Progressive Wage: The debate continues…

 

This article has been contributed by Ed C, a double degree student in Economics and Finance. Ed is currently writing his thesis.

 

I refer to the AsiaOne article “Minimum wage debate will go on” (Jan 28th 2014) by Han Fook Kwang. (http://business.asiaone.com/news/minimum-wage-debate-will-go)

I would agree the implementation of a minimum wage, as part of a larger package in the Progressive Wage Model, for the cleaning industry may be indication of change in our government’s policy stance.

1.) Out of the NTUC and Government quarters, there has not been a serious public discourse regarding this issue

2.) It is very difficult for the government to explore nuances in policies because the minimum wage is not a blunt tool.

The government’s adamant stance against the minimum wage makes it difficult for people to see past the false dichotomy of a national minimum wage and a free market where actually there exist many shades of grey in between. Take for example sectoral minimum wage and implicit minimum wage in the form of mandated welfare like working hours, medical coverage etc.

Han’s article recognizes sectoral minimum wage as a first step away from a free labour market, the academic arguments it raised falls into the trap of a false dichotomy.

1) Han stated that the debate over minimum wage vs income supplement (WorkFare) is academically inconclusive.

Fact:
A) While he has shown in his subsequent (flawed) examples that the debate on the minimum wage is inconclusive, Han had not addressed the income supplement scheme at all.

Yes the debate on the minimum wage is global in nature but no one else is really talking about the income supplement scheme.

B) To first address his flawed argument on the minimum wage,

i) The theoretical debate is in fact conclusive: the minimum wage is a negative sum game which transfers economic surplus from employers to employees while destroying value for the marginal low skilled employee who would become unemployed due to his/her ability to command the minimum wage.

It is only in the case of a monopsony (non-discriminating) where the the minimum wage can be applied as a policy instrument to correct market failure due to a monopsony’s incentive to intentionally reduce labour demand to bid down wages. So the theoretical debate is actually supportive of a sectoral minimum wage scheme.

To broadly weigh the minimum wage against the free market is to fall into the trap of a false dichotomy.

ii) The empirical debate is contentious. Han quoted Paul Krugman on this matter but I think it is unfair for him to quote Krugman without understanding how Krugman came to his conclusion.

The classic literature on the non-existence of the unemployment effect is David Card’s paper which compares fast food restaurants in Pennsylvania to fast food restaurants in New Jersey after New Jersey raised its minimum wage from $4.25 to $5.05/hr.

This paper is fraught with caveats.

Firstly it does not clearly address the fundamental question of whether fast food restaurants act like monopsonies in the market for low wage workers.

Secondly it did not consider whether or not the minimum wage stifled growth of fast food restaurants in Jew Jersey and neither did it consider the possibility of interstate migration which is possible in US but would not be possible in Singapore.

While Paul Krugman won the Noble prize due to his contributions in the field of international trade, he is by no means right on all economic issues.

C.) The income supplement scheme is in fact a negative tax which subsidizes both companies and low wage workers and is theoretically proven to increase employment, so there is actually no debate over the benefits of the income supplement scheme.

The main drawback to the income supplement scheme is the fiscal burden which it places on the government which makes it unattractive to many governments of developed economies.

It important to weigh the two sets of policies in terms of their impact on the various stakeholders in our country. This may be a long shot, but Singaporeans need to start conversations about the policy mix most suitable based on the conditions of our country.

The introduction of the minimum wage component in the Progressive Wage Model to the cleaning sector, in conjunction with existing policy of workfare, would transfer part of the burden of subsidizing cleaners from the government to companies.

I personally believe the government should start by admitting that the minimum wage is a plausible policy before slowly engaging the public regarding what is the best policy mix for Singapore.

I also believe that the government can start by looking into concentrated industries hiring people with very specific skills to explore possibility of monopsonies.

Singapore is still fundamentally a relatively free economy where labour can easily move in and out so monopsonies are not likely to be common making a national minimum wage unfeasible,

And finally let us not lose sight that welfare of employees are not solely determined by wages but also by their enjoyment at work, working conditions, hours and learning opportunities so even while we debate over the minimum wage we should not lose sight of things contributing to what I might call the implicit wage rate.

(Editor: The Progressive Wage Model does not just consist of a base wage pay, it also requires the employer to develop a wage ladder for the employee. This must be done via career progression so that the low wage worker does not stay a low wage worker. The Progressive Wage Model was aggressively pushed by the NTUC for many years before being implemented by the government)

 

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