Can productivity increase really lead to wage increase?
When there are employers like Douglas Foo of Sakae now offering $3,000 for cleaners, it hardly seems that wage has anything to do with productivity. While the offer by Sakae has been criticised as a publicity stunt, there is some truth to the labour crunch in the cleaning sector. At an average monthly pay of $850, for what many would regard as a dirty job, it is no wonder that employers find it hard to attract locals. There is definitely pressure to raise wages, whether or not there is productivity.
Our Government and unions seem to think that wage increase should only be based on productivity increase. This has been the key reason for defending their position of no-minimum-wage. The well-known principle for this is one of the free market:- that we should allow wages to be free to move along with market forces. Therefore the way to increase wage is to increase the value of the job, through productivity improvement. Supporting arguments include, that if minimum wage set too low it will lead to sticky low wages (wage will be stuck at the minimum level since that is the minimum expected), and if set too high, it’ll drive off investors because labours costs will drive up business costs.
On the other hand, proponents of minimum wage by opposition camps, or the famous “wage-shock” therapy proposed by Professor Lim Chong Yah, says that productivity don’t always drive wages. Professor Lim’s point is that productivity has indeed risen over the years for low wage groups, but wages have not caught up, due to depression by FWs. By setting some form of wage level, whether through legislated minimum wage, or a short-term wage shock, it can also drive productivity.
This logic can also work, because when cost per worker is high, business will be motivated to increase productivity to squeeze higher revenue or value from each worker. In other words, businesses can also innovate and adapt to higher labour costs. The question therefore seems to be, in today’s globalized world, where labour and capital are increasingly mobile, how much of labour cost increases can our economy stomache before we become uncompetitive?
I’m not an economic expert, so I’m attempting to discuss this from a layman’s perspective. The determinant of wage can be quite simply how much someone is willing and able to pay, in exchange for what a person is willing and able to put in as ‘labour’. So generally speaking, wage levels can be determined by the relative bargaining positions of employer vs worker. This is in turn determined broadly by (1) demand-supply, (2) productivity of labour, and (3) labour-employer relations.
If we look at the demand and supply of labour, two things are happening with globalization. Capital flows easily from place to place so business are always on the look-out for cheaper, better and faster places to earn money. Labour, also flows easily as people can move more freely from places to places to work. So to give workers a stronger bargaining position for wage to rise, the Government should either limit labour supply, or find a way to lock in capital investments to keep demand for labour strong.
For the supply side, Government is already doing so, and the manpower squeeze is already yielding some results as we see pressure for wage at the bottom to rise, as seen rather clearly in the case of Sakae sushi. For the demand side, this depends very much on our investment environment. For now, Singapore still has competitive edge due to its connectivity and system integrity, but these are easily replaced by a hungrier competitor. It is also becoming increasingly difficult to run a business here, where land is scarce, raw materials are scarce, and now manpower will become more scarce. If we fail to keep demand for labour strong, even if we tighten supply, wages will still fall.
(2) Labour Productivity
In a rather direct manner, labour productivity increase does raise the value of labour to employer, therefore justifying higher wages. But even with productivity, and added value, if businesses’ bargaining position is strong and labour weak, business creams off the value. Or in Singapore, a common scenario is that the landlord creams it off eventually by raising the rentals.
To prevent this, I applaud the Government’s ingenuity in creating the Continuing Education and Training (CET) framework which sets basic skills standards for industries. By requiring skills for jobs, this limits the supply pool of labour, giving workers better bargaining position when negotiating for better wages. At the same time, this keeps Singapore competitive, keeping the demand for labour high.
(3) Labour-employer relations
In Singapore, we have a rather unique way of managing the bargaining powers between employer and worker, through what we call “tripartism”. Unions generally adopt the attitude that industrial actions will hurt Singapore’s economic competitiveness, and so should be avoided in the interest of keeping jobs. Bargaining rights are instead given through legislation, by signing of collective agreements with employers and requiring compulsory mediation/arbitration during disputes.
The advantage of this is that it gives workers a peaceful avenue to resolve grievances and negotiate for better employment terms. This works if labour always has something to negotiate with, and better productivity can be one of the bargaining chip. This is where, productivity improvements, either through better skills or raising the value per worker, will result in better wage.
The disadvantage is that workers’ interests may be compromised in the interest of upholding industrial peace. For e.g. in situations where productivity simply cannot improve unless the whole industry structure changes, the worker loses their bargaining chip. This is where, it is then important for the 3rd leg of the tripartite partnership – the Government – to step in to correct the industry structures.
So the way I see it, today’s debate over how to raise wages can be a little too simplistic without understanding how the pieces fit together. Whether Singapore workers can enjoy good wages depend on whether the various factors that affect bargaining positions of employers and workers are managed well. Industrial peace, tripartite cooperation, keeping our competitive edge, all plays an integral part.