This article first appeared here on 3 Oct 2010.

Written By: Gilbert Goh

Minister Without Portfolio, Mr Lim Swee Say, has thrown his weight against the implementation of the minimum wage system citing adverse consequences of  a rise in business cost as his main reason. Mr Lim’s  fear is not without its merit.

Companies will close shop eventually  and relocate to  a cheaper location if they could not improve on its profit margin due to an increase in labour cost.

We saw this happened  during  the global recession in 2001 and 2007 when labour-sensitive MNCs pull out and move its operations to cheaper countries such as China, Vietnam, Malaysia and Philippines. Factory workers, engineers, technicians, purchasers and many other rank and file workers lost their jobs during that awful period.

However, the miserable take-home pay of our rank and file workers have irked many causing some to question whether the government is doing enough to protect our vulnerable workers from unscrupulous employers. A flexible-wage employment market means that employers will  pay the lowest wage possible for workers.  There is also little bargaining power for our locals as globalisation and free-trade agreement (FTA) has  allowed foreigners  to enter our country to look for work further enlarging the labour pool for our employers.

More than 180,000 people 40 years or older in Singapore were earning less than S$1,000 (nearly $740) a month as of June last year. Another 154,000 over 40 were earning less than than S$1,500. Together they made  up more than 17 per cent of the 1.86 million-strong local workforce (source: MOM).

Citigroup in its 2007′s assessment report on the economic growth of Singapore has accurately predicted that:-

“Embracing globalization has had disproportionate effects on different income groups, particularly in a small open economy where the impact is amplified. Such trends favor the higher income and foreign segment groups – those in the “global periphery” – benefiting from the regional boom. The lower income groups have to face greater competition because of globalization and liberalization, particularly with the emergence and opening up of China and India.” (source: Singapore Economy: The New and The Dual, 2007)

Our government needs to be given credit, however,  for doggedly embracing globalisation even though there are adverse consequences as in order to survive in this new economy there is simply no other easy way. Our economy will slow down considerably and we can never absorb the full benefits of globalisation if we remain too protective. Its a delicate balance and whichever way we take there will be casualties.

Consequences of Minimum Wage Policy

For a country that emphasizes alot of its economic growth on having a strong GDP, poor business growth will be very bad news indeed as business owners reconsider their option of setting up shop in Singapore due to rising labour cost.

Unemployment will  also rise in tantem with a rise in business cost as existing employers  try to cut down workers to save cost. This will also result in an immediate spike in short-term unemployment  – a nightmarish thought for the government. As the current  main growth drivers is concentrated mainly on the service factor viz-a-viz the two integrated resorts, I believe that the implementation of minimum wage will have a serious impact on economic growth.

Some businesses may also close down as they could not manage its overhead well resulting in periodic retrenchment exercises. it is apparent that the government rather have businesses operating here hiring both foreign and local workers than having them close down completely denying our locals the chance of employment.

Mr Lim spoke on  this critical issue at the Singapore Human Capital Summit during a panel discussion on the human capital challenges facing Asia in 2020 (Straits Times, 1 Oct).

‘Yes, we can try to reduce the number of low-wage workers by having a minimum wage, but the number of workers with no wage will go up and unemployment will go up,’ he said during a panel discussion at a conference to explore ways Asian companies can better attract and groom talent.

It would be more effective to introduce a ‘minimum skills’ system for jobs and raise the skills level over time through education and training, said Mr Lim, who is also Minister in the Prime Minister’s Office. ‘That way, lower-wage workers of today will become better-skilled workers and earn better wages of tomorrow.’

However, every major policy decision has its pros and cons and  the minimum wage system  is no different. The key question to ask ourselves is:  will there be a greater good if there is  a minimum wage system remembering that there will be no perfect solution to the issue of  low wages?

Proponents  of the minimum wage system has often argued that the free-market wage policy has not benefit our low-wage workers at all and the open-door policy of employing foreigners for labour-intensive jobs  has also suppressed wages.  As labour supply is always  there through the foreign-worker policy, wages have not risen as much even in a buoyant economy such as ours. Moreover, at least half or more of the  jobs created these days will go to a foreigner.

Wages of rank and file workers have not risen in proportion with the high cost of living for a very long time. A cleaner who used to earn $700 a month five years ago will find that his salary will not change much as the employer can replace him easily with a foreigner if the local worker  is unhappy with his wages. He has little bargaining power here.

This has severe adverse repercussion in the future as there will be a large group of needy Singaporeans out there who can never be able to retire comfortably as they fail to save enough in their CPF account let alone in their  own savings account. Many will turn to the state for assistance draining the country of its resources.

