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Why the Current Wage Model (PWM + WIS) Falls Short?

The problem really is that PWM fails to acknowledge the fact that wages for workers in the lower rungs have been artificially and unfairly depressed in the past by the practice of wage dumping. Hence, before linking wage increments to productivity growth and workers’ performance, there is a need to redress that inequity by first lifting wages to a ‘fair starting point’.

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9 September 2019

To be sure, the concept of Progressive Wage Model (PWM), which seeks to set wages based on career advancement and skills upgrading of individual workers, has its merits. Arguably, the work of National Wage Council (NWC) can also be said to have served the purpose of preserving and enhancing Singapore’s long term competitiveness. A hard-to-dispute guiding principle adopted by the NWC towards that end, for example, is that real wage increases should be in line with productivity growth.


Wages in Lower Rungs are Far from a “Fair Starting Point”

The problem really is that PWM fails to acknowledge the fact that wages for workers in the lower rungs have been artificially and unfairly depressed in the past because of their weak political voice. Hence, before linking wage increments to productivity growth and workers’ performance as per the guidelines set by PWM and NWC, there is a need to redress that inequity by first lifting wages to a ‘fair starting point’.


It is therefore important to emphasize that the minimum wage debate is more than just about showing compassion. Much as we hate to admit it, the low-wage workers had gotten an inequitable deal in the past because the influx of low-cost foreign workers resulted in stagnating or even declining wages. As a result of that inequity the workers suffered due to their lack of bargaining power and political voice, their wages today are far from a “fair starting point” from which they can enjoy meaningful wage growth. The minimum wage debate is therefore more about an overdue redress for the inequity suffered by the low-wage workers over the past two decades due to Government’s liberal foreign workers policy.


Inequality Today Driven by Government Policy Not Just Globalization


To be sure, globalization has always been an important driver of inequality for Singapore’s dual-track economy comprising a higher growth “global track” dominated by MNCs serving the external markets and a slower “local track” with mostly indigenous SMEs serving the domestic markets. Because the activities in the “local track” have lower value-add, workers here command lower wages than those in the higher growth higher value-add “global track”.


During the 1980s, when Singapore was experiencing high growth and the difference between the two tracks was minimal, wage inequality improved initially as evidenced by the fall in ratio of the top to bottom quintiles of households by wage from 14.4 in 1980 to 11.4 in 1990.


By the 1990s, however, wage differentials began to widen as Singapore’s upgraded economic structure amplified the effects of the dual-speed dual-track economy.[1] Gini coefficient rose from 0.44 in 1990 to 0.47 in 1999.[2] By 2000, the ratio of the top to bottom quintiles of households by wage rose again to 20.9.


After the turn of the century, the unequal wage distribution persisted particularly after 2004 when the economy began to recover strongly from the shocks brought about by the dot-com bubble burst, the New York 9/11 attack, and Hong Kong bird flu scare. Amid the impressive growth, Singapore was also undergoing structural changes moving decisively away from manufacturing to high-end services. Foreign direct investment in the manufacturing sector, as a ratio of gross domestic product, shrank from 36% to 21% but grew in the financial and insurance services sector from 36% to 43%. This bolstered the skills premium for high-end workers in those sectors while less-skilled workers displaced by the shrinking manufacturing sector were redeployed to the lower value-add domestic services sector, such as public transport, cleaning, retailing and construction.[3]


Rightfully, the floodgate for unskilled foreign workers destined for domestic services sector should have been narrowed or closed at this point, so that the jobs in that sector could go to the older Singaporean workers facing declining employability in the knowledge-based economy.


The situation was unlike during the ’70s and ’80s when manufacturing jobs were abundant and Singapore workers were also in their prime. Foreign workers were brought in then to supplement, not supplant, them. In the end, the growing economic pie helped to raise wages across the board.


In contrast, with a shrinking manufacturing sector after the turn of the century, the influx of low-skilled foreign workers willing to work for less depressed wages for the Singapore workers at the lower rungs. By 2007, the Gini coefficient peaked at 0.482 but moderated to 0.474 in 2008 and 0.471 in 2009 only because of the financial crisis. 


In short, globalization has certainly been a driver of inequality particularly since the 1990s but after the turn of the century, it was the government policies on foreign workers that caused wages in the lower rungs to stagnate while wages at the top were allowed to grow unrestrained.


The Issue of Wage Dumping


Given Singapore’s small population and limited talent pool, it is unrealistic to think that we can do away with foreign workers and talents. Notwithstanding, foreign workers should be brought in to supplement not supplant the local work force. In reality, we now have foreign workers competing for jobs not only at the lower rungs but also in the middle rungs.


Singapore’s liberal foreign worker policy stands in stark contrast to the approach of the European Union (EU) countries. In 2004, after the grouping’s enlargement, the EU member states saw an influx of migrant labour and service providers from the new Eastern-European member states. Many of these foreign service-providers resorted to winning contracts by bidding low and bringing in labours from their home markets to cut wage cost. The practice, known as wage dumping, threatened to depress wages of and to take away jobs from native workers. In Finland, for example, East European workers employed were paid as little as €2 per hour when the minimum wage was €20. In Switzerland, Slovenian workers were paid €8 per hour instead of the €27.5 guaranteed by the collective labour agreements.


