Monopsony – Predatory power to undercut wages

by Irene Choo

It is often argued that influx of migrant increases domestic labour supply, depresses wages and curtails employment opportunities for native workers. Conversely, reducing the inflows of migrant would effectively reduce labour supply and stimulate wage growth. Unfortunately, labour market doesn’t work that way.  In reality, workers are paid very differently, even ones with similar skills and experience within the same company. The classic demand-and-supply model of labour is deeply flawed as inequality of bargaining power is inherent in the employment relationship.

There is a growing body of evidence that suggests employers have enormous monopoly power to undercut wages. An example of extreme abuse of monopsony power is the low-skilled migrant labour market – indentured workers trapped in slave-like work conditions with meagre compensation. Foreign workers (FW) are often afraid to report to authority about mistreatments and unpaid wages for fear of losing their job and deportation. When their wages are suppressed, so are the wages of native workers competing for similar jobs.

We frequently read anecdotal reports about difficulties to find workers with the “right skill” and vacancies unfilled for an extended period of time. Mismatch skill is a compelling theory for rising unemployment and falling wages. But is there any evidence of soaring wages for workers whose skills are in short supply?

Recent studies suggest the erosion of workers’ collective bargaining power is a key driver behind the wholesale wage suppression. It is no secret that labour share of global income has been falling – less of an economy’s wealth flows to workers. The skills mismatch argument diverts attention from the negative implications of declining labour share of total income and increasing allocation of wealth towards profits, dividends and rents.

In the wake of weak collective labour representation, our business-friendly labour policy is a double-edged sword that encourages exploitation, re-victimization of our vulnerable workers (regardless of their skill level), and exacerbates wage suppression and income inequalities. Efforts to promote fair wages is mired by the government’s fixed mindset that “labour cost reductions would, in turn, generate more employment as companies could then channel the savings into creating more regular jobs” (Enactment of the Employment Act, 1968).

Not only is there inadequate empirical evidence to support the argument that lower wages are necessary to boost profits in order to stimulate investment and job creation in the developed economies, studies show that the shift in income towards capital caused investment to fall much more than what had been expected.  (“The Labour Share in G20 Economies” report by ILO &OECD, 2015).

In other words, changing the mindset about labour protection is a good direction to build a more inclusive and sustainable economic growth for Singaporeans.  Don’t you think so?