Minimum wage law works

The following article was first published in the Straits Times.

By Hui Weng Tat, For The Straits Times

IN A surprising departure from its usual free market orientation, Hong Kong lawmakers recently voted in favour of a minimum wage law for vulnerable low-wage workers. It may be time for Singapore to consider a minimum wage law; such a policy may be preferable to raising the levy on foreign workers to reduce the country's dependence on these workers.

A growing influx of low-skilled, low-cost foreign labour has effectively increased Singapore's overall labour supply. There is an ongoing debate as to whether this has depressed domestic wages at the bottom. I believe the available evidence for this link between the influx of foreign labour and depressed wages at the bottom is compelling.

Between 1998 and 2008, the number of foreign workers employed, most of them lower-skilled, rose by about 438,000 or 48 per cent of total new employment over the period. Over the same period, real wages of employed residents in the lowest 20 per cent of the wage distribution were virtually stagnant while those in the upper half experienced real growth of at least 20 per cent.

If one takes an international perspective, mobility of labour leads to greater efficiency and higher productivity. The national perspective can be different: For example, in response to low wages in certain jobs, some local workers may withdraw from the labour market. Others might prefer to work part-time instead of full-time. In short, the full-time employment rate of local workers may be lower as the result of the influx of foreign labour. This would represent an underutilisation of scarce labour resources, a situation that Singapore can ill afford.

The introduction of the Workfare Income Supplement scheme in 2007 to encourage older workers to stay employed in the face of wage stagnation; the lower employment rate among women in Singapore compared to other developed countries; and the steady rise in part-time employment rate in Singapore - all these suggest that low wages at the bottom may have restricted the size of the labour force.

How might a minimum wage improve the situation?

For a start, it will raise the incentive to work among the lower-skilled. For example, a 50-year-old worker may not want to work for $5 an hour, calculating that an eight-hour work day, five days a week, will net him $800 gross a month or about $622 in cash after factoring in CPF contributions ($118) and a transport cost of $3 a day ($60 a month). On the other hand, a minimum wage of $7 per hour would give him a gross salary of $1,120, CPF contribution of $187 and a take-home pay of $873. That difference could nudge him into taking a job.

Without a minimum wage, the current system of low wages for some local workers has created a need for remedial measures such as Workfare. The scheme is expected to cost $400 million this year and benefit 400,000 recipients. The subsidy will increase in future if local wages at the bottom continue to be depressed. A minimum wage law can stave off the need for higher government subsidies of low-wage jobs.

A minimum wage law would also have the salutary effect of making employers more efficient in using their workers. It would encourage them to hire better-quality workers with the requisite skills or those who can be trained to acquire such skills, so as to justify the higher wages. Employers will thereby be compelled to boost productivity, move up the value chain, thus increasing the demand for higher-paid jobs.

Detractors of a minimum wage would argue that it will reduce employment by raising the wage bills of firms. In Singapore, however, demand for low-wage workers exceeds supply, which is why there is a large inflow of foreign labour. Companies naturally favour a continued influx of cheap foreign labour. But it should be remembered that a large foreign worker population generates significant negative externalities. A minimum wage policy would help moderate the excessive inflow of foreign workers.

As for the argument that mandating a minimum wage goes against the ethos of a free market, the truth is that intervention in the labour market is not new. The foreign worker levy system, which has been in place since 1980, is calculated to increase employer costs and reduce dependence on foreign labour. Minimum salary levels have also been set for certain types of employment passes, such as the S-pass and employment pass.

But levies do not raise productivity if the higher wage cost is passed on by employers to workers in the form of lower wages. Foreign work permits often tie workers to a specific employer, leaving them powerless to protest against low wages. Such a regime would not only de-motivate existing workers but also end up attracting even less productive workers to our shores.

In contrast, a mandatory minimum wage would boost wages and morale. Workers who benefit from a mandated minimum wage will feel better and more fairly treated. This would help build goodwill towards the nation among transient foreign workers who will eventually return to their home countries.

When all these factors are considered, it becomes clear that a minimum wage would raise productivity and improve workers' welfare. Hong Kong took a decade to debate the issue. Perhaps it is time for Singapore to start.

The writer is an associate professor at the Lee Kuan Yew School of Public Policy, NUS.