Subsidising wage rises good, Minimum Wage bad

In Economy, Political economy on 13/03/2013 at 6:40 am

As usual the grumblers are out on TRE, TOC and Facebook. The question they are bitching out loud is, “Why is the govt spending our money on subsidising wage increases?”. And asking, “What about introducing a Minimum Wage?”

I’ve this fantasy that when the govt introduces a Minimum Wage scheme, these same people who say that this scheme is bad for S’pore: which it is*.

Coming back to subsidised pay rises, other than to win votes from the many S’poreans who don’t belong to Team “Govt, PAP are bastards” or “PAP govt is always wrong” or “We always bitch against the PAP, govt”, there is a good economic reason for the govt subsidising wage rises.

Rising wages give employers an incentive to increase the return to recruiting and training, if they can no longer bring in FTs by the cattle-truck load to off-set rising wages for locals. At the same time, rising wages make it more attractive for older S’poreans to look for work, rather than go online and complain about everything, while making it more attractive for employers to drop their prejudices and discrimination against the elderly.

(Having said all that, there is an educated oldie at the Marine Parade polyclinic that I wish wasn’t working there.)

And given that the SMEs are screaming that the govt is killing them by cutting off the supply of FTS, how else to give S’poreans a wage rise, on top of CPF employer rate rises.

And better to spend our money on fellow S’poreans rather than giving it to our SWFs who will spend some of it on ang moh investment bankers who bring them lousy deals.

Post on Workfare:

*I wish all those MPs who talked cock about a Minimum Wage would read and I’m shocked that the PAP didn’t ensure that its MPs understood elementary economics. (BTW, the piece is entitled “The minimum wage- The law of demand is a bummer”)

Most relevant excerpt: There are conditions under which raising the minimum wage will increase demand, as well as economic efficiency. According to one story, monopsony conditions for low-wage labour, ie, imperfectly competitive labour-market conditions in which there is but a single buyer of low-wage labour (or a colluding band of buyers) that is able to set wages at a level workers have little choice but to accept. Good old Econ 101 shows that under such conditions, a bump in the minimum wage, within a certain range, can boost employment and enhance efficiency. So there’s that. And such conditions no doubt exist in some sectors at some places at some times. One famous, and egregiously misused, study suggests that monopsony-like conditions applied to fast-food restaurants in Pennsylvania and New Jersey in the mid-1990s. But there is basically no reason whatsoever to think that such conditions apply generally, across all sector and regions of the American labour market.

In the absence of special conditions, we have every reason to expect the law of demand to hold, such that raising the minimum wage will make it harder for inexperienced workers—workers whose output is worth less to employers than the mandated wage, and especially teenagers from low-income families looking to get a first footing in the labour market—to find work. And this is, in fact, what empirical studies tend to conclude. A comprehensive 2008 survey of the empirical literature from David Neumark, a professor of economics at the University of California, Irvine, and William Wascher, an economist for the Federal Reserve, found that, as one would expect, “[M]inimum wages reduce employment opportunities for less-skilled workers, especially those who are most directly affected by the minimum wage.”

Again, it doesn’t have to work this way. Employers can cut hours rather than hiring fewer workers. They can turn down the air-conditioner, strictly police the length of breaks, and otherwise reduce the cost of amenities previously enjoyed by employees. They can shift to off-the-books employees willing to work for less than the legally-mandated minimum. They can raise prices, passing on increased labour costs to consumers. It’s conceivable that the only consequence would be that a larger share of profits gets distributed to low-wage workers. Conceivable and exceedingly unlikely. In reality, we probably get small adjustments along each of these dimensions.

Of course, there is some newish empirical research contesting the disemployment effect of increases in the minimum wage, and then there is even newer research debunking it.

  1. Minimum Wage – The Good, the Bad and the Truth
    there are many points to discuss and should be discussed in parliament,but I observe some pro-PAP 61% likes to mix “Minimum Wage” with “Welfare State”,this is the yypical PAP eveil tactics of to mix thus confuse-it is EVIL.

  2. Didn’t the PAP ministers themselves applied ‘minimum wages’ for themselves???
    So in PAP’s own guidelines, paying minimum salary for ordinary workers is a very bad thing to do while it’s perfectly fine for PAP ministers to be paid with a minimum paycheck.

