The economic case for a Minimum Wage: a conversation with Linda Lim

Academic Views, Interviews / Saturday, July 25th, 2020

There is a consensus in Singapore that the chronic problem of low wages needs state intervention. The question is how. A major policy debate concerns whether the government’s Progressive Wage Model is the answer, or if it is time to introduce a Minimum Wage. Economist LINDA LIM, Professor Emerita at the Stephen M. Ross School of Business, University of Michigan, explained the case for a Minimum Wage in a SocialService.SG podcast. She was interviewed by Kwan Jin Yao, a PhD candidate at the UCLA Luskin School of Public Affairs. This is an edited transcript of the podcast, which can be heard at the SocialService.SG website.

Kwan Jin Yao: Throughout GE 2020 and its aftermath, the minimum wage has emerged as a key policy proposal, with at least five opposition parties proposing a minimum wage or a living wage.  In response the ruling party promised to extend the Progressive Wage Model (PWM) to more industries beyond the cleaning, security and landscape sectors. 

A central concern has been the persistence of poor wages for low-income Singaporeans.  We speak with economist Prof. Linda Lim of the University of Michigan, to understand and compare the minimum wage and Singapore’s PWM, address common objections to the minimum wage, and discuss the overall challenge of low-wage labour in Singapore.

What is the minimum wage?

Linda Lim: The minimum wage is the lowest wage that employers must provide by law to workers that are covered by the legislation. Nearly all other high-income developed economies have a minimum wage.  We are one of the rare ones, if not the only one, that doesn’t have one. The goal of a minimum wage is to prevent workers from being unduly exploited, particularly low-skilled, low-wage workers, and to ensure they have minimum living standards.

The wage is paid by the employer, not by the government, which just sets the regulation. In the case of Singapore, I assume that it will be the same as in other countries, with a minimum wage applying to all workers, Singapore citizens and PRs (Permanent Residents), and foreigners.

Kwan: In GE2020, Senior Minister Tharman argued that Singapore’s Progressive Wage Model is better than a minimum wage. Help us understand what the Progressive Wage Model (PWM) is.

Lim: The goal of the PWM is to raise wages for the lowest 10-20% of Singaporean wage earners.  Everybody recognizes that their wages are too low.  They are below what would be a local living wage, and they are much lower relative to median wages than in other countries at the same level of per capita income. A rich country shouldn’t have so many poor citizens—proportionally, Singapore has twice as many poor citizens as OECD countries, other rich countries.  So everybody agrees that you need to raise low-end wages.  MOM Ministry of Manpower’s website also notes that “low wages result in high turnover and labour shortages”, which hurts productivity.

So a low wage is clearly not good for low-income workers, but it’s also not good for the country because it reduces productivity.  So that’s the goal of the PWM.  What it actually does is mandate specified increases in the wages of low-skilled workers over a number of years.  It also requires employers to provide training to raise worker productivity.

The wage levels and training for particular job clusters are set by tripartite bodies in each sector—employers, unions and the government, presumably MOM.  The only sectors covered so far are cleaning, security and landscaping.  Employers, unions and the government get together to decide what the wage should be, how it should increase, and the training you must go through in order to get the wage increase.

In addition, there is the Wage Credit Scheme WCS, which provides government subsidies for employers to co-fund wage increases for workers earning below the median. There’s also a separate Workfare Income Supplement WIS which provides cash and CPF top-ups for workers in the bottom 20% of wage earners.

So you have PWM, but you also have Wage Credit and Workfare, and all are available only to Singapore citizens and PRs.

Kwan: Conceptually, what are some limitations of the PWM?

Lim: PWM doesn’t deal with the root cause of Singapore’s ultra-low wages, which the MOM website states “have stagnated due to widespread cheap sourcing”. This refers to over twenty years of a HUGE influx of foreign workers from very low-wage neighbouring countries which depresses the market wage of low-skilled workers in Singapore.  In economics, if the supply curve of labour moves out, the wage will fall. So it is excess supply of unskilled labour, leading to low labour productivity, which is responsible for the low-wage problem. The PWM doesn’t do anything about the supply curve of labour—that is its first limitation.

