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“Fair and just society”: Minimum Wage for the discussion

“Fair and just society”: Minimum Wage for the discussion
January 16
17:29 2014

I’d like to comment on an article written by Acting Minister for Culture, Community and Youth, Lawrence Wong, in the People’s Action Party (PAP)’s party newsletter titled “Reinforcing a fair and just society”.

In my comments I provide (what I think to be) a sound justification for a minimum wage here in Singapore,

  • Dispelling the “job loss” myth using elementary economic principles,
  • addressing the “collective bargaining” alternative, and
  • touch on fairness to the tax payer.

I also consider some minor peeve I have with the PAP’s way of “farming gratitude”.

The acting minister’s piece may be found in this link (See pages 14 and 15). I will not proceed point by point, but I will address the major issues he touches on.

Mr Wong writes that low-wage households can expect to, over their lifetime, receive a high quantum of total government assistance relative to their lifetime earnings. For 10th percentile households (by income), he says total assistance will amount to about double their lifetime earnings.

I believe that Mr Wong would agree that all this assistance is given based on the principle that there is a minimal standard of living that all Singaporeans should all be able to have, and that some Singaporeans will need a bit of help getting there.

But I take special exception to the use of wage supplements as opposed to a minimum wage. He asserts that “when the price of labour is artificially increased, the first to lose their jobs will often be the least skilled”.

This is misleading. The statement is only true if the minimum wage is high relative to the wages of TOO MANY workers. Allow me to explain.

A minimum wage below prevailing wages for a particular job has no effect on employment for that job. Consider a minimum wage of $7 per hour which on a 45 hour work week, 4 weeks a month provides a monthly salary of $1,260. (This number is based an estimate of how much a family of three would need to “scrape by”. That is, a small improvement over “barely scrape by”.)

Not many Singaporean workers work in jobs that pay less than that. So not many positions will be affected. But what about THOSE positions, in particular, that are?

Can a Minimum Wage be Supported Without Redundancy: Analyzing “Supply Chains”

The question is whether employers would willingly continue to employ those workers and pay them the minimum wage.

To comprehensively analyze this, we need to consider the notion of a “supply chain”, which is a sequence of businesses linked by service/goods contracts up to the retail customer. (This may be part of a wider “supply network” which may combine multiple good/service inputs over multiple stages to create a final good/service that is marketed to a retail customer. Note that this definition is different from the traditional notion of a “supply chain”.)

We will consider a chain that starts at the business affected by the minimum wage and ends downstream at the retail customer.

An example to illustrate this: A cleaning company cleans the sales office of a bank, the sales division sells financial products to their wealth management clients. The chain consists of the cleaning company, the bank and the wealth management clients.

(Note that though someone packages the financial instruments for the Sales Division, and someone designs the instruments, but those are not parts of our “chain” in this case.)

If the firm employing workers whose initial wages are below the minimum wage is making good profits by paying those workers low wages (due to the low bargaining power of low-skilled workers), it will be able to pay up. But if the firm is not making good profits, we have to look down the chain to its customers (which are unlikely to be retail consumers, but rather, other businesses).

Are these businesses paid little for their services by their downstream customers due to poor bargaining power or are their customers genuinely unable to support a higher contract value? If the former is the case, it means contract values can be raised because the downstream firm/customer would prefer to pay up than to lose the product/service altogether. (Not paying the required amount to ultimately support the minimum wage means the upstream provider cannot provide its product/service.)

We proceed down the chain whenever a high enough contract value is not operationally viable and do so as far as necessary, only giving up when the retail consumer is reached.

Typically, we should not need to go more than one step. Consider the example of the cleaning services: Subtract a cleaning service and the disamenity becomes huge. Now imagine the fanciful idea of “extortion by withholding cleaning services”, and consider the maximum a business being extorted from this way would be willing to pay. This value should generally be rather high.

Economically speaking, this outlandish case means the cleaning firm has bargaining power and is able to extract all of the gains of the transaction. So it is reasonable to conclude that at least for cleaning services, cleaning firms will be able to pay the minimum wage because essentially all their clients would be willing to pay.

Now, in general, for all businesses affected by the minimum wage, if all the way up the supply chain to the retail customer one cannot find economic support for the minimum wage, there is a sense in which that particular “supply chain” should not be operating in Singapore, at least not some parts of it. If the cost of living is too high to support such a business then it might be best to offshore it.

So for businesses we would like to keep in Singapore, a minimum wage affecting them or their upstream suppliers would not result in redundancy. This might sound harsh if one is running a labour intensive fishball factory in Woodlands, but which Singapore fishball factory has not either embraced automation or moved offshore? (Yes, I know there is one on Senoko Way, but the fishballs are not handmade.) I challenge the PAP to name one “supply chain” that should be kept in Singapore but that cannot ultimately support a minimum wage of $7/hour without forced redundancy.

The Gap in the Argument

This is a “single period argument” which considers the possibility of the continuation of operations by companies without change, only changes in salaries paid out. In the longer term, firms might pursue automation that results in actual redundancy. This is relevant and we should still think about redundancy issues when implementing a minimum wage.

The Collective Bargaining Alternative

Mr Wong might make the following counter offer: Why not do this profession by profession through collective bargaining? We have, after all, over a thousand collective bargaining agreements that are in force.

But some things, such as minimal standards of living for the household of someone who is working full-time, should not have to be haggled over repeatedly in multiple professions. This minimum should be set at a reasonable level and enforced as a minimum economic return for labour. Collective bargining can continue in earnest for wages, benefits and working conditions in excess of this minimum standard.

The Principle of Self-Reliance: Business Edition

Finally, there is a principle at stake. When a business can afford to pay the wages of its employees from its revenues, should it be coming to the state and asking for the state to help pay those wages so the owners of that business can enjoy higher profits?

I think there is something morally suspect in that line of reasoning. If people are expected to be self-reliant, we should expect businesses to also be. The furthest we should go is compensating firms for providing social benefits that their customers do not pay for, but that is it. Why should tax payers pay for wage supplements so some business owner can afford a Maserati instead of just a Mercedes?

Assistance or Sneaky Re-framing?

Moving away from the minimum wage issue, in his article, Mr Wong says that “assistance schemes” such as U-Save are not well communicated and PAP party activists would do well to help explain this to people. I would like to highlight that these schemes are marketing ploys fronting a simple system of price discrimination.

I am not averse to asking people who are well-off to pay a higher rate for their utilities. The cross subsidy supports the welfare of those earning lower incomes and may be viewed as a cost of living in a civilized society. There are cross subsidies in HDB flat prices too, which I support. However, to communicate this pricing scheme as “government assistance” is somewhat unethical.
Looks good but does it “taste” as good?


Naturally, the article features a graphic of the now famous “government assistance” kueh lapis. Like or hate the concept, I must congratulate the PAP for its good infographic artists. The non-monotonicity in the numbers does bug me a little, as it might our Prime Minister Lee Hsien Loong, who says he is still a math person at heart. But still… nice visuals.)

By Jeremy Chen