Friday, November 19, 2010

Minimum skills, not minimum wage

Nov 18, 2010
By Augustine H.H. Tan

THE debate about whether Singapore should legislate a minimum wage has attracted contributions from academics as well as prominent citizens such as Professor Tommy Koh and Mr Ho Kwon Ping.

Like them, I am concerned about the widening income and wealth disparities in Singapore. I share their compassion for the disadvantaged and I agree that markets are imperfect and that government intervention is needed.

However, I am even more concerned that measures like a minimum wage do not create distortions and distract us from undertaking real remedies for the problem of income inequality.

To begin with, it should be noted that the widely quoted Gini coefficients from last year's United Nations Development Programme Human Development Report are based upon household surveys from different countries that differ widely in their methods of data collection.

Moreover, Singapore's Gini coefficient has been rising since the 1990s, mainly because it has let in very highly paid as well as very lowly paid people from abroad.

Interestingly, the coefficient declined from over 0.47 in 2007 to 0.425 (the 2002 level) in 2008-09, mainly because the financial crisis drastically reduced the bonuses and salaries of high earners.

Singapore's need to attract highly talented people whose salaries are globally determined will certainly skew its income and wealth distribution. Of course, too many immigrants with low skills will also accentuate the income inequality.

Obviously mindful of this, Prime Minister Lee Hsien Loong recently set a quota of 80,000 for this year's intake of foreign workers.

Nevertheless, Singaporeans should be mindful that we need migrants at all levels of skills because Singapore has the third-fastest ageing population in the world.

This fact should be brought home to Singaporeans, especially the young who complain about overcrowding as a result of immigration. If immigration is curtailed, our young will have to be prepared to pay burdensome taxes in the future to support their ageing relatives.

Furthermore, if we are not careful, our economy will stagnate like that of Japan, which is unwilling to absorb immigrants. Over the last two decades, many young Japanese university graduates were able to find only temporary jobs at best.

There is a middle strata of workers whose plight should not be neglected. Studies conducted by the United States National Bureau of Economic Research have shown that technological changes and offshoring have destroyed middle-level jobs and lowered middle-level wages.

If such is the case in Singapore too, then it is imperative that we emphasise skill improvement for our workers at all levels. It would be a mistake to concentrate solely on the lowest 20-30 per cent of our workers.

Newer technologies - including computers, robots and software - are displacing workers with mid-level skills and depressing their wages, while enhancing the productivity and wages of higher-skilled workers.

Similarly, the rapid fall in the cost of communication technology is enabling offshoring to move up the value chain, threatening more white-collar jobs and depressing wages. Singapore has already seen jobs offshored to countries such as India, Malaysia and the Philippines

Obviously, setting a minimum wage will not help mid-skill workers. Even for low wage earners, having a minimum wage by legislation can also be problematic: Too high a level would create unemployment; too low a level would not benefit workers and might even penalise marginal workers.

Plenty of empirical studies can be quoted to prove that a minimum wage would both increase as well as not increase unemployment.

What remains indisputable, however, is that a minimum wage is a handy political tool. It can distract us from focusing on improving skills and raising productivity - the only way, ultimately, of closing the income gap.

We should be mindful of the rapid rise of China and India. With bountiful talent, improving educational standards, increased spending on research and development, and much cheaper infrastructure and labour, the competition they present is upsetting the global power balance.

We need to ensure that Singapore stays competitive enough to attract enough investment and talent to generate full employment and, hopefully, a rising standard of living. Minimum wage legislation can be a costly distraction from what is really necessary.

The Singapore Government has rightly emphasised productivity improvement via skills upgrading and educational scholarships. At the same time, Workfare and direct financial assistance have been implemented to alleviate the plight of poorer workers.

Undoubtedly more can be done. But let us continue to pursue skills upgrading at all levels with the seriousness it deserves.

The writer is a professor at the Singapore Management University.

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