Mr Lim has also argued for  minimum-skills instead of minimum wages so that our unskilled workers could upgrade and fit into  our new economy but is it so easy to reskill and find alternative employment? What other skills can you instill in a 55-year-old cleaner? Moreover, there are many awful stories of how our workers have registered in our many WDA-sponsored courses but were left  disappointed when they could not find any work after graduation.

Let us  examine the consequences of  minimum wage system in greater detail:

1.       Business cost will rise

Most detractors will argue against the minimum wage policy due to the rise in business cost with valid reason.

In Singapore, business owners are most concerned with two aspects on their overhead – rental and labour cost. These two overheads alone account for at least 75% of their over all business cost.

Two ministers, Mr Lim Boon Heng and Mr Lim Swee Say, have argued against minimum wage implementation base on the increase in labour cost  factor.

Both ministers have also witnessed how tens of thousands of workers were laid off during the two recent recessions and their concerns must have its’ reasonable merit.

Many MNCs have also pulled out of Singapore permanently setting their sights on cheaper locations for their operations. We have also seen a much reduced manufacturing presence in our country as a result of this exodus.

If  minimum wage is in place, both ministers  will  wonder if more  people will  be retrenched  as  manufacturing plants decide to pull the plug and relocate their operations.  This is a genuine fear and proponents of the minimum wage policy  must be conscious of.

Moreover, inflationary factors such as  falling productivity growth, rising profit margins, surging house prices have left underlying CPI inflation climbing of late. The implementation of minimum wage will further contribute to inflationary pressures.

Compared with August 2009, the consumer price index rose by 3.3 per cent in August 2010, reflecting higher costs of transport, housing and food. The cost of transport registered an increase of 9.0 per cent, arising from higher prices of cars and car insurance premium. Housing cost rose by 3.1 per cent due mainly to higher electricity tariffs and accommodation costs. Food prices increased by 1.7 per cent on account of dearer prepared meals, vegetables, fresh seafood, rice & other cereals, dairy products & eggs as well as chilled meat. Excluding accommodation costs, the consumer price index moved up by 3.7 per cent in August 2010 compared with a year ago (source: http://www.singstat.gov.sg).

With the implementation of minimum wage, business cost will definitely rise and employers will most immediately retrench staff to reduce overhead. This will result in an immediate rise in short-termed unemployment especially for labour-intensive industries such as hospitality, service and construction.

With the rise in overhead, many employers will also want to pass such cost on to their customers in order to survive. Eateries will charge higher for a plate of fried rice for example. Instead of the usual $3 a plate,  customers now  have to pay $5 for the food.  This price hike will result in an inflationary push – escalating into a sharp rise in the cost of living if we are not careful. The only way out  is for businesses to think of quick ways to improve on its productivity to negate the effects of escalating labour cost.

Businesses will also think twice whether  to expand its operations as a result of increased labour cost. Job expansion  may not materialise as business owners do not want to take the risk of having another eatery if their profit margin is squeezed. The economy may slow down consequently resulting in short-termed deflation.

This happens in Australia as the minimum wage of A$15 an hour has put off much business expansion.  The sharp rise in utilities cost has also added to the strain of doing business in Sydney so much so that many have even considered pulling out of that city and relocate to cheaper places such as Queensland and Victoria.

More significantly, business owners have also  pass such cost directly to the consumers. For example,  in Australia, a loaf of bread costs A$4 on average,  a visit to the GP sets you back by $50 and eating out costs you a minimum of A$10 for anything on the food menu. It is a luxury to eat out and many simply buy back groceries to cook at home.

Labour cost has always being the major tab for most businesses  in  Singapore. We can’t compete with our neighbours based on labour cost alone as, for example,  average wage in Indonesia  is just one-fifth of ours due to their lower standard of living. However, we can’t stop manufacturers from relocating as their industries are very labour-intensive and won’t survive if they continue operating in Singapore.

Our superb  infrastructure  and high spending power, however,  have fortunately more than make up for our expensive labour cost. In fact, many businesses prefer to set up shop in Singapore than anywhere else in Asia despite the  very high overhead.

2. Unemployment Will Rise

I want to examine this in greater detail here as this is the main fear of many detractors of the minimum wage system.

Labour-sensitive industries will definitely retrench staff immediately once minimum wage is being implemented. How can you not reduce  staff when you need to pay 20%  more for each  worker?

Restaurants employing ten staff will now have to trim 20% off its labour cost and the only way to do this is to reduce manpower.  This eatery will now have to cope with its operation with a reduced manpower strength.

