Thursday, January 23, 2014

The price of intervention


21 January 2014

The market for cleaners is highly competitive. On the demand side, the cleaning companies compete for contracts using low prices, thus reducing the benefits of the contracts. Hence, the demand for cleaners is low.

On the supply side, there is literally no barrier to entry as the job does not require much skill or physical strength. Hence, the supply is high, especially among older and less-educated people.

In the absence of government intervention, low demand together with high supply results in a low equilibrium wage of about S$850 per month. This has been deemed unacceptable by the Government and paves the way for the progressive wage model to raise the wages of cleaners.

This marks the first time the Singapore Government is intervening directly in the labour market to set wages. It is important to analyse the possible impact of this model in Singapore.

The first impact is Economics 101. The wage of S$1,000, which is above the market equilibrium wage, is an effective price floor. Other things being equal, this will lead to more people willing to work as cleaners, while firms will demand fewer cleaners. The outcome will be a surplus of cleaners.

Firms will cease operations or downsize so that ultimately, there will be fewer cleaners employed at S$1,000 per month. The firms still operating will retain those workers who are relatively more productive and lay off those who are less productive. These workers are likely to be the relatively older and less-educated ones, and this is not the outcome the Government would like to see.


The second impact is to make S$1,000 the new equilibrium wage by reducing the supply of cleaners. This could arise from tightening the quantity of foreign labour in the cleaner market to reduce the supply of labour. This will result in Singaporeans, including the older and less-educated ones, taking up most of the cleaning jobs at higher wages, as the firms do not have much choice in the labour pool.

The setback is that there will be fewer cleaners employed in the market due to a shrinking cleaning sector.

The third impact is to make S$1,000 the new equilibrium wage by increasing the demand for cleaners. Classical theory states that in a competitive labour market, the equilibrium wage is equal to the value of marginal product of labour, which is the amount of money that the worker helps the firm to earn. A higher wage will require a higher value of marginal product. In other words, the firm will only pay the cleaner S$1,000 per month if the cleaner helps the company to earn at least S$1,000 per month.

The value of marginal product is obtained by multiplying the marginal product of worker (productivity) and the market price of output.

Since it is mandatory for all firms to pay their cleaners a higher wage, the easiest way is to raise the market price of the output. When all bidding firms quote a higher price, the awarding companies will have no choice but to comply. This means the higher cost will inevitably be passed on to consumers. Consumers may end up having to pay a higher price for all cleaning services and this contributes to a higher cost of living.

A higher value of marginal product can also be obtained by increasing the marginal product of cleaners and there are two possible scenarios.

One is that the firm will increase the cleaners’ workload to justify the higher wage. The workload of each cleaner will have to increase by 20 per cent to justify the higher wage.

Although this will raise the productivity of the workers, it will hardly increase their quality of life.


The other scenario is to provide training to the workers such that their productivity increases to justify the higher pay. This is the outcome that Government hopes to see, but it is easier said than done.

First, cleaning firms may not know how to increase the productivity of their workers. There is little scope to boost productivity in the cleaning sector, other than using equipment such as vacuum cleaners to replace brooms, and dishwashers to replace manual dishwashing. Sophisticated machines, even if available, are unlikely to be deployed in low-value places in a large scale which would not justify hawker centres. The difficulty in training older and uneducated workers to command technology is a real one, and most importantly, the competitive nature of the industry means it is a luxury for the cleaning firms to send workers for training.

The fourth impact is a dynamic one. The progressive wage model may set a benchmark for the other sectors to follow. It is difficult for other industries that require similar skills as cleaners to offer wages of less than S$1,000 per month.

With almost no barrier for workers to move from the other industries to the cleaning sector, wages will adjust until similar sectors pay their workers at least S$1,000 per month. This may develop into a segmented minimum wage. Whether it will spread to other sectors besides the security sector remains to be seen, but it will be difficult for employers to justify why their workers are less deserving than cleaners in earning higher wages.

As this scheme aims to raise the wage of Singapore cleaners, the jobs should be given to Singaporeans first before firms are allowed to employ foreigners. Thus, the cleaning companies will need to provide evidence to the Government that they have tried to employ Singapore cleaners, but to no avail, before they are allowed to fill up the vacancies by foreigners.

It is also good for the Ministry of Manpower to keep track of the workload of cleaners after the implementation of the progressive wage model. This will prevent the exploitation of the cleaners by their employers to make up for the higher wage.


Dr Tan Khay Boon is Senior Lecturer at SIM Global Education

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