[Commentary] Why I am not for minimum wage in Singapore


[Commentary] Why I am not for minimum wage in Singapore

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The minimum wage issue has long been a hotly discussed and debated issue in Singapore. During the last general election, it was also used as a key political agenda and contention used to sway the nation’s political inclination.

While it seems that the minimum wage protects employees from being overly underpaid, I believe there are intricacies and hidden flaws surrounding the ‘minimum wage’.

One key problem with the minimum wage is that it is a short-term measure rather than a long-term solution. The minimum wage does protect workers from exploitation where employers suppress the wage intentionally. This is a fair argument. However, I rather we let the private industry and free market take care of it instead.

As a business owner myself, I understand for a fact that there is an impending rising costs of doing business in Singapore. Sky-high rentals, high operating expenses and ever-competitive landscape are key challenges faced by business owners and entrepreneurs. It is already said that entrepreneurs need to fail many times in order to taste success in today’s world.

One key issue faced by employers today is the challenge of hiring suitable workers. It is said that a company is only as good as its employees. Hiring suitable and competitive workers will not only increase a company’s business competitiveness, but also ensure the long-term business survival of the company.

As much as possible, employers will try to match salaries with market forces so as to recruit and retain the best employees in their company. In today’s labour shortage work force, retaining employees is really an uphill task.

Hence my argument is that employers would be ethical and ‘smart’ enough to pay employees at a market rate that is benchmarked competitively according to the industry. While some might argue that there might be exploitation or unethical practices; in this case paying workers a ridiculously low wage, I believe the laws of demand and supply will counter this argument.

If there is huge supply of jobs available and there’s not enough demand of workers to fill the jobs, employers will raise the salary to attract the demand. The reverse is true. If there is limited supply of jobs and demand is huge, there is a possibility where employers will adopt a lower wage strategy. Nonetheless, this does not mean that the employers will exploit the situation by suddenly reducing the ceiling of salary remuneration.

The central argument for having the minimum wage is always on the premise of an anti-poverty tool, especially for low skilled entry-level positions. However I read a Forbes article which states that there is abundant evidence that a 10% increase in the minimum wage leads to a 1 to 3% decrease in employment of low-skilled workers (using teens as a proxy) in the short run, and to a larger decrease in the long run, along with rising unemployment.

http://www.forbes.com/sites/jamesdorn/2013/05/07/the-minimum-wage-delusion-and-the-death-of-common-sense/

I wonder why this is the case. I suppose when employers are forced to pay-entry level workers more, this will ultimately make them hire fewer of them, and consider replacing more workers with robots, computers, IT systems or infrastructures. This is already true as I am beginning to see more restaurants using automated systems to order food and no longer you see smiley looking waiters attending to your needs.

I will spare you the complex economics theories. If there is one thing you have to know about why so many people are against the minimum wage, it is this: Having a minimum wage guarantees nothing.

Yes, some (probably low-skilled?) workers might earn more money, PROVIDED they already have a job. But there will be people who are left jobless because they do not possess skills that have meaningful value or are relevant to the marketplace. Even if they are willing to work at lower wages and businesses are willing to take them on at lower wages, they cannot do so with a minimum wage in place. So in many cases, we actually see the implementation of minimum wage killing jobs for the very people it is trying to help.

There’s an old but still very good article that said this, “In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”

Singapore is supposedly a free market, and we should really let the demand and supply forces play their hands and set prices. Just like what the labour chief Lim Swee Say said, minimum wage can be a zero sum game. Nobody really wins, not even the workers.

Other than making workers lose their jobs, minimum wage may also limit future wage increase since businesses may just pay the minimum wage, period. So, minimum wage may just turn out to be the maximum wage.

The other issue, which is close to my heart, is on the notion of productivity. Productivity is an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs used in the production process, i.e. output per unit of input. It is said that Singaporeans are highly productive and due to the knowledge-based economy, our nation’s competitiveness stems from our highly skilled, knowledgeable and productive workers.

There are also various productivity grants and incentives like the Inclusive Growth Programme grants from e2i or even Productivity and Innovation grant (an incentive which I have truly benefited) in place to encourage businesses to improve productivity to counter the manpower crunch. With higher-tech solutions, businesses will also train their staff so there’s also the element of upgrading for the workers.

Meritocracy is itself integral in the way our society works. We work hard for what we want. And somehow, if we do it right with a pinch of luck, we will be duly rewarded at the end of the day. I am a firm believer in the continuous pursuit of knowledge and skills, be it for professional or personal reasons. Not having the minimum wage gives a notion or signal that anyone, who works hard enough will be able to reap his or her fruits in the long run. By having the minimum wage, not only does it send the signal that workers are generally protected constitutionally, it gives room and spaces for people to think that they don’t need to up keep their skills or knowledge, yet be paid a certain ceiling of pay, made mandatory by the government, and not necessary a true reflection of their real skill set.

