalent to two weeks of their monthly salary on top of a 3% annual wage increase from 2020 onward. Assuming that they are making $1000 a month, the monthly increment they get every year will be just $30, a puny amount that will hardly make a difference.

 

In effect, these households are caught in a ‘low-wage trap’ because of their weak bargaining power and their plight is not reflected by the Gini coefficient. For these households, raising wages incrementally by linking it with productivity growth is unfair. Government’s transfer measures may help to marginally mollify their pains from stagnating wages and rising living costs but hardly enough to fundamentally improve their lives and to save for the future. A substantial step-up adjustment is therefore necessary to bring wages first to a more equitable level before further increment is pegged to inflation and capped by productivity improvement. In the words of Singapore’s eminent economist Lim Chong Yah, low-wage workers need a “fair starting point” which explains his proposal of “wage shock therapy” in 2012 to lift the wage of lowest-paid workers by 50% over three years.

 

To narrow the gradient gap, the low and stagnating wage at the lower rungs is only half the picture. The other half is the runaway wage growth at the top rungs. There are therefore merits in Lim Chong Yah’s suggestion to also restrain pay increases at the top for three years.

 

The challenge facing the incoming 4G leaders is therefore not how to mollify the pains of the low-wage households with more and more transfer measures which will inevitably translate into mounting fiscal burden to the state. Rather, they need to work on narrowing the gradient gap by critically reassessing the current model of development to ensure that households at the lower-rungs have an equitable share of the pie and are not left behind because they do not have a political voice.

 

 

Relative or Absolute Inequality?

 

All these while, political expediency dictates that policymakers focus on controlling relative inequality, hence the use of the relative Gini coefficient. In reality, however, the real harm is done by the widening absolute inequality because when wages are too low for those at the bottom, even just getting by with bare necessities becomes hard. And this is only about wage inequality. We have not even begun looking into income inequality and wealth inequality.

 

The incoming 4G leadership therefore has a difficult choice to make.

 

They can squarely face the true state of inequality in Singapore and review past policies to come up with a new vision of an inclusive society. This would entail a long overdue relook at how the economic pie is being sliced and distributed among business owners, capital owners, workers, and the government. The problem here is the government’s vested interests as not only policymakers but also business owners, through the government-linked companies and their webs of subsidiaries, as well as capital owners, through the state investment companies.

 

Moreover, success will still depend on whether the new leadership demonstrates enough sincerity and whether it possesses the suasive power to bring all together to work toward that common vision. Many of those (about 30% of the populace at last count) who have been left behind economically have become so disillusioned and distrustful that even engaging with them will be a real challenge. 

 

Alternatively, they can persist with the current focus on relative inequality with the same unwavering conviction but risk seeing anguish and possibly also opposition to continue swelling in the coming years. More importantly, there is a distinct possibility that absolute inequality may in time deteriorate to a point where social stratification will become so fortified that any future efforts to U-turn will be exceedingly tedious or worse futile.

 

Whichever path the 4G leaders choose to go down, they face a monumental task.

NEXT02 Comparing Singapore's Wage System with that of the Neoliberal US and Social Democratic Sweden 

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REFERENCES

[1] See Eurofound. (2015). “Recent developments in the distribution of Wages in Europe.”

[2] See Robert H. Wade. (2013). “Our misleading measure of income and wealth inequality: the standard Gini coefficient.” TripleCrisis. 6 May, 2013.