Gordon Lee/
In Part 2, we study costs of production, inflation, productivity and competitiveness.
Costs of production
A minimum wage policy will lead to increased costs for firms – but the degree to which costs increase is diluted by non-wage costs and higher wage earners.
Take a hypothetical firm, where 60% of total costs are labour costs. Even though 50% of its employees are low paid employees whose wages ($5/hr) will be increased with a minimum wage policy by 20% (to $6/hr), because they are lowly paid compared to managers and executives, they only constitute a third of the firm’s labour costs.
Even in this hypothetical firm with high labour costs as a proportion of total costs, a 20% increase in low wages increases the firm’s total costs by just 6% (60% x 50% x 20%).
Inflation
Even if we assume that every single firm in the economy is like our earlier example, with high labour costs and a high proportion of low paid employees, such that total costs of production in the entire economy increases by 6%, what will be the impact on inflation? The answer is that a 6% rise in total costs will lead to inflation (price rises) of less than 6%.
This is because firms respond to a rise in costs in a few ways; for example, by increasing productivity, saving costs by reducing working hours*, accepting lower profits, etc. – passing costs on to consumers is only one such way. No firm has the ability to pass on 100% of cost increases to consumers as price increases.
*According to the International Labour Organisation, Singapore has the longest working hours in the world.
Graphically, a rise in the costs of production by firms (upward shift of the aggregate supply curve from AS1 to AS2 by the distance between ‘a’ and ‘b’) leads to a rise in price from P1 to P2, instead of P1 to P3. This is because of the slope of the aggregate demand curve (AD).
It is also interesting to note that in the long run, the aggregate supply curve (ASLR) is vertical, so an increase in costs will not itself lead to any price rises (i.e. no inflation).
But even if there is inflation, is inflation bad?
1. A stable and modest inflation rate is generally healthy – but inflation that is too high or too low is not. For example, the Bank of England is tasked to target inflation at 2% (±1%).
2. It is said that inflation erodes savings, but it is because of this effect that consumer spending is encouraged (which has a stimulating effect on economic growth).
3. It is said that inflation reduces competitiveness by making domestic products more expensive to export, but changes in exchange rates reflect changes in prices – with the end result being that inflation has little, if any, effect on the real price of exports (which is what customers overseas are concerned with).
4. It is said that inflation penalises the poor more than the rich. Whilst that is generally true, in this case, we are talking about a wage increase for low wage earners because of a minimum wage. In other words, building on our examples, even though prices of goods may increase (through inflation) by, say. 2% for everyone, a minimum wage would increase hourly wages by 20% for low wage earners.
The effect of inflation in this case is like a redistributive tax which taxes everyone by 2% (small compared to our other taxes), but which helps the lowest paid in the country. Redistributive taxes are not new (high-income earners pay more in income tax than low-income earners). The difference is that a minimum wage really helps the lowest paid in society, and can even have a stimulating effect on economic growth as the poor spend more as a percentage of their income than the rich. In other words, give a rich person $10 and he invests most of it and only spends $1 in the economy, but give a poor person $10 and he would save $1 but spend $9 in the economy. So redistributive taxes, besides having a social aspect of helping the poor and increasing social cohesion, also generate wider economic benefits for everyone.
Productivity
According to the above UBS Prices and Earnings survey [1], Singapore’s hourly wages (productivity) is 30% that of New York’s. This is because Singapore’s growth has thus far relied mainly on foreign workers – the influx of which suppresses wages and productivity. [2] Firms have little incentive to increase productivity if they are able to rely on cheap labour. A national minimum wage policy allows low paid Singaporeans to compete with foreign labour not on price, but on skills – and also provide the incentive for firms to invest in increasing productivity.
In other words, the number of Singaporean workers employed in the economy as a whole should increase against that of foreign workers. The economic case is to reduce the negative effects associated with a large foreign workforce – as evidenced from Singaporeans’ concerns over effects such as rises in house prices and congestion on public transport. Notes Associate Professor Hui Wen Tat at the LKY School of Public Policy, “a large foreign worker population generates significant negative externalities”.[2]
He also says, “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.” [2]
The government already intervenes in the market by setting foreign worker levies, imposing foreign worker quotas and specifying minimum salaries for S-Pass and Employment Pass holders. But that does not directly affect the wages of low-wage Singaporeans. It might be simpler, more efficient and effective for the government to set a minimum wage (to replace its current policies) for local and foreign workers – and allow the market to work freely from there.
