Sunday, December 12, 2010

Widening wage gap. Does it matter?

Dec 11, 2010

As Singapore's economy powers ahead at full steam this year, the income gap between the top and bottom earners continues to widen. Is it cause for concern? Does it really matter? And if so, what more can be done about it?

By Li Xueying , Zakir Hussain

A SOBERING statistic is casting a shadow over the headline-making reports of record gross domestic product growth, record household wealth and record bonuses.

The widening gap between Singapore's rich and poor is now the second largest among the world's developed economies, according to a United Nations report last month.

The Government has flagged it as a concern that it is addressing through education and training. The opposition is calling for more to be done to help those at the bottom. Economists and scholars are exercising their minds on the issue.

But is it really cause for concern? Does it matter if those at the bottom have a reasonable standard of living? If yes, what more can be done?

Singapore's growing inequality has been borne out most recently by the UN Development Programme's ranking of developed economies. It shows Singapore coming in second - after Hong Kong - in income inequality.

Singapore's Gini coefficient - which measures inequality on a scale of 0 to 1 (0 means that income is shared equally among all; 1 means one person has all the income and everyone else none) - for the decade up to this year stood at 0.425, below Hong Kong's 0.434.

Tracking the Gini year by year, Singapore's inequality has increased steadily since 2000. That year, it stood at 0.444, before hitting a peak of 0.489 in 2007. It dipped to 0.478 last year because of the recession.

The situation is, however, leavened by government transfers: After taking into account taxes and social aid such as ComCare payments and Workfare supplements, the coefficient fell to 0.453.

But it remains high - comparable to that of Latin American countries like Argentina (0.457), higher than that of liberal market economies such as the United States (0.408) and Britain (0.36) and heads and shoulders above those in Europe such as Germany (0.283) and France (0.327).

Other statistics point in a similar direction. Last year, managers - Singapore's best-paid group of workers - earned a median wage of $6,300. This is 6.3 times more than what cleaners and labourers, with a median wage of $1,000, earned. In 1997, the gap was 4.13 times.

Slice the data another way, and the same trend stands. Singapore's richest 20 per cent of residents saw their estimated real median monthly income increase from $5,328 in 1996 to $7,278 last year.

In contrast, the poorest 20 per cent struggled to keep up with inflation, with their wages increasing by a mere $32 - from $711 to $749, according to computations by economist Hui Weng Tat of the Lee Kuan Yew School of Public Policy, based on data from the Manpower Ministry's Labour Force surveys.

This means that Singapore's richest 20 per cent earn 9.7 times more than the poorest 20 per cent. In contrast, Japan's gap is 3.5 times, Germany's is 5.2, and the US, 8.5.

Statistical limitation

THERE are, however, certain limitations to the statistics.

For one thing, the Gini coefficient is a relative measure. It 'does not locate where in the distribution the inequality occurs', notes Professor Augustine Tan, an economics professor at the Singapore Management University (SMU).

This means that it is possible for both a very rich country and a very poor one to be deemed equally unequal.

Also, to place the ranking in context, Singapore, as a city-state, accommodates its population's wide spectrum of skills within a limited space compared to larger countries that have non-urban areas for people out of the rat race.

Another shortcoming cited by Professor Tan Khee Giap of the LKY School and Mr Liang Eng Hwa, a PAP MP, is that the statistics do not fully capture non-monetary aspects of the Singapore social safety net such as public housing and subsidised health care.

Noting that 95 per cent of Singaporeans own their homes, Mr Liang, a DBS Bank managing director, says: 'At retirement, most would have owned a fully paid HDB flat. This wealth would be the envy of low-income groups in many countries. If the home owner chooses to monetise his flat, he could receive a steady stream of income for many years.'

That said, those who do not own their homes - usually the poorest with little or no Central Provident Fund (CPF) savings for the down payment for a flat - would not have recourse to this avenue. Housing Board figures for the last financial year show there are 47,532 rental flats.

SMU assistant professor of economics Davin Chor says: 'For just about any conceivable measure of inequality, the message has been very uniform: Inequality has indeed been widening in Singapore, and this increase has been especially sharp in the last 10 years.'

Another worried about the situation is Dr Khor Hoe Ee, previously chief economist at the Monetary Authority of Singapore.

'When you compare the situation of Singapore with other advanced, high income countries, it looks like we're really way behind in terms of the income distribution relative to our per capita standard of living,' he says, referring to countries such as Japan and Germany.

At the same time, the story of inequality is not simply about the bottom 20 per cent, say those interviewed.

While the wages for the middle rungs have increased, the rise fell far short of that for the top earners. The real median monthly income of employed residents grew from $1,876 in 1997 to $2,420 last year.

In comparison, top honchos such as those in the banking sector took home US$3 million to US$4 million (S$4 million to S$5.2 million) last year.