A second limitation is that in many “low-skilled” occupations, like cleaning, productivity is determined less by workers’ individual skills than by the equipment they have to work with, by job design and work organisation.  It’s not about how fast you can use the mop.  It’s about how many places you have to clean within a certain period of time, if you have more advanced equipment, who organises the time schedule, and so on. These things depend on the employer’s investment and management. The worker’s skill is only a very small part of it, particularly when the skill required is low.

A third limitation of the PWM is that only Singapore citizens and PRs are covered by it. So foreign workers will still exert downward pressure on wages.  Productivity will also vary among workers in a particular job category.  You have local workers with a certain set of training and wage requirements, and then you have foreign workers who are different, doing the same job or in the same category. 

So from the employer’s perspective, since they can avoid paying PWM wage increases simply by hiring foreign workers not subject to all these requirements, employers are discouraged from investing in productivity-enhancing technologies and work organisation for all workers in an entire job category.  This is the first-best solution–to change everybody’s productivity and everybody’s wages, as opposed to having locals and foreigners separated with different conditions.

You can argue that PWM should be seen not in isolation but together with the system of quotas and foreign worker levies that is supposed to regulate the supply of foreign workers.  The supply of foreign workers is heavily regulated–it is a government policy variable. The question then is why this system of quotas and levies has not worked in limiting or even just slowing down the increase of foreign workers.  We’ve had it for twenty years and we’ve had low wages for Singaporeans for twenty years. If something is not working for twenty or thirty years, then you need to do something different.

A fourth limitation is that the PWM discourages job mobility. From a market economics point of view, it is best if the worker changes her job according to supply and demand, or market forces.  In this case the worker “benefits” from PWM only if she stays within the same sector and employer and moves to “higher-value” work within the sector and employer.  So it actually produces rigidity in the labour market.

In many “low-skilled” occupations, like cleaning, productivity is determined less by workers’ individual skills than by the equipment they have to work with, by job design and work organisation. It’s not about how fast you can use the mop. It’s about how many places you have to clean within a certain period of time, if you have more advanced equipment, who organises the time schedule, and so on.

LINDA LIM on why it’s vital to push employers to raise productivity.

Kwan: Beyond the conceptual limitations of PWM, are there other limitations or challenges that we have observed since its implementation?

Lim: The first thing to note is that the PWM has raised wages for some low-wage workers (those in the three categories) but by too little, too slowly and incompletely.

The roll-out has been very slow.  I think it was introduced in 2012, implementation started only in 2014 or 2015, and is supposed to be completed only in 2020 for the three occupations.  The scheme has not been extended beyond cleaning, security and landscaping.

Secondly, enforcement is lax. Irene Ng’s research shows that workers often don’t know what they are entitled to, while employers evade or work around labor rights and rules on working conditions. 

The other thing is that Singaporean workers in these low-wage occupations tend to be the elderly poor, whom you would expect to be less productive than younger foreign contract workers in manual jobs. Employers adjust by assigning each group of workers—elderly poor locals, younger foreign contract workers–to different roles within the same occupation/sector, even within a restaurant.  This makes sense from a business point of view.

But to continue receiving wage increases, the worker must move to “higher-value” work within the sector.  In reality upward mobility is limited for the individual worker because employers tend to choose different workers for higher-level positions.  It makes sense for them. So they often do just the minimum one-time training to increase the wages of the lowest-wage/least skilled workers.

Finally, a limitation from the implementation to date is that PWM by itself is inadequate to enable workers to reach a basic living standard.  This requires government subsidies like the Wage Credit Scheme and Workfare, which so far has been inadequate to make up the shortfall between the market wage and a living wage.  With all these subsidies we still haven’t closed the gap and the wage falls far short of the standard in other rich countries.

Kwan: How does the PWM compare to a proposed minimum wage?

Lim: The PWM currently targets a minimum level of $1,237 p.m. for cleaners and $1,450 p.m. for landscapers.  Higher levels are stipulated for each year from now. This compares with the Workers’ Party’s proposed Minimum wage of $1,300.  $1,300 happens to be what the 2019 Minimum Income Standards in Singapore study found covers basic needs for a one-person elderly household.  So without subsidies, both the PWM and the Workers’ Party’s proposed minimum wage are not enough—it’s below the absolute poverty level threshold, which in 2018 was $1,848 p.m. for a family of four, calculated by Irene Ng, a professor of social work at NUS. 