Competitiveness
1. As mentioned, price rises (which affect competitiveness) are less than the rise in costs. Consumers only care about the prices of goods that they pay for, not about the costs to firms.
2. Please see point (3) above under the section ‘Inflation’ for mitigatory effects of exchange rates on competitiveness.
3. Any productivity increases will also help to cushion the rise in prices.
4. What is probably more important for sustainable long term economic growth is that a minimum wage will help to shift the competitiveness of Singapore firms from price competition to competition based on innovation, ideas and quality products. So rather than understanding the issue as a reduction in the level of competitiveness, we should understand it as a shift in the nature of competition.
Conclusion
In practice, it is necessary to start off with a modest minimum wage. When the UK first introduced a minimum wage, it was at an initial level of £3.60, which increased wage bills across the economy by about 0.5% (although different sectors were affected differently), and costs of production by less than 0.5%. [3]
I hope I have shown that there are many extenuating factors that reduce the ills of a minimum wage. These ills must also be weighed against the benefits of a minimum wage – for e.g. productivity growth, economic stimulus, balancing of local-foreign worker composition in the workforce. We will look at more benefits in the next instalment, which will also examine Workfare.
[1] http://www.ubs.com/2/e/medlib/wmr/pdf/Preise_Loehne_2010_e.pdf
[2] http://newasiarepublic.com/?p=20567 (This is a highly recommended article.)
[3] http://www.dti.gov.uk/files/file37987.pdf (pg. 6)
To read Part 1 of this debate, click here.
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@Tan Ah Beng
Have a nice trip to Oz and don’t forget to drop by a McD joint and ask how much a worker is paid.
And oh, whilst you are there do you know how to make the Oz PM shake her head in disbelief and then cry in shame? It’s easy.
First, when you tell her how much our cars cost she will shake her head in utter disbelief and then when you tell her that her pay is ls only one-tenth that of ours, she will break down and cry shamefully!
@Get Our Priorities Right
“Have a nice trip to Oz and don’t forget to drop by a McD joint and ask how much a worker is paid.”
heh heh… I didn’t ask how much they are paid, but my Macdonald’s burger with drinks and fries costed me almost A$10… which is S$13…
And the bloody taxi ride from hotel (four seasons) to my office (20 mins journey) costed A$50 = S$80!!!!
If you are willing to pay this sort of prices for MacDonald’s or Taxi fare then you can ask for the same MW!
Comparison WITHOUT taking PPP into consideration is nothing but a waste of time. Even Gordon does not try to go down this path in his arguments… (of course he wouldn’t point out your mistake since you are supporting his views). :P
Corrections:
Taxi fare A$50 = S$65 (not S$80)…. :)
@Ethen Jin-Chew
“The percentage of low pay unskilled labour cost in the manufacture industries is even more insignificant because nowadays the bulk of manufacturing jobs are skilled, which falls out of the minimum wage range.
The percentage of low pay unskilled labour cost in the manufacture industries is even more insignificant because nowadays the bulk of manufacturing jobs are skilled, which falls out of the minimum wage range.
Businesses who claim that they would have to shut down because of minimum wage are businesses that are already on the border line of viability.”
Well, these companies that STILL employ unskilled labour will have ONLY 2 choices (since they are already on the borderline).
1) They close down – since they cannot afford the MW. Results? these unskilled workers lose their jobs. And they CANNOT get work from other companies since MOST of them required skilled workers (as stated in your first sentence).
2) They automate – with a one-time cost of automation they can reduce the MW of unskilled workers. Results? The unskilled workers lose their jobs.
Can you point out any error in the above reasoning? If not, BOTH outcome results in job lost for the unskilled workers.
Busting minimum wage myths
==========================
An excellent article from Michael Saltsman, research fellow at the Employment Policies Institute in Washington, D.C., a nonprofit research organization dedicated to studying public policy issues surrounding entry-level employment.