'The perfect storm'

A TRINITY of inter-related factors led to the situation today, according to those interviewed.

First, the rise of globalisation from 20 years ago saw low-end jobs in manufacturing leaving for much cheaper labour in China and India.

As a result, Singapore workers in this sector are caught in a bind. Their pay stagnates, often dips - and that is if they keep their jobs.

The second factor is that Singapore's growth today is propelled by technology, which favours the skilled and displaces those who are not.

The third is the influx of foreign workers to fill unmet demand in certain sectors, which placed a cap on the earning power of lesser-skilled Singaporeans. As of the end of last year, 856,000 Work Permit holders and 82,000 S-Pass holders made up one-fifth of the population.

Meanwhile, the open-door policy increases the pool of high-income earners which in turn raises the Gini co-efficient, says Bank of America Merrill Lynch economist Chua Hak Bin.

Underlying these developments is the Government's philosophy that Singapore must enlarge the overall pie as much as it can. It can then share the success by redistributing some of the gains to help the less successful help themselves.

But while the three trends helped power the economy's robust growth, they also created what Dr Chor calls a 'perfect storm' of negative shocks for those at the bottom.

Alarmingly, the pool of workers affected by such competition has also grown. Those whose pay stagnated include not just those right at the bottom, but also the lower-skilled professionals, managers, executives and technicians facing competition from S-Pass holders.

As Dr Chor sees it, the pace of economic developments over the last 10 years has made it difficult for Singapore to balance competing priorities.

For instance, the inflow of foreign labour was partly occasioned by the Government wanting to grow the economy as much as possible to make up for several downturns over the past decade.

What's the fuss?

SOME may wonder what all the fuss over inequality is about.

After all, by one broad measure, Singaporeans across the board are better off. The country's GDP per capita rose from $40,364 in 2000 to $53,143 at the end of last year.

Indeed, some argue, it is surely better for people to be richer across the board than they were 10 or 20 years ago - even if some lag far behind the top-earners - than it is for everyone to be more equal but to see slower growth overall.

The rapid growth allows for more jobs to be created across the board, even if they are low-paying ones, they contend.

Mr Liang notes that Singapore enjoys very low unemployment, which is a key measure of social well-being.

Others, like Prof Augustine Tan, feel that some inequality motivates individuals to do better for themselves. 'Some inequality is needed to provide inducements to get better education or training, work harder, be more entrepreneurial,' he says.

Adds Dr Tan Ern Ser, a sociologist at the National University of Singapore: 'As long as all Singaporeans enjoy a decent quality of life and possess the hope that they and/or their children can still move up the ladder, I don't see inequality as a big issue.'

The threshold, he feels, is where the bottom can survive reasonably well, while the middle and top thrive.

The question is, are the bottom fifth of society surviving 'reasonably well' in Singapore? And how does one measure that?

Based on government surveys, a household of four needs a minimum of $1,700 to cover basic costs of living like food and utilities, as LKY School dean Kishore Mahbubani noted in a recent article in The Straits Times.

The numbers affected are significant. The Singapore Workforce 2010 report noted that some 400,000 workers - 20 per cent of the resident workforce - earn $1,200 or less a month.

[Note that this is a comparison of the individual's income vs the household expenditure. For single-income household of 4 with the sole income earner taking home $1,200 that would be below the poverty line. Of course, there are many such households. But there are also households where there are more than one income earner, and there are household with less than 4 members. There are also households with 1 income earner and more than 4 members in the household.]

If there is a glimmer of hope, it is that although these Singaporeans' wages have stagnated, their material standard of living - from upgraded homes to possession of mobile phones - has improved.

As observers note, Singaporeans do generally accept some level of inequality because they believe they have a chance of moving up over time.

So yes, they may be poor today, but they or at least their children can make it tomorrow.

What really matters

WHAT matters therefore is equality of opportunity - rather than equality of income.

However, this hope of mobility is undermined when the latter affects the former: when gaps in income widen to the point that they become ever harder to bridge and the relative poverty of those at the bottom undercuts social mobility.

For instance, when the bottom 20 per cent of households struggle to make daily ends meet, they are hard-pressed to set aside extra for what some call investments in human capital - to nurture their children in education, improve their own skills, or buy a computer and subscribe to broadband access for the home.

While government schemes go some way towards helping such families, the reality of Singapore - with its tuition culture, for example - is that such enrichment extras matter.

So over and beyond the 'minimum subsistence line' of $1,700, a family of four would need the 'social inclusion level' of $2,500 to $3,000 a month, as some economists calculate, to have a fighting chance of having their children move up in life.

A prolonged exclusion of these children from equal opportunities of moving up in life - occasioned by wage stagnation and growing inequality - could, in the words of social work academics Irene Ng and David Rothwell, 'signal that economic mobility may be less common, a trend that threatens Singapore's venerated notion of meritocracy'.

