Minimum wage: My reason for advocating it

Before we go into why I advocate minimum wage, let us first ask, what is the aim of minimum wage? The concept of a minimum wage is to assist the lowest income group of people that had struggled to keep up with the rest of the economy. Before a minimum wage can be introduced, there must be recognition that there is a group of workers that needs assistance to enjoy a predetermined-minimum standard of living. In every growing economy, there is bound to be such a group of workers. The government will then need to ask themselves whether they want to assist this particular group to achieve a better standard of living. Does the government only wants to achieve the lowest unemployment rate possible? Or does the government prefers to create a more equitable society? Then the next question to ask is: How do we determine the minimum standard of living? In my opinion, I think a fair answer would be for the lowest income group to tag minimum wage to the change in cost of living. Although a rough gauge, the CPI index would suffice.

Most college economics teach their students the standard textbook answer–that minimum wage is a bad thing. The reasons are simple. Minimum wage is hard to determine. If a minimum wage is set too low, given a typical labor supply and demand curve, low wage workers do not benefit from the scheme while employers benefit instead. Employees lose, employers gain. If minimum wage is set too high, employers will not hire the equilibrium number of workers and unemployment rate will rise. While some low income workers might benefit from the higher wage, some low income workers became worse off because instead of a low income to be earned, they are now jobless. Some employees and all employers lose. In addition, a higher minimum wage increases inflationary pressure which will hit the lowest income earners more.

The term ‘job losses’ is a frightening thought, going by how much more risk averse human psychology has towards losing what one already possess versus what one can potentially gain. This is the reason the PAP advocates creating more jobs supplemented by increase in productivity, levies on foreign workers, rebates and subsidizes as the better way to help low income workers. Productivity is a big word. And the PAP has been promoting this concept in recent months. Just how has the ruling party influence the productivity of Singaporean workers? I’ll go into detail later.

However, we must note some of the shortcomings of this textbook answer to minimum wage. For the above illustration to happen, we assume that:

1. Wage information is easily available without asymmetrical information
2. Labor market behaves like the Laissez-faire market , where the ‘invisible hand’ clears out labor supply and demand changes to reach market equilibrium on it’s own. As such, wages must have been flexible.
3.  There is no inclusion of the effects of a larger mobile foreign labor force that can easily enter the market

Let’s look at each point one by one:

1. Do you think wage information is readily available? While it might be for fresh graduates due to the salary surveys done by the local universities every year, it is not so for low income workers. How much do you pay for a dish washer? A dish washer at a hawker center might be paid $600 a month while a similarly skilled dish washer at a restaurant might be paid $800. In fact, for low income jobs that only advertise through word-of-mouth or through small articles on newspapers hardly give us as much information on pay scale than other higher-paying jobs such as accountants or financial analysts.
2. As a Keynesian, it is to my opinion that wage, like price, is sticky. Wages in general only goes up, and it does not changes frequently. Even during the financial crisis, very small number of companies offered lowering wages to survive, with most opting to retrench their workers instead. Wages is not simply a matter of labor supply and demand. It also consists of years of working experience, expertise skills and sometimes, even something intangible like luck (very apparent in the case of property and insurance agents. Agent A might be more aggressive than agent B in selling but somehow agent B just seems to close more cases). An analysis using supply and demand curves is too simplistic.
3. When we include the presence of a mobile foreign labor force, it distorts the domestic market equilibrium. A local worker with a family to feed and a house loan to repay has a much higher financial burden as compared to a foreign worker that only spends on himself and repatriate most of his income earned in Singapore back to his home country, which is usually a much higher amount compared to what he can earn back home. As such, foreign workers are willing to take on jobs at a lower wage rate in Singapore as he will still be better off working here than working back home. This creates downward pressure on the lowest wages.

The main question we need to ask is: Has the lowest income earners encountered financial problem? The current fact that we see in Singapore is there is an increasing number of foreign workers (including talents) as the government continues to attract more foreign investment and foreign entities to set up branches in Singapore. This is all out economic growth policy. With a growing economy, a low median income of S$2,500 and a growing Gini coefficient, it is obvious that the lowest income earners are being left out in the cold. So is this a problem? I think it is. We see polarizing of the society with the rich getting richer while the poor faces increased deterioration in their standard of living (especially if you include the effects of inflation pressure brought about by a higher population growth via foreigners).

