Minimum Wage and its implications to Singapore

Last week, I had accepted a written interview with a journalist from a Singapore press, questioning me on issues related to Minimum Wage, and what would be the implications to Singapore.

Below are my full responses given, but understandably, she only quoted me on two occasions because she had also other interviewees to give inputs.

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1. I understand there are plenty of reasons for and against minimum wage. But at the core of it is about social inequality - can minimum wage narrow the income gap? What is a minimum wage policy supposed to achieve actually?

CH:

According to International Labour Organization (ILO), minimum wage is defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.”

The core function of minimum wage is acting as a form of workers protection mechanism against unduly low pay. The amount of pay signifies a minimum expectation of a fair and just compensation to the fruits of labour regardless of which sector one works in, and who are employed (domestic and foreign, too, should be equally applied). Some coin it as minimum living wage to hedge against poverty, to allow a worker to live with dignity with at least that amount of remuneration to survive.

If the ‘social inequality’ you referred to (in the first part of your question sentence) means income inequality, implementing or raising the minimum wage could have cascading effects on the lowly paid jobs at the most bottom of labour market (ie. jobs which are paid slightly above the minimum wage would usually be pressured to adjust accordingly), and it should effectively help increase the income of low income workers, periodically.

Whether or not the so-called income gap could be narrowed, actually that depends more on the growth rate of top and middle income tiers. Periodic adjustment of minimum wage is usually at most a couple of hundreds if not at least tens of dollars, compared to middle and top income earners their salary increment could be in the range of few hundreds to tens of thousands during the same period. If that is the case, in real term, the income gap could be also widen even if minimum wage is implemented.

2. Can minimum wage be effective without supporting policies like capping top wages? What about protecting price inflation as a result of minimum wage?

CH:

The purpose of implementing minimum wage is not to reduce income equality via restricting or capping on top wages, but uplifting the low income households.

In the reference formula for setting a minimum wage rate in Malaysia, it clearly considers a few key macro- and microeconomic factors such as labour productivity , consumer price index (inflation rate), poverty line income , average number of workers per household, and median wage (for bottom income tier).

One should also consider what is called ‘social wage’ where certain basic public services (as social safety net) are provided to citizens so that the low income earners do not have to fork out their precious little wage to pay for such services. Effectively, living in such society with good public and social support in many ways could help increasing disposable income and relieving the household financial burden, particularly meaningful to the low income households.

3. Proponents of minimum wage believe that wage would drive demand and spending, spurring the economy. How true is that across economies? Meanwhile, the other side believes profit drives demand, and spurring demand for businesses would drive employment and wages rather than having a minimum wage.

CH:

With the implementation of minimum wage, low income earners would expect better and more stable income prospect in supporting their ever-increasing living cost.

The establishment or increment of minimum wage would contribute additional financial resource to low income earners, but most likely they will spend or cross-subsidize most of it on rather essential items purchase.

For example, according to Household expenditure survey 2016 in Malaysia, household income class lower than RM2,000 per month had already spent more than half of their income on food , housing utilities and transport.

So, additional amount of wage could be translated to additional household expenditure, and this could help spurring or favouring certain sector or industry rather than across the board. Small businesses such as hawker food stalls and petty traders are more likely to capture the extra amount of household expenditure. Thus, as a result of minimum wage policy (if the amount is appropriately set), it could have positive effect in encouraging  businesses and employment, rather than forcing businesses to shut down.

4. I know policy makers are most afraid that minimum wage will result in reduced employment or illegal work

CH:

For the case of Malaysia, the total number of employment is actually increasing after Malaysia first implemented the Minimum Wage in 2013.

This policy may be partially responsible for the improvement in labour force participating rate (LFPR) from 65.6% in 2012 (pre-minimum wage policy) to 67.7% in 2016. The implementation of the minimum wage policy also coincided with an increase in women’s participation in the labour force, where female LFPR reached 54.3% in 2016, up from 49.5% in 2012. The number of employed persons in Malaysia also increased from 12.8million in 2012 to 14.2million in 2016. This clearly shows that employment opportunities and labour participation in Malaysia were not negatively affected by the minimum wage policy.

For the case of Singapore, if the minimum wage policy were implemented, most likely it will only positively affect the low income earners, together with foreign migrant workers (who hold work permit - 965,200 and S-pass - 184,400, as of Dec 2017). Given that Singapore has a large foreign workforce and many are in the low income categories, the minimum wage should be set at appropriate rates in the most transparent manner. If the employers feel ‘too expensive’ to continue hiring foreign workers (such as in the construction and domestic works) perhaps they really pay too low to workers, or they should consider hiring local Singaporeans who still want to work if the minimum wage is decent enough for living. In this way, perhaps Singapore could be more self-reliant in local labour market, or pay a right price for foreign labour.

I do not think that the Singapore authority could tolerate illegal work, and most probably local Singaporeans would not accept a lower paid job than the minimum wage. For foreign workers, I doubt that they can do illegal work easily in a city state which is rather tight in immigration control.

5. ...and make the country uncompetitive for MNCs to take root?

CH:

I believe most of the MNCs Singapore attracted are not in labour intensive low-skilled industry, thus most likely their staffs/workers are not near the minimum wage. Labour policy could be a consideration for MNC to invest and grow in Singapore, but probably more towards the existent supply of middle to high skilled workers, such as those in the finance, education, health and IT sector.

The minimum wage could have uplifted many low income local Singaporeans who do not have much bargaining power to their employers, and yet face wage depression due to differential payment to foreign and local workers. They need some kind of workers protection in term of wage arrangement in order to live with means in an increasingly more expensive city.


6. At the core of it, is the basis for minimum wage a moral argument?

CH:

I do not think it is JUST a moral argument, but a fundamental labour right. If the labour do not have strong and independent unions, the compensation for their fruits of labour (in terms of wage) would just leave it to the market to determine, however due to very unequal power heavily-tilted to the employer side, the workers would most likely get unfair deal and undercut. This would actually reduce the welfare of workers in the city. Making their life harder is not going to make them happier, there would be a social cost and negative externalities to that policy.

I think the government should take pro-active approach to protect the welfare of workers, show the care by standing on the workers’ side to prevent them from being abused by the market.

7. Just want to check if there is any data on impact of minimum wage on Malaysian SMEs?

CH:

Malaysia has introduced minimum wage on 1st January 2013 (RM900 for Peninsular Malaysia; RM800 for East Malaysia) and revised on July 2016 (RM1,000 for Peninsular Malaysia; RM920 for East Malaysia). 

The annual growth of SME GDP actually shot up in 2014 and 2017(p) after the introduction and revision of the minimum wage rates. In terms of SMEs contribution to GDP, the percentage share of SMEs is growing year-on-year, even after the intervention of minimum wage policy. Biggest jump was in 2014, a year after the introduction of minimum wage.

 

Source: Department of Statistics, Malaysia

According to Economic Census, there was a 42% increase in number of SME establishments in 2015 compared to 2010, after the introduction of minimum wage policy. Numbers of value of gross output, value added, total persons employed/engaged were also increased, compared to 2010.

Source: Economic Census 2011 & 2016, Department of Statistics Malaysia

This shows that the minimum wage policy did not negatively affect the growth of SME industries (as a whole) in Malaysia, the economic growth for SMEs continues and maybe for better. Besides, the policy might have produced more social values that cannot be captured by the economic values stated in the statistics.