Hot off the press too!
http://www.telegram.com/article/20110603/NEWS/106039824/1020
Do we really need a minimum wage?
=================================
Great article from the Christian Science Monitor 2 weeks ago:
http://www.csmonitor.com/Business/Mises-Economics-Blog/2011/0524/Do-we-really-need-a-minimum-wage
My favorite quote from that article:
“If minimum wage were eliminated, the only jobs that would be affected would be ones that overpay unskilled workers”
Amen to that…..
@Tan Ah Beng
“but my Macdonald’s burger with drinks and fries costed me almost A$10… which is S$13…”
If you check at McD website you will find that in Singapore the ‘Double Quarter Pounder with Cheese Meal’ upsize with fries and drink delivered is Sing$9.45.
The price of the McD meal in Sydney where you are now staying is only 38% more than that in SG for a comparable meal.
So why is the McD worker in SYD paid S$18 an hr vs $4 in SG for the same work?
“And the bloody taxi ride from hotel (four seasons) to my office (20 mins journey) costed A$50 = S$80!!!”
Since our cars cost 3 to 4 times MORE than in Sydney where the Four Seasons Hotel is and a 20 minute ride from Changi Airport to the city costs about $30 to $40 then you are just confirming that taxi drivers in SG are woefully underpaid in a First World city.
“If you are willing to pay this sort of prices for MacDonald’s or Taxi fare then you can ask for the same MW!”
If you are not willing to pay the MW in SG why not live in Manila?
@Get Our Priorities Right
I am willing to pay current Singapore prices, so I am staying put. Since you are so EAGER to pay Australian prices, why don’t you move to Sydney?
@Tan Ah Beng
Hey, Ah Beng its already 4am in Sydney. What are you doing staying up so late? Don’t you have to work on Tues 7 June?
Or is it true that you are NOT in Oz but right here in SG?
If you are willing to pay current SG prices for cars, maids and houses but unwilling to pay a modest MW for the 25% low income group then it makes more sense if you to move to Manila where cars, maids, houses and labor are all much cheaper.
Correction please :
“If you are willing to pay current SG prices for cars, maids and houses but unwilling to pay a modest MW for the 25% low income group then it makes more sense FOR you to move to Manila where cars, maids, houses and labor are all much cheaper.”
Tan Ah Beng, 6 June 2011
the study by Michael Saltsman in the earlier link you provided is done in USA, not S’pore. its a rather different reality. no wonder people like you say MW wun work, because people like you are too lazy to make policies work. if authorities are you want only to cut-&-paste policies, den dun need them liao.
also its little wonder there are touts who demand posters to give solutions to issues, another copycat looking out for free answers to cut-&-paste?
:P
……………………………..
not sure about overpaying unskilled workers, but i know about overpaying untalented elite civil servants…
that is the flip side of MW for a “special breed” of people. & the (“anniversary”) floods are a good reminder about overpaying untalented people.
@mice is nice
Same rationale as your… you kept on using examples of MW in UK and Australia, and people like you are TOO LAZY to think of OTHER more viable methods to help low wage workers and instead trying to borrow inherently faulty policy of MW to solve the problem. In tbe end the MW solution will cause more damage to the economy than the problem it hopes to solve.
It’s like trying to cure a disease in a patient by using a strong medicine but in the end killing the patient instead. The INTENTION is GOOD but the outcome BAD.
You are right in saying that you are copycat to try to copy MW policy from other countries.
@Get Our Priorities Right
There is no point in to-and-fro on you should live here or live there or live in Timbuktu. This does not mask the FACT that your REASONING IS FAULTY. To use absolute wage in Australia and compare it to Singapore without considering PPP and other factors, is an exercise in futility.
If you want to use examples or numbers please use them correctly.
To those who are advocating MW.
Kindly note that the political parties that have been voted into the parliament in the recent election are all not intending to implement MW or propose to implement MW anytime soon.
Their stand was open and public before the election.
AND THE PEOPLE HAVE SPOKEN.
@Tan Ah Seng
“Comparison WITHOUT taking PPP into consideration is nothing but a waste of time.”