Against the strong objections of the unions, the European governments, including Finland, Sweden, Norway, Denmark, Switzerland, Germany, and Austria, acted swiftly to clamp down on wage dumping.[4] In countries where wages are determined by collective agreements, unions sought to extend the agreements to industries with a high number of labour migrants and to compel foreign service-providers to also sign collective agreements. Today, wages within the EU remain among the highest in the world and the Gini coefficient the lowest.[5] It is so because the unions constantly play their singular given role as the staunch defender of workers’ welfares.


More recently and closer to home, Japan also began legislating the import of foreign workers to address its problem of ageing population and declining birth date. Japan's fertility rate dropped below 2.1 childbirths per woman - replacement level - in the 1970s and now stands at around 1.4. The country also has one of the world's longest life expectancies (85.5).[6]


To be sure, Japan had been guilty also of wage dumping since as early as 1993 when it introduced a technical intern program with the professed aim to transfer skills to developing countries. But the scheme, which is still running, ended up as cover for companies that want to import cheap labour. Many interns were found to have been saddled with debts in coming to Japan and ended up being exploited.


In March 2019, a new visa system was implemented to allow foreign workers aged 18 or older to apply for two new residence statuses — one for people who will engage in work that requires a certain level of knowledge and experience and another for work that entails higher skill levels. To prevent these workers from being exploited and to ensure that their arrival will not depress wages of Japanese workers, employers are required to pay wages equivalent to or higher than those of Japanese nationals. With the new visa system, Japan plans to bring in 345,000 foreign workers over the next five years.[7]


What is wrong with Singapore’s Tripartite Unionism?


The problem with Singapore’s tripartite labour relations is that it is overly dominated by the Government with the union headed by a cabinet minister. The appointment puts him in a situation where he is perennially faced with a conflict of interests between ‘fighting’ for the welfare of the workers or to fulfil his given first and foremost mission to foster industrial peace as a minister.


To be sure, it is not all bad to have the Government leading the union movement given Singapore history of disruptive communist-instigated industrial actions in the 1950s and early 1960s. By seizing control of the unions after coming to power, the 1G Government restored industrial peace which in turn attracted foreign investments that enabled Singapore to achieve transformative developments within a few short decades. During this period, having a minister heading the trading unions worked to the benefits of the workers by giving them a strong political voice. In the end, unionism led by the Government therefore worked for Singapore during the earlier phases in terms of not only economic developments but more importantly also nationhood building.


However, after six decades of uninterrupted absolute rule with almost no opposition, the Government today is no more only the policymaker and regulator but also a capital owner with extensive investments through the state-owned investment companies, and a business owner through the government linked companies and their webs of subsidiaries.


In other words, unlike in the earlier years when the 1G political leaders were completely altruistic in their motivations, the current Government faces growing conflicts of interests that may in the end sway its policymaking that results in inequitable distribution of economic gains.


In the face of a conflict of interests, it will take a strong political leader like former President Ong Teng Cheong to know his true call of duty. In 1986, he was both a cabinet minister and a union chief when he sanctioned a 2-day strike in the shipping industry without first informing his cabinet colleagues thus incurring their wrath. But political leaders of his integrity are hard to come by.


Indeed, this conflict of interest played out in a bad way soon after the turn of the century when the economy recovered strongly from the initial shocks brought about by the dotcom bubble burst, 9/11 attack, and the Hong Kong bird flu scare. The government decided to go for “growth at all costs” and sanctioned the influx of foreign workers to drive growth and to suppress wage costs. The union chief was thus faced with the dilemma of supporting the influx of foreign workers for higher economic growth or to oppose the liberal foreign worker policy to safeguard the interests of workers.


As it turned out, with the influx of low-cost foreign workers, Singapore GDP grew annually by an impressive average of 8.75%. During the same period, Gini coefficient widened significantly from 0.464 in 2004 to reach its peak at 0.489 in 2007.

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[1] See Chia and Chen (2003) for a summary of various studies conducted by different economists on how income distribution in Singapore changes at different phases of economic development.

[2] See Singapore Department of Statistics (2000) and Mukhopadhaya (2001).

[3] See Rachael Chang. (2013). “Mind… the Gap.” Straits Times. 6 April, 2013. Quoting Singapore Management University economist Hoon Hian Teck.

[4] Smith, R. (2013). “Wage Dumping Hits Switzerland.” 7 January, 2013. Inter Press Service; Fischer, M.K. (2015). “Austria:

Stricter rules against wage dumping.” 29 June, 2015. Warwick Legal Network.

[5] See Line Eldring & Kristin Alsos. (2012). “European Minimum Wage: A Nordic Outlook.” Fafo. Pg 80 – 81.

[6] See BBC. (2018). “Japan eases immigration rules for workers.” 8 December, 2018.

[7] See Japan Times. (2019). “Rules issued for firms hiring foreign workers via new system, including pay parity with Japanese.” 15 March 2019.

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