Some Thoughts about the Minimum Wage

The following are some of my thoughts about the minimum wage.  By minimum wage, we are referring to a living wage, meaning wages that are not exploitative, and by which people are not reduced to being working poor.  In calculating a minimum wage, the challenge is not to price the lowest skill levels out of the market, thus increasing net unemployment.  The government is against a minimum wage.  Here are some of the points that opponents of a minimum wage have raised.

According to the government, a minimum wage is not an effective means of alleviating poverty; rather, it will produce a net increase in poverty due to the higher cost of hiring.  They then invoke the fear that jobs will be outsourced to countries with lower labour costs.  This will then result in higher long-term unemployment.

They also claim that it excludes low-cost competitors from the labour market.  This would hurt SMEs more than corporations.  They would compensate by reducing the number of hours worked by individuals, or eliminating a number of jobs.  SMEs are hampered from offering their more valuable employees attractive wages due to the cost of workers paid a minimum which businesses may view as artificially high.  They project that this may cause price inflation because businesses will try to compensate by raising the prices of the goods and services.

One of the examples that are used against a high minimum wage is the United States.  There, it is arguable that a high minimum wage has not done much to reduce social inequality.  Or they would cite studies that show that in many EU countries, high minimum wages have been accompanied by high unemployment, affecting people with the lowest skill sets the most severely.  They could point out that in Western Europe, the average jobless rate is twice as high in countries with a minimum wage.  They could cite Hong Kong as an example, and they would seem to have an iron clad case.  Mind you, this is the common line by NTUC.

What a minimum wage is supposed to do, is to alleviate the stress of an insufficient income so that people are not forced to work two or more jobs simply to make ends meet.  This helps the economy by lowering healthcare costs in the long term.  With that added time, people can actually attend skills training.  The NTUC model does not work since workers on poverty wages cannot afford skills training, or if they are sponsored, they cannot attend because they are working to make ends meet.  Or, even if they do attend, they would be too tired to actually learn anything.

The Singapore economy is not labour-intensive.  It was never meant to be.  Our focus has always been high technology and innovation since we recognised very early that we could never compete with countries such as Indonesia, India, Philippines and China with their deeper labour pool.  A business model based on low-cost labour is already not a major component of our economy.  How would it greatly impact the labour market?  If, after 50 years of economic development, we are competing with Malaysia for labour costs, then something is seriously wrong with the structure of our economy and these companies.

All these arguments about the minimum wage not being effective in alleviating poverty and lowering the GINI coefficient are false.  Firstly, a minimum wage is merely a tool in an entire programme for poverty alleviation.  Its immediate impact is providing people a working wage.  It provides an immediate increase in the standard of living for the poorest and most vulnerable class in society.  This eventually creates a new consumer base by stimulating consumption and has a long term positive impact on small business owners and industry.  This will then lead to increased job growth and job creation since there is an actual incentive to take jobs.  Other methods of transferring income to the poor such as food subsidies or welfare payments are not tied to employment.  Because people are incentivised to work, they are less likely to pursue illegal avenues of earning.  This has a direct positive impact on society.  This also decreases the cost of government social welfare programmes.

The government’s use of the US and Hong Kong as examples of why the minimum wage does not work is disingenuous.  The US has serious institutional problems, and the minimum wage is both inadequate and offset by other measures designed specifically to defend corporate interests.  Hong Kong has to deal with a serious internal migration issue, being part of China.  They have complications Singapore does not have.

The case of the EU and Western Europe is an example of omission of facts.  It is true, that the average jobless rate is twice as high in countries with a minimum wage than those without.  It cites the fact that countries such as Switzerland, Austria, Germany and all the Nordic countries do not have a minimum wage.  What they omit to mention is that they have very strong independent trade unions who negotiate collective agreements that function as a minimum wage for specific groups.  In effect, they have several categories of minimum wages.

None of the reasons cited by the government in opposing a minimum wage actually stand up to scrutiny.  I can only speculate here, but we have to consider the fact the government is the largest single employer, directly or indirectly.  The government and the GLCs employ a substantial proportion of the workforce in Singapore.  Some estimate that there is more than 50% ownership of all major Singapore corporations, either directly, through investment vehicles or stakes that government owned entities take in other companies.  The STI is an index of the 30 largest listed companies, and over half have the Singapore government as the largest shareholder.  A rough estimate based on the value of these companies adds up to over US$100 billion, and this is certainly conservative since our sovereign wealth funds are secretive about their investments.

There is no minimum wage to keep business costs down, so as to make Singapore more attractive to foreign investment, and rise GDP.  This is not inherently wrong.  And when much of that business operating cost is tied directly to government entities, it is our money paid out.  However, we need some balance.  Keynesian economics applied means that setting a minimum wage will address the GINI coefficient, while putting more purchasing power in the lower middle class and lower class.  This still contributes to our GDP and economic growth.  Our system is unsustainable when some benefit our progress far more than others.  We cannot afford to have a segment of the population disenfranchised.