'Intergenerational economic mobility - the extent to which children's economic outcomes depend on parents' economic status - is relatively low,' they wrote in a 2009 article. 'It is lower than most developed countries and similar to the United States and United Kingdom - two countries where concerns have been expressed over their low intergenerational mobility.'

Inequality, in and of itself, also matters when it comes to social cohesion. Left unchecked, it could entrench a class divide.

It is human nature to compare oneself to one's neighbours, colleagues, countrymen. As Prof Augustine Tan puts it: 'Inequality is always an emotive issue because of envy.'

And in a small, densely populated city like Singapore, where inevitably urban poverty runs up against displays of wealth and affluence, such relative inequality could breed social tension.

The implications are worse if such inequality is more pronounced along ethnic lines. Already, minorities have lower median incomes and are disproportionately represented among low-wage earners.

Nanyang Technological University economist Ho Kong Weng says that, based on national surveys of youth, minorities appear to have a lower level of intergenerational social mobility. If such trends are left uncorrected, the risk of racial cleavages will grow and the social compact could unravel.

Psychologically, worker morale could also be affected. Scholars note that it is more stressful living in a more unequal society, as there is a greater struggle to achieve a certain level of income.

A more equal society - where the lot of the bottom is nearer the median, would raise the level of the country's competitiveness if the skills levels of the poorest are also lifted.

But the way forward, caution those interviewed, should not be to cap the income levels of the rich, who create jobs and contribute a large share of tax revenues.

The challenge, instead, is to raise the boat for the bottom fifth of households.

Minding the gap

INDEED, the Government is lifting the boat through a variety of schemes.

Its social safety net is upheld by four key pillars: public housing (HDB), affordable health care (the 3Ms - Medisave, MediShield, Medifund), enforced retirement savings (CPF), and a wage supplement for low-wage workers (Workfare Income Supplement).

Then, there are the initiatives to equip Singaporeans for a knowledge economy: education for the young (top-ups and bursaries) and training for the workers (from the Skills Programme for Upgrading and Resilience to the Workfare Training Scheme).

Cash handouts are given out as a last resort through ComCare (limited to three months of aid although there is flexibility for deserving cases) and Public Assistance for the old and disabled.

At the same time, the Government is tightening the flow of foreign workers, forcing employers to boost productivity - leading, hopefully, to higher wages.

All those interviewed are unanimous in giving the Government credit, saying it is on the right track. But more, they argue, should be done (see other report).

What would happen if Singapore maintains the status quo?

The pragmatic may note that natural attrition will take place - it is a matter of time before the generation of older, poorer-educated Singaporeans passes on.

["Pragmatic". Nice alternative to "callous".]

Yet not addressing the problem now will mean not according due respect and recognition to the pioneers who helped to build Singapore with their blood, sweat and tears.

And if wage stagnation at the low end becomes persistent, there will be long- term trickle-down effects for future generations.

Says Dr Chor: 'One of my greatest fears would be if the children of low-income earners themselves become discouraged in the face of the large income divide, and view their own chances for social mobility to be low.

'If this is not addressed, it could really undermine our ethos of meritocracy of opportunity, at least in people's minds and perceptions.'

On a more philosophical level, as Singapore moves ahead, the problem of inequality strikes at the heart of the country's perennial policymaking struggle between two competing demands:

How can it continue to seize opportunities in a globalised economy and still ensure that no segments of society are left trailing far behind?

Increasing payouts, taxing consumption

WHAT more can be done to help close the gap between the rich and poor? Here are some ideas.


The state should work backwards by ascertaining the minimum needed to subsist in Singapore, and then ensure families are above that 'poverty line', argues Dr Khor Hoe Ee, former chief economist at the Monetary Authority of Singapore.

'We should look at the minimum income - what is a liveable income for a household and then use that as a benchmark in order to make policy.'

1. Raise Workfare payouts

The scheme, made permanent in 2007 to encourage low-wage workers to work and incentivise employers to hire them, has been likened to Singapore's minimum wage. What then would suffice as the minimum wage?

Just this year, the payout from Workfare was bumped up - with the maximum amount going up from $2,400 to $2,800 ($233 a month).

For example, an office cleaner who earns her occupation's median wage of $767 will now receive $957 a month.

Should she get more? MP Liang Eng Hwa calls for a regular review of the scheme - perhaps every two or three years - to 'raise the cut-off range whenever our finances permit'. He suggests: 'The quantum and salary range to qualify should have a stable basis; perhaps pegged to long-term basic cost of living and general economic conditions.'

