Proponents of a minimum wage argue that it will help uplift low-wage workers and reduce
income inequality. Its opponents maintain that it will displace low-wage workers and
create more unemployment. I think both the benefits and costs are somewhat overstated
and that we might want to seriously study a modest minimum wage. It is not a straightforward issue.
I have changed my mind, my view of the minimum wage three times over the last 35 years:
from no to yes; then to no again; and now yes. Let me explain. There is now a large body
of empirical evidence across countries that finds zero or minimal adverse effects on employment
from an increase in the minimum wage. In a recent wide-ranging survey of the empirical literature
the British economist Alan Manning describes the employment effect of minimum wages
as elusive or hard to find. The increase in the wage bill arising from a minimum wage is
mostly passed through to higher prices and partly absorbed in profit margins;
and this varies across sectors and industries. I mean, there's no free lunch.
A different way to pose the question might be this instead of asking whether
we should have a minimum wage, why not ask at what level might we set it at?
Years ago, I asked an economist from the Asian Development Bank
if a minimum wage was a good idea and he said, and I quote, "it depends on where you set it.
So let us imagine a minimum wage of say $1,200 per month. The key question then is:
what are the likely effects on wages, employment and prices in different industries?
What is the wage distribution of workers earning below $1,200 level? If most of them are bunched
close to $1,200, there is a good chance the positive wage effect of pushing them above
could be sizeable while the negative employment effect is trivial. But if most of these workers
are well below two hundred dollars there is a chance that many of them may become
unemployed. Then the question is: is there scope to move them to other jobs?
I should add though, that the benefits of a minimum wage should not be exaggerated.
Some well-meaning proponents of the minimum wage in Singapore view it as
a means to reduce income inequality. I do not think that a minimum wage
at the kinds of levels that are being talked about will make a discernible dent in income inequality.
If we do have a minimum wage, we must be clear of its rationale. It is to help lift the wages of
those at the bottom of the income distribution. A minimum wage also signifies a societal value
that no one should be paid less than this amount for his or her labor.
It is not unlike setting minimum standards for workplace safety and humane conditions of work.
For raising the wage prospects of the majority of our low-wage workers, the sector-based progressive
wage model is more effective than a national minimum wage. Why then have a minimum wage?
Well, it is not clear whether the progressive wage model can be extended to all occupations
below the 30th percentile, how long will it take, and whether it will work as well.
The minimum wage and progressive wage need not be alternatives;
they could be complements. Now, if a national minimum wage is seen as too big a step
we could more decisively use the Local Qualifying Salary or LQS as a de facto minimum wage.
This is how it works: firms that bring in foreign workers are subject to a Dependency Ratio Ceiling
or DRC that sets a limit on the number of foreign workers they can bring in relative to their
resident workers. the DRC in the service sector is 35. In other words, up to 35 percent of the firm's
total workforce can be foreign workers. The LQS is the minimum wage that must be paid to resident
workers, so that these resident workers can count towards the firm's total workforce for purposes
of computing the number of foreign workers the firm can employ within the DRC ceiling.
The LQS is currently $1,400 for the last few years. It has been going up by $100 every year.
We could continue doing so or we could even step up the increases.
One drawback of using the LQS as a de-facto a minimum wage is that firms that are not yet
hitting their Dependency Ratio Ceiling would not need to pay the marginal resident worker the LQS.
But as long as these firms need to hire foreigners at all,
they would still have to pay some of their locals the LQS, and it would make sense for
them to extend this wage to the other locals doing the same job for the sake of parity.
For any form of minimum wage to work we would need to simultaneously raise the price of foreign
workers relative to locals. Well, one way to do it is to raise the foreign worker levies,
but the levy increase could simply be passed down to the foreign worker
in terms of wage reductions leading to a reduction in labor quality.
So these are not straightforward issues; they need careful study.