I presume both PWM and the minimum wage would increase with inflation–as local living costs go up, it will go up. Both should apply to part-time as well as full-time workers. By the way, if you’re doing PWM for part-time workers, there’s no way they could survive.

The minimum wage is administratively simpler, less bureaucratically complex and costly than PWM. With all the metrics you have to make, all the processes you have to go through, training, plus all the other subsidies—PWM is very complex.  It requires a lot of civil servants to maintain, and the civil servants are paid a lot more than the minimum-wage worker.

Minimum wage is also a permanent structural feature of the labour market. This means it reduces uncertainty for the employer, so the employer is encouraged to invest for the long term to increase productivity. “I’m going to have to meet this minimum wage forever, not just three years. After I reach the PWM level, who knows what will happen, I might as well hire a few foreign workers instead of going through all these hoops.”

The minimum wage covers, or should cover, foreign as well as domestic workers.  If it does that it will increase earnings of both foreign and domestic workers.  It will push employers to substitute capital and technology for labour across the board, thus raising productivity.  And it will remove employers’ incentive to favour foreign workers and discriminate against local workers, which is what they will do if only local workers are more expensive.

Kwan: One of the common pushbacks against the minimum wage is that it will increase unemployment. Empirically, what is the relationship between a minimum wage and employment? What is likely to happen in the Singapore context?

Lim: Empirical evidence in other developed/rich countries shows little impact of the minimum wage on overall employment.

The exception is youth unemployment (teenagers) which does rise by a small amount. This however should not be an issue in Singapore since, firstly, we have an overall labour shortage and low citizen unemployment. Secondly we have high educational standards compared with other countries including other rich countries, and our high educational standards should be correlated with higher productivity.  Thirdly, nearly all our youth (teenagers) are in tertiary education, vocational training and/or military service.  So our social context is totally different from other countries where it has been observed that minimum wage does reduce employment of teenagers.

Other countries’ experience also suggests that small increases in the minimum wage could actually increase employment in low-wage markets, because it increases the incentive to work.  We all know that if you offer people more money, they are more likely to work more.  If a higher wage enables a low-wage worker to better cover her costs of work like childcare and transport, you might actually have a situation, it might actually be the norm, where if you raise wages you get more employment—in economics, an upward-sloping supply curve of labour.

In Singapore we’ve already established that the market wage is very low.  So a wage increase could raise employment by encouraging higher labour force participation by low-wage workers for which the cost of work is important.

Singapore is also chronically labour-short, so permanent unemployment is not a major concern.  You might lose this job but you should be able to get another job.  Increasing productivity will reduce overall employment, but there should still be plenty of jobs for Singaporeans as employers cut the foreign workforce.

But there are still some people who are unemployed–what happens to them? Unemployment can result from any cause—an economic downturn, a shift in consumer preferences, technological change. Those are the main causes of unemployment—it doesn’t have to be from a minimum wage, or PWM which would have the same impact of raising costs.  Unemployment from any cause can be compensated for if we also institute a system of unemployment insurance.  This is the norm in other rich countries but doesn’t exist in Singapore.

So from all this I don’t think unemployment is a concern from instituting a minimum wage.

Other countries’ experience also suggests that small increases in the minimum wage could actually increase employment in low-wage markets, because it increases the incentive to work. We all know that if you offer people more money, they are more likely to work more.

LINDA LIM on whether a minimum wage would increase unemployment.

Kwan: There are a few other claims about or objections to the minimum wage.  The first is that a minimum wage will reduce Singapore’s economic competitiveness.

Lim: First of all, especially for an affluent/developed economy, competitiveness depends not on cost but on productivity and innovation. We are competitive because we are productive, because we are innovative, not because we are cheap.  In fact one can argue that productivity and innovation are discouraged by access to low costs.  If I can compete by being cheap, why should I bother to innovate?  Sustainable competitiveness for a rich country cannot rely on costs.

Secondly, costs may not and should not increase if, as PWM and a minimum wage intend, higher wages spur productivity increase.  Higher wages improve productivity in three ways. One, they incentivize employers to invest in higher productivity. Two, they improve worker motivation, reducing turnover and retraining costs.  And three, research shows they improve workers’ cognitive and psychological functioning.  So higher wages improve productivity—if they do that, there will not be an increase in costs—unless you fail.

