Wage Shock: Part 1

Budget 2013


Low Wage Workers

In this two-part series, I would like to explore the recent proposals made by the esteemed Professor Lim Chong Yah, former Chairman of the National Wage Council (from 1972 to 2001), and the wage shock therapies associated with him.  First, I would like to look at the economic backdrop of the 1970s and the 1980s and assess why wage shock therapy back then was the right thing to do. Next, we fast forward into the present day, appreciate the state of the Singapore economy, and study Professor Lim’s ideas for the ability to (i) solve the income gap as he intended to, and (ii) whether they prove to be a viable path for Singapore’s next phase of economic growth.

Part 1: The Economic Landscape of the 1970s and 1980s – At Home and Abroad

Singapore’s industrialisation drive in the 1960s and into the early 1970s saw many put to work with the establishment of textile and garment factories, alongside many other labour-intensive sectors. Singapore then had three industrial sectors: petroleum refining using crude oil, shipbuilding and ship repair, and electronics. We were, back then, a “low-wage manufacturing base”.

Externally, the global economy experienced two severe oil shocks, the first in 1973 and the second in 1979. These two oil shocks derailed economic growth in many countries across the globe. Singapore, survived relatively unscathed. In fact, Singapore managed to achieve an average of 8.7 per cent growth between 1973 and 1979 .

So why did Professor Lim’s wage shock therapy work from 1979 to 1981?

According to Prime Minister Lee Hsien Loong, wages in the 1970s were restrained by the NWC and therefore there was ample room for wages to increase. With rising wages, Gross Domestic Product (GDP) grew as well. From 1979 to 1983, real GDP grew at 9.2 per cent per annum .
But the economic engine halted in the mid-1980s as Singapore experienced its worst economic recession. The Government attributed partial cause of the recession to the wage shock therapy that was pursued. Wage growth outstripped productivity growth and this was not tenable . High wages, if unjustified, blunts competitiveness.

This is not to say that we should not improve wages at all. Genuine wage growth must be achieved and sustained by genuine improvements in productivity. On the one hand, employers and investors will know that they are getting their money’s worth by paying higher wages because the worker is more productive. On the other, the worker can be at ease knowing that he will not be easily replaced by cheaper labour because he commands value through his skills productivity. As such, it was additionally painful when the recession hit in the mid-1980s due to the high number of layoffs and consequently, in order to find employment again, workers had to settle for lower wages. The readjustment was just as painful – workers had to accept wage freezes and cuts in employers’ CPF contribution rates from 25% to 10% . The lesson learnt was thus: wages cannot be increased without justification, otherwise artificial inflation would only lead workers onto a deluded path and a destination of agony.

This was a broad overview of what transpired in Singapore’s economic history during the 1970s and the 1980s, highlighting only the relevant portions to our discussion on wage shock therapy. We now turn to the dissonance between the opinions of Professor Lim and the Government, which I think is important: if a wage shock could potentially cause a recession, this would have serious consequences for Singaporeans. In the second part, we fast forward to 2012 and assess the current state of the economy in relation to Professor Lim’s ideas.

 …to be continued…

  1. i’ve an analogy for the wage freeze: if you can score 100 marks for an exam, but your teacher says you can only score 80 even if you score 100, will you be tulan? YES OF COURSE WILL TULANS!
    So it’s the same for wage freeze, you won’t be too happy if your wages are frozen when you can actually earn more. What is imperative is that we try to get everyone to score better, ie to earn better wages that’s better for all of us.

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