As a business owner myself, my goal is to grow my companies and to ensure my employees are rewarded well based on their performances & inputs. I believe our current social –economic landscape is mature enough to handle the intricate issues relating to manpower and labour force. Having constitutional protection of a minimum wage may be a good stance for some people politically; it might not necessarily help our country in the long run.

 

Dennis Toh , Editor, http://www.TheInfluencerMedia.com

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6 thoughts on “[Commentary] Why I am not for minimum wage in Singapore”

  1. Dennis, this is a strongly-argued article, and I appreciate the attention to economic theory. I think the minimum wage is socially useful for reasons that go way beyond economics. But I had a few thoughts about the economic evidence, which I’ll cover first.

    The fundamental argument against minimum wage is a simple supply-and-demand observation, that if you increase price you reduce quantity demanded. You cited the Forbes article for the 10% increase in minwage –> 1-3% decrease in employment among teens. But (1) teens 16-24 have a lot of other things to do than working, like getting a diploma or degree; and (2) since demand for higher ed is countercyclical with the economy (if job prospects are generally poor, more people try to stay in school and “ride out” the downturn–an option generally not available to older low-skilled workers), which means economic trends would also have knock-on effects on youth employment trends. So I’m not so sure that young people are a good proxy for low-skilled workers in the first place. In any case that stat has no sources in the Forbes article.

    I did my own trawling through Google Scholar for evidence on one very specific issue: the impact on employment caused by the introduction of a minimum wage. The UK introduced it in 1999, and Hong Kong and Malaysia much more recently. I want to emphasise how specific this issue is because much of the evidence that is used against the introduction of minimum wage actually comes from studies that look at the impact of increasing the minimum wage. But the two are different phenomena, and it’s not clear if conclusions from one can support the other. The initial shock of implementing a minimum wage could be different from the impact of nudging a minimum wage up. I would expect it to be bigger. But that also depends on the size of the ‘nudge’: one of the papers your Forbes article cited studied an increase in New York state from $5.15/hr to $7.15/hr, which is very large! I believe tribunal- or council-set (that is, not *politically* motivated) wage scales in Australia and the UK tend to move more gradually.

    Ultimately, both sides can draw support from the available evidence, though it comes out more strongly on the “no impact” side. I looked at a few UK studies, but there are many more out there. Stewart (2004) found no significant adverse impact on employment for any demographic group for any position in the wage distribution in 1999, 2000, and 2001 (when minimum wage was introduced + two upward adjustments). In another study (2002), the same author looked at geographical variation within the UK, and paid attention to particular areas which had high proportions of low-wage workers: employment growth after the nationwide minimum wage was introduced was not significantly lower in those areas. (The likely reason IMHO is that poor workers are also poor consumers: raising their wages disproportionately pushes up consumption in those areas, providing a stimulus to depressed local economies.) He also compared the employment rates of those right at the bottom of the wage distribution with those just a step up (and therefore not directly affected by the implementation of the minimum wage). Again, no significant effects found (Stewart 2004). Machin, Rahman and Manning (2003) studied nursing-home workers (who are very poorly paid and therefore probably most affected by minimum wage laws): they found a small reduction in number of hours worked, but they judged it to be outweighed by the “very big wage compression of the lower end of the wage distribution.” Then there’s this paper (which I haven’t read the whole of, unfortunately): “Why has the British National Minimum Wage Had Little or No Impact on Employment?” http://eprints.lse.ac.uk/19742/1/Why_Has_the_British_National_Minimum_Wage_Had_Little_or_No_Impact_on_Employment.pdf?origin=publication_detail (Studies on Hong Kong and Malaysia, which both recently introduced minwage, may help provide more useful data.)

    So I’ll grant you that the evidence about the minimum wage is inconclusive. The effect of minimum wage is likely to be context-dependent. But we could take a look at social and ethical points of view too.

    The American economist Arthur Okun (who chaired the Presidential Council of Economic Advisers) argued in his book Equality and Efficiency: The Big Trade-Off that “minimum-wage laws and work-safety legislation can be viewed most fruitfully as further examples of prohibitions on exchanges born of desperation, extendig the logic of the ban on indentured service.” He goes on: “as I read the laws, they declare that anyone who takes an absurdly underpaid or extremely risky job must be acting out of desperation… [that desperation] must be kept out of the marketplace…. With these bans, society assumes a commitment to provide jobs that are not excessively risky or woefully underpaid. That commitment is often regrettably unfulfilled, and perhaps, if it were fulfilled, the bans would be unnecessary.”