Thirdly, if you’re looking at costs, low-wage labour is not the only component of costs.  There are many other components of costs—for example, in a land-scarce territory like ours–rents.  Why should only the costs of low-wage labour be suppressed in the effort to contain costs to be cost-competitive?  Some employers say rising rents force them to squeeze labour costs and resort to the available “cheap sourcing” of foreign workers.

Fourth, a rich country should not be competing with poor countries, but with other rich countries and cities.  We want to be competitive with Tokyo, London, New York, San Francisco, not with Bangladesh or Myanmar.  These global cities manage to be competitive with much higher wages for workers in low-end jobs, so why can’t we?  Maybe they are not No. 1 or 2 in competitiveness rankings, but rather No. 4 or 5.  But their low-end workers make three times what ours do—is that a bad trade-off?

Fifth, talking about rankings, Singapore is continually ranked as one of the “most competitive” economies in the world.  I’m not sure how a marginal increase (say 20%) in the cost of low-skilled labor would damage this significantly.  You mean we are the most competitive because we have the cheapest wages? That doesn’t sound like a rich country.  In any event, if we are developing based on comparative advantage as market economics says we should, the cost of low-skilled labour should be a small proportion of total costs.  Because we are capital-abundant, skill-abundant, talent-abundant, those will be bigger portions of cost.

Kwan: What do you think about the claim that a minimum wage will increase costs to consumers, or that consumers are the ones who will bear the increased labour costs?

Lim: Let me go back to what PWM intends.  Costs will not increase if productivity also increases through technology and improved management. So No. 1—costs will not increase.

No. 2, the cost of low-wage workers is or should be very small proportion of total product cost.  According to comparative advantage, we’re a rich country, so unskilled labour is a small proportion of total cost. And that small cost of increased wages for low-wage workers can be absorbed by increased efficiencies in all your operations.  Why are you focusing only on increased cost of unskilled labor?  You could, for example, have smaller increases in other costs like rent or utilities, or you could have a small reduction in landlord/property-owner profits.

Studies in the US show that minimum wage increases have not led to higher inflation. One study found that from 1978–2015, which is a very long period of time, restaurant food prices rose by just 0.36 percent for every 10 percent increase in the minimum wage. Researchers conclude that small minimum wage increases do not lead to higher prices and may actually reduce prices.

So, costs may not increase.  If they do, the number of low-wage workers to “benefit” from a minimum wage is small relative to the number of consumers in a high-income country, which we are. For example, low-wage workers are about 30%–very high for a rich country—of the Singapore labour force.  But 70% are not low-wage workers. Consumers are 100%. So any increase in cost to the consumer, spread out among all consumers, of a wage increase for a small number of workers, would be small and maybe not even noticeable.

Let’s look at Singapore’s economic structure.  We’re very global, we export a lot of services like travel, tourism. We host many foreign companies and many foreign skilled as well as unskilled workers.  Foreign companies’ profits and foreign consumers’ welfare should not be subsidized by individual poor Singaporeans. 

Finally, the increased cost to the consumer—assuming there is one–would be at least partly offset by lesser need for the taxpayer to subsidize living costs of the poor through welfare payments, since the poor will now be earning more, closer to the living wage. Wage Credit, Workfare –all of those are paid for by the Singapore taxpayer.

Kwan: So how would you respond to the claim that a minimum wage will increase cost to the taxpayer?

Lim: Who pays the minimum wage? Who pays for PWM? The minimum wage is paid by employers, not from the government budget, unless it is too low and there are separate wage subsidies.  For example, if the minimum wage is below basic subsistence, then the taxpayer has to top it up–as we are doing now through Wage Credit, Workfare and so on.  So that’s No. 1.  It’s paid by employers—unless it’s too low and you don’t want to increase it so you have to pay subsidies.

Secondly, if a government subsidy is required, say from Wage Credit, the budgetary cost–whether it is minimum wage or PWM–is the same, if it’s too low and you have to subsidize. The difference is  that the minimum wage covers more workers since it includes foreigners—which is not small, given how many foreigners there are.

