Tuesday, January 14, 2014

Singapore Takes First Step Towards Minimum Wag

Singapore Deputy Prime Minister Tharman Shanmugaratnam announced last week that a compulsory licensing scheme leading to mandatory basic wages for cleaners and workers in the security sector will be introduced. The move falls short of a nation-wide minimum wage scheme, however, targeting only specific sectors that rely on low-skilled aged resident workers.

The scheme will make it mandatory for cleaning and security sectors to adopt a progressive wage model with basic wage levels set in accordance with the role of the employees, so as to raise wages progressively as workers’ productivity improve through skills upgrading and training. All cleaning companies will come under the scheme in September, with the entry-level pay for cleaners set at SG$1,000 monthly. This is about 20% higher than the current median basic wage for cleaners.

The move marks an important step towards fostering an inclusive society and ensuring that the most vulnerable segment of the population also gets to enjoy the fruits of economic success. In our opinion, chances of this scheme being extended to other sectors in the longer term are high.

That said, this targeted approach will have negligible impact in reducing the widening income gap in Singapore. In most countries, a minimum wage scheme is often applied nation-wide in an attempt to improve the standards of living for the lowest income group and to narrow the income gap.

The last few years of economic restructuring has brought along its set of side effects on the lower income group. Tightening the inflow of low-skilled foreign workers may help to level the playing field to some extent but the associated inflationary impact is certainly undermining the welfare of lower wage resident workers.

Introducing industry-specific mandatory minimum wage may provide a short term solution. But if inflation is allowed to soar due to the structural transition, such minimum wage schemes will be meaningless in the longer term. The outcome will be an “inflation-pegged” minimum wage scheme. Higher wage is also a double edge sword. It increases purchasing power directly but raises inflation indirectly.

The restructuring is nearing its halfway mark. Rather than continuously encouraging wage increase, which undermines longer term competitiveness – particularly when improvement in productivity is not assured – it is time to look deeper into tackling the rapid increase in costs. An assessment of the progress made and the direction to take going forward may be necessary in this upcoming budget.