Commentary: Singapore’s poorest earners will benefit from expansion of Progressive Wage Model but some conditions must be met
These include a reduction in low-wage foreign labour, a continuation of wage subsidies and expanded social protections, say Linda Lim and Irene YH Ng.
SINGAPORE: It is past time to raise the wages of Singapore’s low-wage workers and the productivity of the labour-intensive sectors where they toil.
The Progressive Wage Model (PWM), through which the Government has chosen to do this, has so far proved too little, too late.
First introduced eight years ago, PWM covers only three sectors — cleaning, security and landscaping, which combined account for 15 per cent of low-wage workers, defined as the bottom 20 percent of income earners.
LIMITS OF A LIMITED PWM
One likely reason for the slow and incomplete implementation of PWM is its complex structure, requiring tripartite consultation and negotiation.
As a result, while wages of workers in low-wage sectors have risen in the last few years, their absolute and relative wages continue to be significantly lower here than in other rich countries, even those with lower per capita incomes and lower rates of GDP growth.
For example, Lien Foundation’s 2018 Long-Term Care Manpower Study noted that nursing aides and healthcare assistants in Singapore earned the lowest among peer economies of Australia, Hong Kong, Japan and South Korea. In 2013, average earnings in accommodation and food services in Singapore were less than half of those in the Netherlands and just a quarter of those in Sweden and Denmark.
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More generally, low-pay incidence, defined as two-thirds of the median wage, is estimated to be almost twice as high in Singapore as in all OECD economies, at 30 per cent in 2017.
Extension of the PWM to more sectors recently announced by Deputy Prime Minister and Finance Minister Heng Swee Keat is welcome but lacks a timeline and other concrete details. The taskforce to look into ways to improve the pay of low-income workers should act swiftly so that low-income pay can catch up with professional salaries.
Since 2012, when PWM was first introduced, the average annual increase in salaries of the three lowest-paid occupational categories of service and sales workers, plant and machine operators, and cleaners, labourers and related workers, was 3.4 per cent.
This trails the 3.9 percent average annual wage growth of the highest earning occupational categories of managers and administrators, working proprietors, professionals, and associate professionals and technicians.
AN EXPANDED PWM AND RESTRUCTURING FOR HIGHER WAGES
After cleaning, security and landscaping, which PWM covers, the next lowest wages are found in labour-intensive and foreign-labour-dependent sectors such as retail, F&B and non-therapeutic health and personal care. These jobs are mostly in the service and sales occupation group, which faced the lowest wage growth in the past decade.
Yet, jobs in these sectors provide essential services which have social value, as pointed out by economist and former Nominated Member of Parliament Walter Theseira, and low pay could undermine Singapore’s resilience to economic shocks and cycles.
These service sector jobs also have the greatest potential for upskilling, technology application and other productivity improvements commonplace in advanced economies.
With COVID-19, they may shrink the most as consumer habits change, for example to online shopping, food delivery and home entertainment, as people eat and work more at home.
The Government’s plan to expand PWM is therefore timely, and should be enacted sooner rather than later, with the broadest sectoral coverage. As DPM Heng notes, “COVID-19 has highlighted why it is critical, for long-term survival, for firms to be more manpower-lean, productive, and have jobs that are attractive to our locals”.
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To facilitate this process while ensuring that citizens’ livelihoods are protected as much as possible from pandemic disruption, other rich countries find directly subsidising individuals, where households benefit immediately, is more efficient and effective than subsidising businesses.
This also mitigates the risk of businesses becoming “zombie companies”, unable to survive without subsidies yet hanging on to scarce manpower more productively deployed elsewhere or in new sectors that emerge or expand in post-pandemic structural transformation.
This restructuring will weed out weaker businesses, especially those unable or unwilling to invest in raising productivity, allowing workers to relocate to more productive and hence higher-wage enterprises. Labour becomes a smaller share of total production costs, as expected in an affluent, capital-rich but labour-scarce advanced economy.
The PWM has so far been implemented alongside wage credits to firms and other support to help companies transform.
Research by one of us found that the PWM did compel productivity enhancement in the organisations studied, with one manager sharing that until it was legislated, companies continued to pay low wages despite years of government exhortation to train staff and raise wages.
Thus, the PWM can spur the process of transformation, without waiting until other processes are ready. Its expansion has become urgent given the continued lag in low-skilled wages and the necessity and opportunity that COVID-19 provides to reassess business structures and societal priorities.
Some targeted business subsidies will be required to help viable businesses survive the recession. Here the intent should be to preserve a vibrant pool of small and medium-sized enterprises (SMEs), and avoid the decimation of small businesses caused by skewed incentives.
In the US, the pandemic has fueled industry concentration, as larger businesses command the lion’s share of government subsidies.
This has caused concern as SMEs, which include start-ups, are the major source of employment and innovation, as well as an important channel of upward mobility, and preserver of market competition.
In Singapore, 90 per cent of firms are SMEs employing 70 per cent of the workforce. They provide the added benefit of ensuring that indigenous capabilities and jobs are retained even if global businesses relocate due to their own shifting internal corporate priorities.
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MAKING PWM WORK: COMPLEMENTARY POLICIES
Structural transformation should ultimately benefit the people employed in companies. For PWM to work as intended, complementary policies are also required, chiefly a reduction in the supply of low-wage foreign labour, a continuation of wage and income subsidies such as Workfare Income Supplement, expanded social protections for the elderly and stronger protection of work conditions.
These have been gradually strengthened in the past few years, and are all the more crucial with COVID-19 potentially leading to deterioration of wages and job conditions.
Foreign worker policy, for one, must continue to reduce reliance on migrant workers, since a main reason for Singapore’s underperformance in raising productivity and wages for low-income workers is “cheap sourcing”, or the ease with which businesses can import large numbers of temporary workers from labour-abundant low-income countries,
Since PWM applies only to Singaporeans and permanent residents, it may have the perverse impact of increasing employers’ preference for hiring foreign workers, especially since they can be selected for age, skill, physical strength, endurance and other personal qualities that can yield higher productivity at a lower wage than elderly Singaporeans in the same labour pool who will now cost more.
Thus twinning PWM with reduced foreign worker quotas is essential. The current dependency ratio ceilings of 38 per cent in services (falling to 35 per cent in January 2021), 60 per cent in manufacturing, and higher in other sectors such as construction and processes, need to be decreased.
At the same time, the strengthening of social protection through programmes such as Silver Support will cushion any displacement effects on elderly workers. Low-income elderly whose lifetime wages have been depressed should be supported by society, and not forced to work for survival under poor conditions.
Strengthening and enforcing employment protections must also accompany the expansion of PWM. If not, businesses might seek to meet the mandate by cutting labour costs through other means.
For example, as research by one of us shows, they might cut benefits or increase the hours required for a PWM monthly wage, so that hourly labour costs remain low even as monthly wages increase. They can also change staff to contract, self-employed, part-time or casual status.
Overall, for PWM to be effective in raising wages and productivity, while minimising distortionary labour market effects, it should be rolled out more quickly, across more, if not all, sectors, and enforcement tightened to ensure that employers are indeed investing in productivity-enhancing measures.
Extension to cover foreign as well as Singaporean workers is economically desirable, but probably politically unlikely.
The more successful PWM and reduced foreign labour are in raising productivity and market wages, the fewer the subsidies (including for housing, healthcare and retirement support) the Government and taxpayers will have to shell out through fiscal transfers to shore up the living standards of the poor.
ADDRESSING CONCERNS OVER INFLATION
Higher wages need not translate into higher consumer prices, especially with technology application and improved management, if productivity increases as PWM intends and there are wage floors.
Wages, especially of low-wage workers, are only one, usually minor, component of total costs, which also include rents, profits and taxes.
Commercial rental costs make up the lion’s share of costs for many companies in Singapore. Their fall due to COVID-19 should partly offset rising wage costs, as would lower profit margins as business competition intensifies in the post-pandemic era.
The Government can act to dampen any consumer price increase by reducing or delaying tax increases like GST, or handing out aid to low-income families through the U-Save vouchers.
It can also introduce competition policy and fair trading or consumer protection rules to prevent businesses with large market shares from exercising monopolistic pricing power — a key reason for high prices.
PWM wage rates are still below those in other high-income global cities for similar jobs, so increases should be affordable for the 75 to 80 per cent of consumers who are not low-income, while enabling the lowest-income 20 to 25 per cent to better maintain basic consumption standards. Any consumer price inflation would be a fraction of the wage increase, as studies in the US on raising minimum wages have shown.
With our per capita income level among the world’s richest people, Singaporeans should be able and willing to pay the prices that global companies and their international employees based here are accustomed to elsewhere, where minimum wages much higher than our PWM levels exist.
The lifestyles of the more fortunate among us should not be subsidised by the low wages of other compatriots.
And as an advanced economy, we should compete on the basis of productivity and innovation, not low labour costs that impoverish our fellow citizens.
Linda Lim is Professor Emerita of Corporate Strategy and International Business at the Stephen M Ross School of Business at the University of Michigan. Irene YH Ng is Associate Professor of Social Work and Director of the Social Service Research Centre at the National University of Singapore.