SNEF on why minimum wage won’t work

Dear SNEF,

I refer to the 13 Oct 2010 Straits Times report of your arguments against the minimum wage law.

You said that Germany and other European nations achieved a narrow income gap without a minimum wage. But Germany and other European nations have very strong and independent labour movements that effectively secure good wages for workers. In other words, the labour movements set minimum wages for their respective industries through collective agreements. Also, Germany and other European nations have very generous welfare benefits that effectively act as a minimum wage. If an employer doesn’t pay more than what a jobless can obtain from welfare benefits, the jobless will simply have no incentive to take up the job.

The buying up of scarce resources such as land and properties by top income earners essentially causes these items to become even more scarce and even more expensive. The resulting inflation is in effect a ‘collapsing’ of real wages as things become more expensive even as nominal wages remain stagnant. Since minimum wage is well known for preventing the ‘collapsing’ of wages, nominal or real, it should therefore be useful to us.

The argument that jobs move abroad due to high wages only applies to manufacturing operations, not service sector jobs. While factories may move to China and still produce for the rest of the world, coffee shops, restaurants and supermarkets which primarily serve Singaporeans cannot move to China and still serve Singaporeans.

As far as the local service industry is concerned, it is not labour costs but rental costs that really soak up revenues. The inflation due to wage increase is nothing compared to inflation due to high rental costs.

The Jul 2009 Asian Wall Street Journal article basically refers to the negative employment effects on teenagers and welfare moms. Exclusions for these groups can always be built into the minimum wage law just like the exclusions on domestic helpers in Hong Kong’s minimum wage law.

Page 208 to Page 212 of the book ‘Management of Success: The Moulding of Singapore’ provide alternative explanations to Singapore’s recession in 1985/1986. The fall in international demand which affected the other East Asian dragons as well was one key reason. The fall in regional trade due to problems in Malaysia and Indonesia was another. Yet, high wages was singled out by the government perhaps to justify wage cutting measures which is quite often the de facto method with which we deal with recessions.

There were other explanations for the 1985/1986 recession – appreciation of the Singapore dollar and increased competition in petroleum refining and ship building from the Middle East. In fact, if we refer to Chart 5-1 on Page 31 of the book ‘Singapore – a Case Study in Rapid Development’, throughout the period from 1972 right up to 1982, productivity always exceeded real wages. Thus, there is no truth to the assertion that the high wage policy from 1979 to 1981 caused the recession of 1985/1986.

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