What's keeping blue-collar wages low?

Jan 02, 2014

ASK: NUS ECONOMISTS


By Davin Chor, For The Straits Times

To what extent have low blue-collar wages and rising inequality in Singapore been the result of foreign worker inflows?

THE link between foreign workers and local wages has been a hot-button topic. It is also clearly an issue in which many Singaporeans feel they have a stake. Rightly or wrongly, the slow growth in blue-collar wages and the accompanying rise in inequality over the past decade have been pinned on the influx of foreign workers.

This "conventional wisdom" was recently challenged in an article written by Professor Hoon Hian Teck - entitled Relook Link Between Low Wages And Foreign Workers - published in The Straits Times on Nov 27 last year.

His argument can be summarised as follows: The stagnation of wages at the low end of the income distribution began between 2000 and 2004. This was the result of the Singapore economy being hit by the bursting of the dot.com bubble and the Sars crisis.

However, the growth in the non-resident workforce only accelerated after 2005. Given this timing, it is argued, the influx of foreign workers could not have been the root cause of our blue-collar wage woes.

So did the presence of foreign workers not matter at all? Or is there still some truth to the conventional wisdom? The reality, I believe, lies somewhere in between.

I agree with Prof Hoon's view that there are deeper forces at play that are not fully appreciated in the ongoing debate on wages in Singapore. These issues have to do with the underlying economic restructuring that Singapore has to undergo to stay relevant in the global economy. As Prof Hoon points out, this is a process that has favoured growth in our services sector at the expense of manufacturing.

The stark reality is that these structural changes have also favoured skilled workers over their less skilled counterparts. Being "skilled" now means possessing computer literacy, or being able to use IT tools (such as e-mail and Microsoft Word) that drive any modern workplace. A worker with such capabilities would inevitably be more nimble in making a job transition between sectors than, for example, someone whose primary skill set was working on a specific production line machine.

Consequently, less skilled workers are now in a more vulnerable position. Even if we had hypothetically held constant the number of foreign workers in Singapore, our less skilled resident workers would still have had to play catch-up.

That said, one should not understate the effects of foreign workers on our local labour market. As the Singapore economy embarked on this restructuring, the upswing in the business cycle around 2005-2006 led to a rise in demand for labour. This demand was met by admitting larger numbers of foreign workers. But there were two key differences this time compared to past recovery episodes.

The first difference was that in the 1990s, our foreign worker policy could be described more as a "guest worker" policy. More workers would be permitted during the growth phase of a business cycle to accommodate the rise in labour demand. But these numbers would also be adjusted downward when recessions came.

For example, during the Asian financial crisis in the late 1990s and the Sars episode in 2003, the size of our non-resident workforce actually shrank. This helped to cushion the negative effects of these slowdowns on our resident workers, for example by sparing some of them from being laid off.

Since 2006, however, our non-resident workforce has grown through all phases of the business cycle, expanding even during the global financial crisis (although the rate of increase did moderate during those years). What this means is that the non-resident workforce is now a much more permanent part of the labour force landscape. It is therefore harder to ignore how non-resident and resident workers affect each other.

The second difference is that since 2006 we have also seen the entry of foreign workers into several non-tradable service sectors, such as cleaning, food and beverages, as well as the wholesale and retail sectors. These were industries that previously were staffed mainly by resident workers. But the pressing need for labour meant that foreign workers were eventually recruited too.

While wages did grow on average in Singapore after 2006, it is less clear that workers in all sectors benefited equally. More studies are needed to look at the detailed industry and occupational wage data to better understand how foreign workers affected the local workforce in these sectors. A natural hypothesis is that resident unskilled wages would have been even more adversely affected had government schemes such as the Workfare Income Supplement not been introduced.

If there is an underlying lesson in this, it is that there is a need to be careful and vigilant in the policies the Government adopts as the economy restructures. Foreign workers are an important complement to our workforce. But it makes sense to monitor their quantity - and quality - more judiciously to avoid unintended socio-economic consequences.

Equally important is the need to pursue policies designed to re-skill the resident workforce, so that low-wage Singaporeans will continue to play an active role in transforming our economy.

The writer is an associate professor in the Department of Economics, National University of Singapore.

[You may also wish to see point #4 of this article, which provides a perspective on low wages and unskilled workers. 


The problem is that low skilled workers will always be at a disadvantage. If you have no skills or the skills you need to carry out the work can easily be taught in an hour or a day, then why should anyone pay you more than what any other "no-skill" worker is willing to work for? No-skill workers are plentiful. And when there are a lot of them, why should they be paid a premium. Workers are "selling" their labour, and employers are "buying" their labour, but if the labour is unskilled, the employers want to get a good deal and get labour as cheaply as it can.

But is that exploitation?

Let's take cleaners at a hawker centre. The "market rate" for cleaners is about $800 - $1000. However, paying this rate will mean few takers, because most of the unskilled workers are older persons with lower stamina and energy. They are less likely to be able to take up "3D jobs" - difficult, dangerous, and dirty/demeaning jobs. Cleaning is a difficult job in terms of the need for energy and stamina. You may also consider it dirty, and even demeaning. The work environment is also likely to be uncomfortable. 

So the "younger" ones with the energy and stamina and the need to support the family will take up these jobs, even at the market rates. The older ones, with weak legs, and lower energy would never take up these jobs at whatever salary.

But what if you automate and mechanise?

Good question. Very few innovations have been introduce to the cleaning industry. The last one was probably the trolley for cleaners to clear the tables. But the solution is to approach the issue holistically. Trolleys are great ideas until you try to navigate the narrow spaces between chairs and tables. Automation and labour saving processes cannot be an afterthought. It has to be integrated into the system and infrastructure from the start.


BUT, here is the interesting contradiction: with scarce supply, prices should go up. There is a scarcity of low wage workers, particularly for cleaners. Employers have persistent vacancies. What have they NOT raise wages to attract more people into the sector? Is the supply of cleaners so inelastic? Is there some "ceiling" on what employers are willing to pay? Employers have said that they cannot raise salaries because then they can't make competitive bids, and they can't get contracts, and they go out of business. 

Rather, it is best to not be the first mover. Let their competitors bid high, lose contracts, go out of business, and reduce competition, free up their cleaning staff to be hired by other cleaning companies, who can then bid competitively and continue to survive in the business.

Prisoner's Dilemma for the cleaning companies.

Well, now the govt has set de factor minimum wage for cleaners. Let's see how that works. It would seem promising. On paper.]