The other side of the minimum wage argument

TL;DR – Really need to consider very hard.

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Former chairman of National Wages Council (NWC) Professor Lim Chong Yah recently suggested that Singapore should have a minimum wage. Former chief economist of GIC, Mr Yeoh Lam Keong, wrote in a Facebook post that Prof Lim’s idea is a sound one and could effectively make poverty history in Singapore.

Hang on. Hold your horses.

It may not be as good as it sounds. Let’s take a closer look at the minimum wage.

Look at Indonesia

Indonesia put in place legislation for minimum wage since post World War II. A study
was conducted in 2010 by the Asian Development Bank to assess the impact minimum wage had on workers in Indonesians. The study found that minimum wages significantly explain growth in wages at the bottom end of the distribution of wage workers with wages less than 90% of the minimum wages.

Not bad, right? But wait. The study also found that the minimum wages, however, have no significant effect on changes in wages of individuals that had wages that were 90% of or above the minimum wage line. What’s more, the study found that minimum wages led to a significant increase in hours of work.

A main concern about minimum wage is whether it will lead to unemployment. The thinking goes like this – with increasing wages, companies would be more cautious in hiring. The study about Indonesia found that there is no significant increase in employment or unemployment from increases in the minimum wage. That said, minimum wages do have a significantly negative impact on the number of workers that are employed in formal sector work.

So the lesson from Indonesia is that minimum wage is, at best, a neutral policy. Doesn’t really harm the economy, but doesn’t really do much good either. If that’s the case, then why do people like Prof Lim and Mr Yeoh suggest that we adopt the minimum wage?

Because of inequality

The key reasons why people like him are doing so is because of the high inequality the world now sees. They believe that minimum wage can close the wage gap. However, there isn’t enough evidence that allows us to come to that conclusion.

For instance, America has had a national minimum wage since 1933. But that only applied to employees in certain sectors. In 1990, the laws were changed to draw most employees into the purview of federal minimum wage policy.

You would have thought that policy would result in a decrease in inequality. But you would be wrong.

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As can be seen from the chart, inequality in USA rose significantly since 1990. So has the minimum wage worked?  Obviously not.

Then how?

If minimum wage can’t quite close the wage gap, then what can we do? Maybe the government should do more. After all, the government is so rich! Why can’t the government use more money to eradicate poverty in Singapore?

Yes, Singapore has significant reserves. But the government is already spending part of the returns from the investments of our reserves. In the last Budget, the returns from reserves contribute 19% of total government revenue. That’s actually quite a feat. Most other countries don’t get money from their past reserves. Instead, they spend a significant part of their budget to pay national debts.

And that’s why the government has to be good stewards of our money. Otherwise, we may end up like most other countries – cannot draw money from the returns on investments of our national reserves but have to dedicate part of our budget to pay off our national debt.

But that doesn’t mean that we don’t do anything. The government does transfer money to the lower income.  The amounts are quite significant.

But beyond the transfers from the government, what we should do is to help people with low income earn more. We have to raise productivity.

How do we raise the productivity of low income workers?

Use of technology, new processes, improve skills etc. Easy to say, not easy to do. And many of our SMEs don’t have the capability to do it. Also, there are regulatory restrictions that hamper productivity, and these are seldom mentioned!

No quick way to reduce inequality

It would seem that there are no quick fixes. Minimum wage could help. But it’s no silver bullet. A lot of hard work is needed to truly reduce inequality and eradicate poverty in Singapore. Let’s hope we are up to the task.

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Author: Jake Koh

Recovering sushi addict, I'm a man of mystery and power, whose power is exceeded only by his mystery.


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