Minimum Wage Only Beneficial in Long Term

By Gordon Lee

Much has been said of the minimum wage of late, and I would like to give my opinion and proposal on it.

The Case for a Minimum Wage

There is a strong case for minimum wage recognised by its successful implementation the world over, including, more recently, Hong Kong (which is probably the most similar country to Singapore). Singapore is one of the glaring exceptions within developed states not to implement minimum wage. Of course, Singapore should not implement minimum wage because it does not want to be an exception, but the fact that it is currently an exception should inform decision-makers that they might be missing something out.

But even if we choose to look within, PAP’s respected Professor Tommy Koh has come out in favour of it. So has Associate Professor Hui Weng Tat from LKY School of Public Policy.

I have included links at the end of the article for readers to read more into the issue. The two experts can explain this far better, more in depth, and with much more credibility than I can.

The arguments against minimum wage (unemployment, higher costs of living) are important, but they oversimplify the situation. The economy is far more sophisticated and resilient enough to handle a minimum wage. Yes, the short-term effect of a minimum wage will be a degree of unemployment and higher costs of living – but a minimum wage is an important step towards reducing long-term unemployment and increasing productivity (as businesses have an incentive not to be overreliant on cheap labout – especially foreign ones). The argument to reduce exploitation of low wage earners, and to provide them with a fair wage, is not entirely just a value-laden one, but it can go some way to enhance the level of values and social responsiblity one feels towards fellow Singaporeans. I cannot speak for all, but for me, I would like to be in a more gracious society – and that contributes towards a better experience of life (intangible but important – something GDP can never capture).

Mitigating Unemployment

By defnition, a minimum wage will only have a direct effect on the wages of low-wage earners. However, many of the low wage jobs are necessary to businesses, especially service-oriented ones such as cleaning, sales assistants, etc. Businesses may reduce slightly the number of people they employ in the short term, but most of these jobs have to stay. Businesses have the incentive to increase productivity, and the private sector is very adroit at being able to
create jobs when they are productive. So the net direct effect on unemployment (even in the short term) is not a clear detrimental one.

Source: uebersee.com.sg

Moreover, having a minimum wage also allows local workers to compete with foreign workers on a more even playing field – and if there is any short-term unemployment, the full burden will not fall solely on local workers. For example, a foreign service staff who is unable to speak English well may be willing to work at $4 per hour, and a local service staff at $6 per hour. If businesses value English-speaking abilities at $1 per hour per worker, then in this case, it is still in the interests of businesses to hire foreign workers over local ones. However, if there is a minimum wage that reduces the
comparative advantage that foreign workers have over local ones, then businesses will shift their employee composition to reflect a greater constituent percentage of local workers (increasing employment of Singaporeans) – which also has a greater benefit to consumers and society as a whole, not least since a
large foreign workforce (currently 25.7%) generates considerable negative externalities (effects) on society which economic indicators such as GDP or employment figures do not reflect – but the effect is still felt by the population and affects quality of life.

Mitigating Higher Costs of Living

Again, the short term effect will be higher costs of living, as some business costs will be passed on to consumers. But the bigger picture is less direct. With more pay, lower income earners will be able to spend more, increasing the rate of flow of money within an economy – and coupled with a multiplier effect (although this effect is admittedly not high in Singapore), this can have an upward effect on national income – which is beneficial for all. Empirical evidence (an indeed anecdotal ones) also suggests that children from more
disadvantaged backgrounds may also be disadvantaged when it comes to education and other enrichment opportunities. With more spending power and a reduction of the growing income inequality in Singapore, the long-term effect will be a more educated, skilled, and confident workforce – good news for all.

Costs of living is one thing, but there should also be a focus on the standard of living. The two are not as strongly related as most would assume. The long-term effect on the costs of living is not clearly a detrimental one, but I believe that the long-term effect on the quality of life is a strongly
beneficial one.

The Practical Way to Implement Minimum Wage

I do not expect all readers to agree with me, or the general case for a minimum wage, at this point. But even I think that minimum wage should not be abruptly introduced to allow businesses, the economy, consumers, and the public sector time to respond and react to it. A gradual introduction of minimum wage will dampen any detrimental short-term effects, whilst not denying the country the opportunity to benefit from the long-term effects that it can have.

It is understandable that there is no clear consensus on minimum wage policy, but I hope that readers agree with my proposal which allows minimum wage to be introduced over a period of time – which also allows it to be tried and tested during the time, and at any point, should it prove to start being greatly detrimental, the policy can be halted or reversed in the worst case.

The Proposal

(Figures are currently arbitrarily set for the purpose of discussion, and subject to revision)

The benchmark measure of minimum wage should be set at $6.80 in 2011 and increase annually with CPI, but will not come into force. BUT, the actual minimum wage being implemented and enforced should be set at $4.80 in 2011, but increase at a faster rate (CPI + 3%) until it reaches the benchmark figure in 12 years, and from then on, only the benchmark figure will be used. At any point in time should the rate of minimum wage prove to start to get greatly detrimental, or in a recession, the level of minimum wage can be capped for that year and not be allowed to increase, merely delaying the time needed for actual-benchmark parity. In the worst case scenario, if minimum wage is as catastrophic as opponents claim, this gradual approach will allow minimum wage to be scaled down or even entirely removed with less shock to the economy.

In any chance, even if one is doubtful about minimum wage, surely this presents an excellent way to try it out with little risk – and still giving the country the chance to explore its benefits.

(1) http://www.spp.nus.edu.sg/ips/docs/media/yr2010/ST_Basic%20pay%20Tommy%20Koh%20weighs%20in%20_150910.pdf
(2) http://newasiarepublic.com/?p=20567

The writer is an undergraduate student in Economics and Politics at the University of Warwick.