Moreover, workers will need to double up as there will four instead of five waiters now. Some even have to clean up as the official cleaner has being laid off to reduce labour cost as a result of minimum wage implementation. This retrenched cleaner could even be a local Singaporean.

In the eyes of the employer, there is no difference whether the worker is a local or foreigner. Only the one that can produce  the best return for wages paid is retained.

More importantly, employers will have no choice but to manage its reduced staff strength with better productivity. Industries like the cleaning sector will have to explore using technology to better manage its operations.  Instead of using a broom and pan, the cleaner now has to learn how to clean the kopitiam using a mechanised cleaner all on his own as his co-worker has being retrenched to cut down labour as a result of minimum wage. This also another positive outcome as a result of the minimum wage policy.

Our productivity has being on the decrease the past few years due to a huge influx of foreign workers especially in the service sector where productivity is stringently measured.  Many service workers also struggle to communicate with customers properly due to their poor command of the English language. This has been the main bugbear of our customers and we have read many forum writers complaining on this issue in the press.

Hopefully, when businesses operate on a reduced staff strength, productivity will go up

Unemployment may not be a frightening thought after all if it particularly hits out at those labour-intensive industries with  a penchant for employing foreign workers. This natural attribution will also hopefully  help the country depends less on cheaper foreign workers thus opening the door slightly for our local workers to come in.

3. Minimum Wage – Reduction In Dependency on Foreign Workers?

Actually, if minimum wage policy results in an immediate reduction in dependency on foreign workers, I find this to be  a wonderful outcome.

We have being over-dependent on cheaper foreign workers who can work 10-hour shift without complaining as they come from poorer third-world countries. They naturally will be more competitive and fitter than our local workers. Many companies have also exploit our foreign workers and few of them have came out to air their grievances openly for fear of being sent home.

However, on another note, I feel that the long-termed unemployed (LTU) locals will now come out to earnestly search for work when wages have improved due to the minimum wage policy.

I have always wonder why our locals do not respond to a sharp rise in  job vacancies at the integrated resorts (IR). I saw the reason when someone I knew who is 61 years old managed to clutch a service job working in the casino. He told me his pay is only $1100 and he has to work two shifts only – he was excused from the third shift (11pm – 7am) due to his age. He has two off days a week randomly. Naturally, he is the lone local working among  a sea of workers hailing from China, Philippines, Myamar, Malaysia, Vietnam among others.

How many locals will want to work eight hours a day  for a mere $6 an hour or $50 a day? This, I believe, is the main reason why some low-wage workers have problem staying on in their jobs.

Many simply walk off from their jobs when they find something better even if its a mere $100 pay difference. Anyway, they have wanted to quit from their exploitative work place and doing it for a better pay is good enough reason.

Conclusion

I hope that I have  illustrated adequately that there will never be a perfect system when it comes to dealing with the  dilemma  of low wages for  our rank and file  workers. To support the low-income citizens, the government has in place a welfare assistance package - Workfare Income Supplement (WIS) -  for those earning $1700 and below and they must be above age 35 years old to qualify.

According to government statistics in the MOM website, qualifying citizens were given an average of $1100 last year through WIS and 320,000 low-wage workers have benefitted from the scheme. This works out to roughly a  pathetic $100 a month in government aid for our low-income earners.

For all its worth, WIS does not really solve the problem of employment expliotation and many feel that the government can do more  to ensure that our rank and file workers are paid decently as they feel the effects of globalisation.

Having a minimum wage system in place will definitely  result in a rise in business cost and unemployment whereas not having one means that wages will remain stagnant further widening the salary gap of the poorer and better paid workers.

The government can however consider implementing a hybrid  minimum wage system in our country  meant only for the low-wage workers. Our executives can frankly fend for themselves as  they can demand for more pay through negotiation with their employers or look for another better-paying  job.

Our rank and file workers need  proper  legislation to better protect their welfare – many suffer from low-pay discrimination as they  compete with younger fitter foreigners working alongside them.

A minimum wage of $10 an hour is a good ballmark figure to start with. This will roughly translate to about $1800 a month if we stick to the 44-hour work week that we have in our legislation. After deducting CPF contribution, the worker can still take  home about $1500 – a reasonable disposable income for a family of four.

With  minimum wage in place, hopefully, the wage gap between the better and poorer paid workers will narrow.  A country will only progress if we have taken enough measures to ensure that our low-wage workers have sufficient  to get by when they  put in their  fair share  of work. The intense political pressure that is being exerted on the government currently may just see them implement something soon to soothe the nerves of its populace. Doing  nothing will certainly backfire when Singapore goes to the polls soon.