IF increased budgetary resources are required, they should be minimal and Singapore has plenty of accumulated surpluses, reserves from which to pay them.  Remember we are not talking about a big chunk.  We’re talking about very low wages, increasing by a small amount, for a minority of the labour force.

Also, taxes in Singapore are low, certainly very low compared with other high-income countries.  We are tax-competitive. So IF increased taxes are required, which is unlikely, they would not be out-of-line with what we should expect to pay at our income level

Finally, Singaporeans who have done well by the system, including benefiting for decades from Third World wages in a First World country, can afford and should be willing to pay a BIT more to improve the lot of their fellow citizens.  This is what Singapore Together, SG United is or should be about.

Kwan: If the PWM and the minimum wage are about the same, why would you prefer one over the other?

Lim: First of all, both PWM and minimum wage are what economists call “second-best” policies because they do not directly target the cause of the wage stagnation, which is the readily allowed massive supply of cheap foreign labour.

Minimum wage tackles the problem better by requiring the same pay for foreign and local workers.  This will make foreign workers more expensive than local workers if employers have to continue to cover (improved) housing and transport, plus international travel and visas for foreign workers.  Remember the problem is massive supply of cheap foreign labour.  So minimum wage indirectly reduces that because it increases the cost of the cheap foreign labour.

I think a minimum wage is more likely to increase productivity across the board. PWM applies only to Singapore citizens and PRs.  Thus it retains what we call a segmented two-tier labour force.  This distorts employer hiring practices and overall resource allocation.

So minimum wage is ironically more of a “market mechanism”.  It raises the wage and requires the employer to pay it and adjust by raising productivity.  This raises the demand for labour curve, so is simpler, more straightforward and more flexible than

The PWM which I already said is bureaucratically complex and costly, requiring the tripartite mechanism, requiring lots of highly-paid civil servants to monitor and design.  This may explain why the PWM has been implemented so slowly and incompletely, because it is complex and costly, has to go through lots of different levels of bureaucracy.  In any event, incremental increases over a few years cannot make up for the cumulative impact of decades of wage suppression and stagnation. 

Now if PWM were extended to all sectors and all workers, with bureaucracy reduced, it would be essentially a minimum wage.

I think a minimum wage is more likely to increase productivity across the board. PWM applies only to Singapore citizens and PRs. Thus it retains what we call a segmented two-tier labour force. This distorts employer hiring practices and overall resource allocation. So minimum wage is ironically more of a “market mechanism”.

LINDA LIM on why a minimum wage has a better chance of raising productivity.

Kwan: You mentioned that both PWM and minimum wage are “second-best” policies. How do we address the problem that employers are discouraged from investing in productivity-enhancing technologies because they are incentivized to hire foreign workers?

Lim: The “first-best” solution is to remove distortion in the labour market caused by artificial increase in the labour supply curve i.e. reduce excessive dependence on cheap foreign labour.  This would need to be phased in, and we would need to consider different ways of doing this.  You can think of all kinds of things, like the foreign worker levy can be rebated if you bring in fewer workers next time, if you invest in machines.  There are lots of technical solutions you can think about.  But you must first of all make the policy decision that you want to reduce it.

Other than reducing foreign workers, or pushing back the supply curve of labour, Workfare is the next most important policy to raise low-end wages, and it needs to be enhanced.  Even other countries with a minimum wage do have something like this, like a negative income tax.  It would need to be enhanced to enable a low-wage worker in Singapore to reach a minimum living standard.

But note that wage policy alone cannot solve Singapore’s problem of wage stagnation and ultra-low wages.  This is the result of sticking too long with two related government policies

One, already mentioned–many decades of importing transient foreign labour from much lower- wage countries.  This allowed the persistence of Third World business practices and labour-intensive technologies in what was rapidly becoming a First World country that is labour-scarce, capital-rich, technology-advanced and so on.

Two, targeting top-line GDP growth rates that were too fast for a labour-scarce maturing high-income country, when growth inevitably slows for a whole bunch of reasons.  Such rates could be achieved only by continually adding huge amounts of new inputs of labour and capital to the production process rather than increasing efficiency in the use of both capital and labour, or higher productivity.  Even then, as we have seen, this has worked only temporarily in maintaining growth. Growth has slowed, and we would expect that, because of another economic concept we call diminishing marginal returns.