Sunday, January 16, 2011

The Government's Argument Against the Minimum Wage

Lately, there has been a bit of a fracas over whether or not to implement the minimum wage in Singapore (hint: it's not going to happen.)

I am neither for nor against the minimum wage in Singapore. I simply don't know enough to judge whether minimum wage is a good policy to adopt in Singapore.

What I am, however, much more interested in, is dissecting the government's motivations.

From the little that I know, I believe that it is fair to say that the strongest argument against minimum wage is what I shall term here the free market argument. Not coincidentally, it is also the argument that the government is fondest of promulgating.

What is the free market argument? It is that a minimum wage is a floor on the price of labor, and as such, it operates like any price control measure. Econ 101 tells us that if a price floor is below the market price, it has zero effect. When a price floor is above the market price however, it inevitably leads to surplus supply and dumping ("wine lakes" and "butter mountains"). It is the government's claim that distortions from intervening in the labor market will lead to low wage workers losing their jobs, and as such, the government should not implement a minimum wage.

The government's use of the free market argument is considerably weakened by the fact that the government, in fact, intervenes in the labor market ALL THE TIME.

It doesn't take a genius to observe that hordes of lowly paid, lowly skilled foreigners have been imported by the government over the last decade and a half. In an Econ class, that would be called shifting the supply curve to the right.

Tweaks to foreign worker levies, changes to CPF contribution rates, even massive propaganda promotional efforts to herd young people into industries earmarked for future investment and growth, every one of these is an intervention in the labor market. A darker and more sinister observation would be how unions have been systematically co-opted or dismantled since the early days of Singapore's history, with the whole unsavory process given a PR job, rebranded as a 'tripartite framework'.

The micromanagement of the labor market by the government belies its adherence to free market principles.

If they truly believed in free markets, I think they would more readily admit and correct the problems and distortions that have resulted from interventionist policies. These would include:

1. Years of neglect in investing in worker productivity.

2. An over-reliance on cheap foreign labor, which has meant a REDUCTION in our long term national competitiveness. Ceteris paribus, a preponderance of companies and industries that rely on cheap labor mean that much more competition for capital for hi tech and higher value-added companies that could have created higher quality jobs in years past.

3. Following on, a Catch-22 situation, where mis-allocation of capital due to the distortions of cheap foreign labor have resulted in companies that simply cannot survive should labor costs rise. The benefits of cheap labor to GDP growth are falling due to the law of diminishing returns, but if the cheap labor spigot is turned off, the economy will suffer proportionately.

4. Social and economic effects of a large foreigner population. These might include income inequality, a strain on public facilities and resources, the general sense of alienation the native population feels, etc. The list goes on.

The point here is not that intervention in the labor market is good or bad. The point is, for all their pretensions of subscribing to free market ideology, the government lacks the bona fides to claim the use of the free market argument against the minimum wage. Their track record is full of interventionist moves.

So, what's the real reason behind being so vociferous in opposing the minimum wage? The fear of low wage workers losing their jobs is just a cover. I think the real reason lies in point #3 I have highlighted above.

The economy has adapted structurally to an endless supply of cheap, not necessarily, foreign labor. The policy of encouraging cheap foreign immigrant labor is inherently twinned with NOT implementing the minimum wage. To implement something like a minimum wage is akin to cutting the economy off at the knees. There would be an inflationary impact throughout the economy from a domino effect.

The rapid economic growth in years past was assisted, if not directly caused, by massive imports of labor, together with the side effect of keeping local labor cheap. And what is a Singapore politician and civil servant worth if their KPI of economic growth is not being met? Certainly not their Current Estimated Potential.

The problem is that this strategy of cheap labor is starting to see its limits, particularly when we consider the global inflationary environment that is approaching. As inflation ramps up and the costs of other inputs rises, wage costs are going to constitute a smaller and smaller proportion of the total cost of doing business. As wages become less important, competing on wage cost becomes a less viable strategy.

More importantly, continuing with this strategy makes it harder and harder to turn from it. Leaning on a crutch all the time causes the muscles to atrophy. We had the opportunity to raise productivity in years past and in doing so, the wages of the low skilled worker. We ignored it in favor of continuing with cheap foreign labor. Like a country that has long subsidized petrol, we have failed to invest in fuel economy, and as result, every other car on the road is a gas guzzling SUV. In this case, every other company in our economy relies on cheap labor.

But I don't expect changes from our illustrious government officials anytime soon. As Upton Sinclair once said, "It is difficult to get a man to understand something when his salary depends on his not understanding it."


Gary said...

This should be used in every election rally by the opposition.

Chee Ken said...

This is an excellent post that systematically dissects the govt's motivations and exposes the weaknesses in its over-reliance on cheap foreign labour.