2. Extend Public Assistance

Is the Public Assistance scheme reaching out to all who need help? It now disburses $360 to an individual and up to $1,150 monthly to a household with five persons or more, under strict criteria. They must be unable to work due to age, illness or disability, have no means of subsistence and little family support. About 2,900 people were on the scheme as of the end of last year.

3. Provide training and education

To ensure that social escalators continue moving, every effort must be made to ensure that skills upgrading and the education system are up to scratch - in providing equal opportunities to those from disadvantaged backgrounds.

Professor Augustine Tan of the Singapore Management University says: 'We should take proper surveys - census - of the needs of workers for skills-upgrading and implement appropriate training schemes.'

4. Be firm on foreign workers influx

The Government should stay the course - in good times or bad.

Prof Tan calls for firm action in 'calibrating the flow of immigrant labour, policing to ferret out phantom workers, illegal workers, forging of skills certificates in order to qualify for S-pass, and so on'.


1. Unemployment credit

This is a proposal by a policy group of economists under government feedback unit Reach, to help workers tide over unexpected unemployment in an increasingly volatile economy.

Workers and the Government contribute between 0.5 per cent and 3 per cent of an individual's salary to an account under the Central Provident Fund (CPF). When laid off, he can draw 50 per cent of his salary for three months.

Nobel laureates Dale Mortensen and Christopher Pissarides found that optimal job search takes between three and six months. The scheme will thus buy job-seekers the necessary time.

One downside is that it adds an additional burden on CPF which is meant for retirement. National University of Singapore (NUS) economist Bhanoji Rao sees it as a temporary measure to 'give hope to the unemployed and maintain minimal living standards'.

2. Inflation-indexed retirement grant

The aim is to give, say, $300 a month to the old who earn below $1,000 and have assets under $30,000. They may not have sufficient funds to be insured under the CPF Life scheme.

Its advocates calculate that it will cost the state less than 0.1 per cent of the gross domestic product (GDP). As it is limited to those who pass the means test, it is cost-effective.

Professor Tan Ern Ser of NUS calls it an 'amnesty' for the 'present generation of financially ill-prepared, medically uninsured elderly persons, so that their health-care costs do not eat into the Medisave funds or even assets of the future generations'.

[Such a policy could target those 60 or 65 and above as at 2010. The age of 65 is good as these people would have been 20 years or older when Singapore became independent. They would not have had the opportunities of the education system, but would have been the pioneers in building Singapore. The age of 60 is defensible as these would be 15 or older at independence and would have been at the tail end of their education, or even pass as many dropped out after Primary school. These are the older, less educated generation that would need help and should be helped for their efforts and contributions to early Singapore.]

3. Progressive consumption tax

This is an idea promulgated by Cornell University economist Robert Frank and supported by the likes of billionaire Warren Buffett.

People are taxed based on their consumption (income minus savings), rather than income. This is aimed at forcing the rich to scale back on expenditure, and thus reduce the growing financial pressures confronting middle-class families.

[I don't understand this proposal at all.]

4. Philanthropy

The rich should give more back to society. Says Mr Liang: 'I notice more of the well-off in Singapore are doing philanthropic work and donating a significant portion of their wealth back to society; perhaps inspired by Bill Gates and Warren Buffet. We should encourage more to follow suit.'


Whatever the policy prescriptions, they have to be reconciled with principles held firmly by the Government - they must be financially sustainable and not lead to a 'slippery slope' towards welfare.

Last week, Prime Minister Lee Hsien Loong stressed that Singapore's social safety net is working well, but pledged that the Government will keep finding ways to improve it. But he cautioned against creating a handout mentality, weakening the competitive work ethic or imposing a tax burden that would be hard to roll back.

Dr Khor acknowledges that there 'will always be some moral hazard issues because people are very different'.

'But at the same time you don't want to penalise the majority just because there's a small group of people who want to take advantage of the system.'

Ultimately, it boils down to intelligent design of policies that incentivise people to behave in a certain way, and ensures that the state is not saddled with a financial burden it can never shake off.

[There are about 3.5m citizens. 20% of this is 700,000. Assuming a 3.5 person average household, that's 20,000 household. Assuming all of these are single income earner household, and these all earn just $1,200 a month when they need $1,700, there is a $500 shortfall per month for these 20,000 household. To help these household with the full $500, would cost $10m per month, $120m per year. Or about $6,000 per household per year.

Adjustments: $1,700 per household is based on 4 person household, but our assumption is an average of 3.5 persons. At $425 per person ($1,700 per 4 pax household), 3.5 persons would be about $1,500 (rounded up). At $300 per household, the cost would be $6m per mth or $72m per year, or $3,600 per household per year.

The $2,800 per year compares quite favourably then, with just an $800 annual shortfall. Again, this shortfall could be the "discomfort" factor that the government feels is necessary to incentivise the lower income to try to move up.]

No comments: