14 January 2011

Arguments Against Minimum Wage Miss The Point

A minimum wage may affect the ability of lower skilled workers to secure a job because employers will be reluctant to employ them if the minimum wage is higher than the value of what they can contribute.  These workers will be denied the chance to work for a lower wage that reflects their skills and ability, even if they wish to.

The economic value of a worker's contribution is subjective.

Without access to an alternative liberal supply of low-wage foreign workers, a company has to either (i) be more productive using fewer workers, or (ii) employ the requisite number of workers and pay them at least the minimum wage.

If a company cannot afford to employ workers at the minimum wage, it is likely that its business is low value added.  In that case, it may be better off operating elsewhere.

Companies that are unable to pass on the additional wage cost (if and when a minimum wage law is passed) may become uncompetitive and decide to move out of Singapore, taking away jobs from Singaporeans.

By the very nature of their business, some companies — such as those providing retailing, catering, public transport, cleaning, refuse disposal and security in Singapore — must necessarily operate in Singapore.

Moreover, since Singapore is experiencing full employment and needs to import hundreds of thousands of foreign workers, it may not be an entirely bad idea if some companies exit the economy or the country, especially if they survive here only by virtue of their paying their workers low wages.

If companies decide to move out of Singapore, our GDP may suffer.

The main objective of economic growth is to provide employment for a country's citizens, rather than growth for growth's sake or for the empty honour of being the fastest growing economy, or growth to generate and accumulate large budget surpluses.  Singapore already generates so much demand for workers that companies need to import hordes of foreign workers.  These foreign workers are not invisible; they need almost instant housing, roads, healthcare facilities, recreation facilities, shops, eating places, schools, prisons etc.  In addition, various government departments need to set up or to be beefed up to manage them.  Slower, sustainable economic growth, with a reduced dependence on foreign workers, may be good for the country and its people.

Singapore should be concerned about competition from countries such as China and India, with their bountiful talent, improving educational standards, research and development spending, and cheaper infrastructure and labour.

Certainly Singapore should be concerned about competition from other countries.  While we cannot compete on cost alone, much can be done to reduce the various costs of doing business.  Yet this does not mean that a minimum wage should not be legislated to protect those who earn very little and who probably have very little bargaining power.  How this affects overall competitiveness, if at all, depends on the level at which the minimum wage is set and the labour intensity of the individual company or industry.

The way to narrow a widening income gap is by raising the skills and the productivity of the workforce, not by setting a minimum wage.

Setting a minimum wage does not preclude improving the skills or the productivity of the resident workforce.  They are not mutually exclusive.  Indeed, each person should upgrade his skills and his productivity to the extent possible.

Singapore has Workfare Income Supplement to supplement the wages of low-wage workers.

Workfare Income Supplement, or WIS, is funded out of taxes.  This means that tax payers are supplementing wages that companies should be paying their workers.

To qualify for WIS, a citizen has to satisfy the following conditions: (a) earn not more than $1,700 a month (including overtime pay and bonuses); (b) be aged 35 years and older; (c) live in a property with an annual value not exceeding $11,000; (d) worked at least six months during the work year (or at least three months out of any six-month period during the work year to receive half payment).

One advantage of WIS is that, unlike a minimum wage, it is available to the self-employed.  However, they must declare their net trade income from work done during the year and make the relevant contributions to their Medisave accounts.

WIS paid to a worker depends on his age and monthly salary.  The highest WIS a person in the 45-54 year age group will receive is $1,400 per year ($400 in cash and $1,000 credited to his CPF account) if he is an employee or $933 per year (non-cash, with the entire amount credited to his Medisave account) if he is self-employed.

WIS creates a dependency on the government.

A minimum wage law usually co-exists with an unemployment benefits scheme.

Not all minimum wage regimes co-exist with an unemployment benefits scheme, nor is it necessary to do so.  In any event, Singapore's circumstances may be different.

Minimum wage legislation can be a distraction from doing what is necessary to ensure that Singapore stays competitive enough to attract enough investment and talent to generate full employment.

Anything can be a distraction, but nothing need be.  As stated above, setting a minimum wage does not preclude taking steps to improve the skills or the productivity of the workforce.

A minimum wage system may lead to constant disagreement over the level of the minimum wage, and this may be harmful to tripartite relations (i.e. among the government, trade unions and employers).

Any disagreement over the level of the minimum wage necessarily involves two or more parties.  Any one or more of them may be unreasonable.  It is incomprehensible why workers but not the other tripartite parties should bear the burden of maintaining harmonious tripartite relations.

It may take years to reach agreement on the level of the minimum wage each time it needs to be reviewed.  By that time, it may no longer be relevant.

This is hypothetical inasmuch as wage negotiations between employers and trade unions in Singapore have not been protracted in the past.

Alternatively, the minimum wage may be set by the National Wages Council at its annual deliberations.

The minimum wage will become the maximum wage for low wage workers.  With a minimum wage situation, low wage workers may not receive salary increments.

A worker who commands a salary less than the minimum wage will only be too happy if the minimum wage is his maximum wage.  If he proves himself later, there is no reason for his salary not to exceed the minimum wage, if not at the company he has been working at, then at another company.

Many low wage workers in Singapore probably do not receive annual salary increments or bonuses presently.  With minimum wage legislation, low wage workers have some bargaining power and mobility.

The minimum wage must be reviewed and adjusted regularly in order to remain relevant.  It should be adjusted for inflation.

The minimum wage issue is being politicised.

The Merriam-Webster dictionary defines politics as the art or science of government or of guiding or influencing government policy.  Inasmuch as wages are very important to low wage citizens — people that a government is elected to serve — wages are necessarily political in nature.

Setting a minimum wage may lead to higher prices of goods and services domestically.

If a minimum wage law is passed, it does not follow that any resulting wage increases must be passed onto individuals or other businesses buying the goods or services.

No one — whether an individual or a business — wants to pay higher prices for goods and services that he consumes.  But, if this means paying all workers at least a minimum wage, many if not most people are prepared to accept higher prices, if they can be justified.

A minimum wage law will not help mid-skilled workers.

A minimum wage law is a law setting out the minimum wage.  It is a single minimum wage.  It does not set out a minimum wage for each category or sub-category of worker.  It is not intended for mid-skilled workers.

The arguments for or against implementing a minimum wage regime need a reference to what the minimum wage should be.  If set too high, the arguments against a minimum wage become more valid.  If set too low, it may lose its relevance.  The minimum wage should be a realistic wage that allows a worker to have a decent standard of living, but not much higher.  It will give hope of a better life to the lower wage earners and their families.

This is an update of the post that was previously published on 20 November 2010.

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