    You argued that people will be left jobless if they lack skills that are valuable or relevant in the marketplace. Minwage would kill jobs for these people. I think I have two (related) responses to that, one based on Okun above and one that elaborates on it, but based on something Okun had little insight into when he was writing in 1975. First, Okun would draw attention to the people who have to take these jobs. Are they agreeing to particularly poor terms of employment (salary being one term of employment, like hours, off-days, shift work, occupational hazards and so on) because they have no choice? Is it fair for people to agree to contractual terms out of desperation? In addition, we find that in the modern workplace, people are being made redundant because of (1) global shifts in work and (2) new technologies that they were never trained for or that made their skills obsolete. These are things that people have little responsibility over–they got unlucky because of forces out of their control. And with working lives extending longer (because older workers are healthier and lifespans are pushing past 80 years), more and more people are facing these sorts of risks. These are risks that we have to manage collectively because none of us can do it individually, yet all of us face them. And given that the risk of redundancy grows with age, this is the kind of thing that risk-pooling across the population would help with.

    Conversely, I think where we would agree is that any potential minimum wage level should only be as high as to effectively ban contractual terms that prey on the desperation of low-skilled workers. That is still not a very high bar. For instance, I don’t think anyone should be working full days at $800 a month (which is less than a dollar an hour–can anyone’s time really be so unvaluable?) Anyone who agrees to a job like that must be in really poor shape.

    Both these responses rest on one premise. If we follow this argument (I’ll call it Okun+), the minimum wage can only be one out of many, many different measures that the government should implement. Conceivably this would include a wage subsidy like Workfare. We’d also expect huge training schemes and some sort of incentive for employers to hire and retrain older workers. No doubt these will cost a lot but some would argue that’s what fairness entails.

    In addition, many economists and sociologists will note that though we are a free market, free markets themselves don’t exist in a vacuum. A free market is not and can never be a law unto itself. In reality the free market is controlled in all sorts of ways–safety, morality, and so on. If we regulate the number of hours people work, or the minimum off days people are allowed, why can’t we restrict inhumanely low wages? No one is saying that people should be allocated jobs like Soviet Russia–so your point about letting demand and supply work is not really a point against advocates of minimum wage, because they (we) agree.

    Oh and lol Singaporeans are not productive (http://www.bls.gov/fls/intl_gdp_capita_gdp_hour.pdf). For every hour we work, we produce about 2/3 the output of a typical American worker, or about 80% of most Western European workers (consolation: we’re ahead of Japan and Korea). And minimum wage *could* actually encourage workers to keep up their investments in skills, if it increases the expected future payoff of those skills.

    Look forward to hearing what you and others have to say.

    Machin, Stephen, Alan Manning and Lupin Rahman. 2003. “Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector.” Journal of the European Economic Association 1(1):154-180.

    Stewart, Mark B. 2002. “Estimating the Impact of the Minimum Wage Using Geographical Wage Variation.” Oxford Bulletin of Economics and Statistics 64(S):583-604.

    Stewart, Mark B. 2004. “The Employment Effects of the National Minimum Wage.” The Economic Journal 114:C110-C116.

    Stewart, Mark B. 2004. “The impact of the introduction of the UK minimum wage on the employment probabilities of low-wage workers.” Journal of the European Economic Association 2(1):67-97.

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    1. mcpeanut, i would say the say question really is “does singapore and singaporeans really need minimum wages” the employment act and many social groups have enough initiatives, efforts, plans and more in place there is no way any singaporeans is going to allow themselves to be exploited. at the end of the day, who is really going to benefit from minimum wages in singapore? only a handful, and its not even near the thousands.

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  2. Hi Steven, that’s a really good point and I think it’s a fair point of view to take. Without more evidence (surveys, wage data, real proposals on minwage level) I don’t think we can say whether you’re right or not. (For instance: if the minwage is set at $800, almost no one will be affected; on the other hand, if it’s set at $1500, which I am not proposing, we’ll see a lot of people benefiting–and possibly quite a few jobs lost too.) I would also like to see how the NWC’s recommendations for security guards, cleaners and so on have helped wages in those sectors.

    But I just want to point out something–your view is not compatible with Dennis’s. Original article quotes approvingly: “[A minimum wage law] means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment.” But on the other hand, you say “only a handful” will benefit, and that currently “there is no way any singaporeans is going to allow themselves to be exploited.” If the impact of the minimum wage is as low as you think it is, then the question you should be asking Dennis is: why not? Because between his disastrous vision of minwage and your what’s-the-diff vision, you can’t be looking at the same thing.

    I want a minimum wage level at which you are more or less right, i.e., set minimum wage at a relatively low level, but make sure our state is putting out a clear message that (1) we will not allow anyone to sell his or her time for an insulting amount of money, and (2) this is part of a package of policies that addresses the issues low-wage workers face.

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