I would like to think that wage determination is not just due to labor supply and demand, but also due to the bargaining power between the employers and employees, or monopsonistic competition in economics speech. Take for example the case of MacDonald’s in Singapore. We all know that MacDonald’s pays one of the lowest wage rate in Singapore. Back in the 90s, I remember that the hourly rate is a pathetic S$2.50. Even in recent months, when MacDonald’s announced an increment in hourly rate, it is still a measly S$3.40. While the set meals had increased from S$5.50 to S$8.00 (or almost 44% increase) on average over the last 4 years, wage rate had only increased by 42% in nominal terms over the last 10 years.

Why could MacDonald’s pay such low wages? Because most of the staff are either old and retired or students. This is a group of workers who have low bargaining power, imperfect mobility of labor (a student can’t simply fly to Australia to earn higher hourly wage at MacDonald’s), and inelastic labor demand. In simple terms, it means this group of workers have no other choice. While they may be performing similar job scope as waiters in restaurants (we equate their marginal product of labor, or simply how much output per worker), they are paid much lower. In today’s society, such a worker would only earn a gross amount of S$1060.80 a month for working a punishing 12 hour work day, 6 days a week, and without medical benefits. A foreign worker who could only earn S$500 a month at most back in his home country would have no qualms about coming to work in Singapore. A Singaporean would be able to survive on this wage if he is single. If he has a family, it becomes harder. To rub salt to the wound, the increasingly large foreign population adds inflationary pressure to the economy and the man suffers more.

As an employer, when you have the choice to hire cheaper foreign workers (despite the levies), you would choose to hire them. Why would you bother to invest in improving productivity when you can get the same returns simply by hiring lower cost foreign workers? In fact, granting the choice of foreign labor only increases the bargaining power of employers. One of the benefits in introducing a minimum wage is it forces companies who are willing to stay in Singapore to enjoy the low corporate tax and business-friendly environment to look for alternatives to improve profit returns via investing in technologies and training to improve productivity. The PAP laments that they could not directly improve productivity of different companies, but they can certainly compel companies to do so. It is only a matter of whether you want to kowtow to foreign enterprises.

“We have put in place levies for foreign labor!”, the PAP would argue again. But the burgeoning number of foreign workers only goes to show that the levies are set too low. I would propose a bias levy system where foreign labor levies in industries such as construction or maids to be set low as these are jobs Singaporeans shun. For industries such as tourism and financial services, where Singaporeans sought after, levies should be set high. This is to prevent employers from employing foreign workers to take advantage of the lower cost of hiring. Hiring foreign workers should be a last resort.

“What about companies that could just pack up and leave Singapore leaving some Singaporeans to be unemployed?”, the PAP might argue. Please remember that we are talking about minimum wage here. Any increase in minimum wage shouldn’t be drastic. It’s absurd to ask for a minimum wage of $3000 a month when the initial wage is $800 a month. But if the predetermined minimum standard of living calls for $900, a minimum wage should be set accordingly. As such, we see that the impact should be small for the company but could spell a huge difference for low wage earners.

If a company can pack up and leave Singapore simply because of a slight adjustment in the minimum wage, I don’t see why should the company continue their operations in Singapore. The company could have easily change their operations into lower cost countries such as Vietnam or Thailand. It is only a matter of time before such companies relocate in an increasingly expensive place like Singapore. For a company to pay such low wages, it is most likely a low-value added industry. As the country progresses up the value chain, there is no point to retain such low-value added industries. My mom used to work in a brush manufacturing plant. Do we still see such plants in Singapore? Of course not. It doesn’t make any economical sense to retain low paying low-value added industries in the country, only to be subsidized by stagnant wages of low income domestic workers and population pressures on inflation rate and infrastructure. Yes, some Singaporeans would lose their job. But they will find other positions in other fields or in companies which are willing to stay. I think it’s better for the country to down this medicine as soon as possible. It is futile effort to compete on cost and yet move up the value chain.

I admit that it is not easy to determine what is the minimum standard of living. A national study can be carried out to study this figure. In any case, a minimum wage rate is not cast in stone. It can be changed accordingly using statistical research to best align real wage to the market equilibrium level. It should also be reviewed every 2-3 years so that minimum wage can be adjusted accordingly to CPI and the period allows for higher wage predictability which most businesses values. Is it troublesome? Yes. Will the results be accurate? I offer no guarantees. But is it worth to look into this scheme. Looking back to the main question I asked earlier, I believe the lowest income earners requires help and it is a resounding yes.

Looking at statistical data, if minimum wage is such a bad thing, why do so many countries have them including the United States and United Kingdom? Dare the Singapore Economists Service say they are better than the economists in those first world countries?