    This has always being the PAP’s style – good for PAP but no good for people in the street if it benefit them too much.

  3. […] – Breakfast Network: SMEs’ “Darwinian” feast – Thoughts of a Cynical Investor: Subsidising wage rises good, Minimum Wage bad […]

  4. Medium to large enterprise might pass the saving back to the worker, and the small enterprise will pass the saving to the boss for a new Merc

  5. CI

    Good article with thanks

    Different unlike most your regular commentators than towards one sided

    However, motice you drop out the conclusions as follows:-

    “Perhaps it’s wishful on my part to think, as I do, that most economically literate observers really do understand that raising the minimum wage will screw up the prospects of a fair number of poor young workers. Those who favour raising the minimum wage anyway just think that, all things considered, that’s a price we ought to be willing to pay. But they can’t say that, just as second-amendment enthusiasts can’t say that an occasional grim harvest of kindergartners is a price we ought to be willing to pay for the freedom to own guns. One of the most maddening things about political debate is that it’s rhetorical suicide to accept tragic trade-offs. So one must deny that there are trade-offs. It’s got to be all benefit, no cost. And that’s why we find so few willing to step forward and say, yes, “minimum wages pose a tradeoff of higher wages for some against job losses for others”, but let’s raise the minimum wage anyway, because, in the final analysis, the benefit to those who enjoy higher wages will be greater than the cost suffered by those put out of work, and this distribution of burdens and benefits is not too unfair to stomach.

    I dearly wish somebody would say this, because then we could go on to have a useful, meaty debate about the mix of policies most likely to succeed in helping low-wage workers. My sense is that we’d do best with no minimum wage, wage subsidies, and transfers to low-income households that phase out in a way that does not tax small increases in income at absurdly punitive rates. As it is, we’re left wasting our time debating the minutiae of conditions under which we can expect stones to float.”

    Which basically fits with the present government schemes.


    • Too US centric for one. And I think that most of the S’pore callers don’t know the arguments for and against. Their attitude is MW is everywhere, except S’pore. Govt wants to screw S’poreans
      QED; MW is gd for s’poreans

  6. Without going into the various links in the economist blog post, the post itself doesn’t actually explain why wage subsidies are better.

    And if we talk about elementary economics, aren’t subsidies a form of protectionism that is frowned upon?

    I’m not trying to argue for or against MW, but I feel that every article out there can be guilty of being a little one-sided and we should never draw conclusions from one simply because it reinforces our view.

  7. Here are my 2 cents…

    Singapore once again has a “unique” situation (surprise!). When you import foreign workers and its (low) wages by the truckload, you are artificially lowering wages for all local workers.

    Minimum wage and government wage credit are two options. Either option must address an acceptable pay level for lowest paid workers, or the so called “living wages.” Another tool to maintain local wage is to levy foreign workers.

    That said, the government should consider reducing the CPF contributions by workers. Now magically workers get pay raises and higher combined CPF contributions. This is as good as have your cake and eat it too! It will even “buy” votes for the PAPies.

    • Nice to see you have evolved into thinking critic of PAP from you know what )))

      • Sorry, I’m no fan of any particular political party. LKY was the right person for Singapore in the 60s and 70s. LHL in 10s? NO WAY.

  8. Xmen

    Good ideas.
    I would like to see higher cash component on the Workfare.
    Although your comment on the political support etc methinks will not affect those who vote strategically or even independent ones which depends on candidates and party.

    I would focus more on businesses especially the larger ones to put the screws on in terms of foreign/local ratios and increased carrots for productivity initiatives.

    For startups possibly slightly more liberal foreign/local for 1st 3 years but after that play by the same rules.

    • Onion –

      Just remember that the government (civil service, Temasek, GIC etc) is the biggest employer in town when you suggest to put the screws on…

      There are many better ways to incentivize startups, for example, tax holidays. Singapore is actually quite good at attracting foreign investment. So it’s a matter of priority for the government.

  9. Xmen

    The biggest employers basically has nothing to fear as majority do not have foreign/local ratio issues especially most TLC or GLC type or civil service except for those in certain industries eg shipbuilding.
    The ones most concerned would be the banks for certain departments and some of the MNCs

    For startups, yes, they have tax holidays but unfortunately they still need people to carry out tasks/build up especially marketing side.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: