Growing wage disparity is sign of economic mismanagement on part of govt

02 July 2008

According to the Manpower Ministry’s annual report on wages released on Monday, wages for 2007 rose by 5.9%, compared to a 4.5% rise in 2006.

On the surface, it sounds like great news. However if you take into account inflation, real wages rose only by 3.8% in 2007. Inflation eroded a full 2 percentage points of wage gains.

The situation, in my opinion, might be even more bleak for 2008, given that inflation started off on a very strong 6% clip in January and has risen to as high as 7.5%. Inflation will surely destroy much of the gains in wages for 2008, leaving Singaporeans with less purchasing power.

Much of the inflation we experience is imported from overseas, in the form of escalating commodity and agricultural products prices. However, a significant part of the inflation is domestically generated. Ill-timed policies such as the GST hike to 7% last year as well as the plethora of transport fare hikes, and increase in educational fees and medical costs, have only compounded the already dire inflationary environment.

The decline in labour productivity is also a contributing factor to the inflationary environment. According to the Manpower Ministry’s report, labour productivity fell 0.9% in 2007 after experiencing slowing growth in the previous two years. Declining labour productivity contributes to domestic inflation because companies are paying more in wages for the same unit of value created or service rendered.

Inflation hits the poor and lower income groups the hardest because they spend the largest proportion of their disposable income on basic necessities and have less leeway in terms of cutting back their expenses. Government budget handouts have not necessarily helped the poor alleviate their financial burden because a significant part of the handout is paid into the Medisave account and Post-Secondary Education Account (PSEA), rendering them unavailable for day-to-day usage.

According to the Manpower Ministry’s report, the lowest-paid group of cleaners, labourers and related workers have seen their wages remain stagnant for the past 10 years, which means in inflation-adjusted terms, their real wages have in fact declined. Cleaners, food and drink stall assistants as well as labourers are currently paid around $750 to $800 per month.

Managers — the best-paid group — earned an overall 4.86 times more than cleaners and labourers. The gap has widened in 10 years. It was 4.13 times in 1997, at the start of the Asian Financial Crisis.

The growing wage disparity between the low income group and the upper echelons is not just an inevitable result of globalization and an open economy. In Singapore, the growing wage disparity has been exacerbated by poor government policies which have encouraged companies to hire cheap foreign workers rather than invest in the retraining and upgrading of local workers. It is this “race to the bottom” that has also resulting in declining labour productivity, which in turn has made our economy more and more uncompetitive and further compounded the domestic inflation problem.

In summary, government policies have compounded the high inflationary scenario, encouraged the hiring of cheap foreigners at the expense of locals, and resulted in declining labour productivity and the worsening of the wage disparity between the lower and higher income groups.

These are my suggestions on what can be done:

• Remove GST on essential items and food.
• Enact more aggressive policies that encourage the retraining and rehiring of locals, and which discourage the hiring of foreigners just based on low cost.
• Disburse more of the budget handout in the form of cash, not CPF contributions.