You make it sound as if PPP is a rocket science and only you have the monopoly of it.
Actually, the theory of PPP is an old chestnut, first conceptualized over 500 years ago and was revisited by 1918 by Gustav Cassel.
It is based on the idea that in the absence of difference in various transaction costs in two or more nations and if there is no undue govt interferrence then the same goods and services should have the same price in different countries in one currency when the exchange rate is factored in. This is also called the law of one price.
On a whimsical note, this theory is used The Economist in the UK to calculate the Big Mac Index for the world, as it is sold in 120 countries.
The Purchasing Power Parity (PPP) rate is the local Big Mac price divided by its price in the United States. Prices and their corresponding implied PPP rates are the latest figures available from The Economist. The implied PPP rate of f Australia is 1.17 and for Singapore is 1.13 which is not all that different, based on the 22 July 2010 prices.
On that date the price of a big Mac in Australia was A$4.35 and in Sing$4.25 in SG. It confirmed that the implied PPP rate was nearly the same. The exchange rate today is S$1.31 to A$1.00. Do the maths.
So no matter how you care to slice the enchilada, the worker’s pay at McD in Sydney should not exceed his counterpart’s pay in SG by a King’s ransom, for the same type of work done.
It shows that the SG worker is grossly underpaid.
Btw, Ah Beng, can you confirm whether you are actually in Australia or in SG?
@Tan Ah Beng
“AND THE PEOPLE HAVE SPOKEN.”
And they gave the WP a GRC plus retention of the Hougang SMC and they gave the MIW their worst electoral setback since 1959.
Correction please:
“On a whimsical note, this theory is used BY The Economist in the UK to calculate the Big Mac Index for the world, as it is sold in 120 countries.”
@Get Our Priorities Right
It’s the Worker’s party I am talking about!!!
The people have voted the Worker’s Party in. And they have stated WELL BEFORE the election that they DO NOT SEEK TO INTRODUCE MW in the near future. You don’t know what you are talking about….
And… btw… you can go look around the whole of Singapore, Sentosa, Tekong, under the orchard flood, or over the Singapore Flyer… you wil not find me… I am not in Singapore since Sunday. heh heh.. ;)
@Tan Ah Beng
But even if the WP wishes to introduce a Bill to promulgate a MW they don’t have the vote in Parliament to have it enacted into law. So why waste time?
What’s your room number at the Four Seasons hotel or office in Sydney? I can call you if you are indeed there and not hidden away in your posh mansion in SG. :D
Btw Mr Tan Kin Lian has just confirmed his intention to run for election to be the next Elected President.
If your hero, MF ia alive and is a SG citizen, sorry he will not be qualified.
@Get Our Priorities Right
This is WP’s (LTK) statement:
“I would like to state that the Workers’ Party is not advocating the introduction of a minimum wage at this point of time. It would be preferred if our workers can command good wages by being competitive internationally and doing higher value work. ”
So it is not whether they have the votes… they also agree that MW is not the best medicine to help the low-wage workers currently. And I AGREE WITH LTK on this 101%… :)
I think we are on the same page in WANTING TO HELP THE LOW-WAGE WORKERS.. just that I do not agree on using MW as the solution.
And LTK did also said:
“Let me start with the Workfare Income Supplement (WIS) scheme. I support the principle behind WIS, but there is room for improvement. It should be expanded to better narrow the income gap.”
He was fair in saying that and this also goes to show that there are other ways to help Low Wage workers (i.e. WIS) which do not stifle the proper operation of the economy.
And I do not have a posh mansion in Singapore… ;) Heard that those flooded Lamborghinis are going for a song now… heh heh.. maybe I can afford one when I get back
:-)
But I do not think highly of Mr TanKL.. I would prefer TCB if it is a 2-way fight between the 2 Tans.
Wouldn’t want an insurance salesman who talks about “low wage causes high property price” to be my president.
Never regarded MF as my hero too.. just happen to agree with his view on MW 100%.
Tan Ah Beng, 7 June 2011
hmmm, i am not the one who use examples of MW in UK and Australia.
if you cannot even quote the right person, how can you debate objectively?
MW policies need not be copied wholesale, it very much depends on the ministry to adopt & adapt to local context. of course, there are people who expect whole answers served on a silver platter as in “so you got solution?”.
@Tan Ah Beng
If you are indeed in Australia this is hot off the press:
The Australian MW will be increased to Aust$15.51 (S$20.30) an hour from 1st July, 2011. (See ACTU website).
This means from 1st July 2011 the McD worker in Australia will be paid 406% more than a McD worker in Singapore and yet as a city SG is more expensive than Sydney or Melbourne to live in.
According to the ACTU Secretary, Jeff Lawrence “That will benefit about 100,000 Australian workers, who take home the lowest pay in our community, while the majority of the remaining 1.3 million workers on award wages will receive about $22 a week,”
Australia firmly believes in MW and there is full employment because :
“Relative to the rest of the developed world, Australia is doing very well – and it is only fair that our lowest paid can share in our prosperity.”
I hope the folks at the NTUC will wake up and do more for our workers.
Perhaps one day we may have to repatriate a million FWs back to their own countries to make sure that our employers have no choice but to give Singapore our lowest paid workers a better deal.
Correction please :
“Perhaps one day we may have to repatriate a million FWs back to their own countries to make sure that our employers have no choice but to give Singapore’s lowest paid workers a better deal.”
@Get Our Priorities Right and Tan Ah Beng
I am not sure if Austrailia is a good benchmark to match with Singapore. They have low population density, lots of resoures like steel which China is gobbling up so the economic situation is different from Singapore.
Ragarding MW and WFIS, both do not help the chronically unemployed which includes the old Ah Mahs pushing carts.
In fact, MW will hurt the unemployed since it will lead to inflationary buff on many essential items.
The result is that a large group, basically those hired by Mac’s, NTUC will benefit from MW.
The trade-off is that the relatively smaller group, the very very poor unemployed, will lose out.
Since this Push Cart Ah Mah example is so frequently brought up I think I should just highlight it for the benefit of all.
Maybe if MW is implemented, the costs savings from WFIS can be diverted to helping them. Just make sure the bridges are already built before starting on this policy.
Correction to my previous post, Austrailia has IRON, not Steel. You can’t mine steel, lol.
@Black Hei
I picked Australia because it has about the same per capita GDP, almost the same impled PPP rate as calculated by the Economist’s Big Mac index, to contrast the wage difference of workers at McD.
There is no basis for the huge 406% difference in pay because our per capita reserves are much higher and our cars are three times more expensive and our 5 Room HDB is more expensive than an apartment in Melbourne. SG is one of the top ten most expensive cities in Asia.
Sure they have iron and other resources which China wants but they also have a population 4 times that of Singapore.
The only difference is that there are 1 million FWs in our workforce of 3.13 million. That represents 32% of our total work force pressing down wages.
The other notable difference is that here the unions roll over and pretend to play dead but not in Australia. The ACTU is the driving force in OZ to make sure that “it is only fair that our lowest paid can share in our prosperity.”
I agree if a MW is promulgated those who are unemployed will suffer most but we must see why they are unemployed.
Is it because they don’t want to work or is it because they are handicapped or disabled or sick. In the latter 3 cases they should be entitled to a disability pension, just like the push cart Ah Mah.
I believe in a society those who work should be paid a ‘living wage’ paid to someone who works an ordinary 40 hour per week job would be able to afford shelter, food, health care, and other basic necessities of life.
Unless we have that there will be a cluster of under-class, who are exploited by the employers and this can cause instability.
Does it make sense for someone to be paid $3 an hour in our First World society while our minister is paid $1000 an hour? The answer is obvious.
@Get Our Priorities Right
I think I am living in a black hole. I didn’t know that there are Singaporeans here making $3.00/hr!
They are earning less than a maid on a monthly basis after taking into account food and lodging!
That will make alot of sense for MW if this group of Singaporeans are widespread.
As for the $3 vs $1000, you are right. But I think even a MW $4 will not fly in my opinion. I think $6 is the bare minimum for a fulltime job.
Thanks for highlighting this point, and hope you can help point out which industries are operating at the hideously low $3/hr.