154th ST 15 May 2010
Singapore has grown rapidly in the past four decades, achieving First World status in terms of economic growth. But wage levels seem to be lagging behind. Insight finds out why.
THE recession is over but bosses may not be heaving a sigh of relief. A new challenge is looming: rising wage bills.
From June, bosses will no longer enjoy any wage subsidy from the Jobs Credit scheme.
From July, they will have to fork out a higher levy for foreign workers, or pay more to hire local workers as the inflow of foreigners starts to slow.
From September, they will have to put in a higher contribution to their workers' Central Provident Fund (CPF) accounts.
And if that does not pack enough of a whammy, they also have to heed the national call to boost productivity and pay packages.
Poor employers, some would say, as they seem to be under attack on several fronts to raise wages.
But think of it the other way: Could it be payback time?
For years, companies have creamed off a larger share of economic gains - larger than those in other developed countries or industrialising economies in Asia.
As a result, workers get a slice of Singapore's gross domestic product (GDP) that is considered unusually small compared with their counterparts' share in those countries.
Workers' wages account for less than half of Singapore's GDP. In contrast, wages take up more than half of GDP in developed countries.
This means that Singapore may have achieved one of the highest per capita GDPs - at $51,656 last year - but the superlative showing may not reflect the wealth of workers or benefit them as much.
It has led some analysts to wonder if Singapore is a First World economy with what is closer to a Third World wage structure.
'Factually, our wage levels are much higher than Third World (economies'). Otherwise, so many foreign workers would not be flooding into Singapore,' notes economist Manu Bhaskaran from Centennial Asia Advisors.
'The problem is not our wage levels, which are reasonably high, but whether they are commensurate with our per capita GDP level.'
So are wage levels keeping pace with economic growth? Or is Singapore's low wage share of GDP an indication that workers have been losing out?
Higher profit share
THE issue of Singapore's low wage share has surfaced time and again.
In 2000, a paper by the Singapore Statistics Department highlighted this anomaly, noting that it could be due in part to conscious efforts by the Government to moderate wage increases and maintain high returns to investment largely from multinational companies.
The GDP is split three ways: One share is paid out in wages, another to companies as profits, and lastly, to the Government as taxes.
In 1980, the wage share was a low 38 per cent, climbing to a peak of 48 per cent in 1985, due to high wage policies during that high-growth period.
But recession hit in the mid-1980s, and the high wage policies were seen as adding to the severity of the situation as they eroded the profitability of companies.
Since then, the wage share has moderated to an average of 43 per cent to ensure a competitive wage structure.
It is, however, not on a par with that in other countries with similar GDP rates.
In 2000, Singapore's wage share was 42 per cent, lower than the United States' (58 per cent), Japan's (57 per cent) and France's (52 per cent), according to the paper by the Statistics Department.
In contrast, Singapore's profit share was 48 per cent, higher than these countries', which were closer to 35 per cent.
In fact, countries such as South Korea, New Zealand and Spain have a higher wage share than Singapore even though they have lower per capita GDP.
'These observations suggest that Singapore has First World per capita income but a Third World cost or productive structure,' the paper stated.
But it is not necessarily bad, the paper went on to explain, adding: 'As the economy matures, and wages and per capita income increase, the tendency is for the remuneration share of GDP to rise.'
Yet, a decade later, the wage share has not risen much. At last count, it was 44.9 per cent in 2008.
In March last year, economist Linda Lim said Singapore's economic growth model has tried to 'do too much, and achieved too little' in delivering returns for Singaporeans, relative to foreign firms and foreigners.
She cited the low wage share (41 per cent in 2007) and high share of profits, interest and dividends (more than 50 per cent). Foreign share of domestic production and income has also increased.
Similarly, a survey by Swiss bank UBS on prices and earnings last year showed a sobering picture for Singapore workers.
On a list of 73 cities, Singapore is the 24th most expensive city - moving up eight spots from the previous survey in 2006. It is costlier than Chicago, Hong Kong and Sydney.
But when it comes to wage levels, Singapore slipped two notches to 40th position. It is just one rung above Moscow, which is way down the 'expensive cities' list at No. 56 - or 32 places below Singapore.
With prices rising more than wages, Singapore workers cannot afford to buy as much as people in many other cities.
Purchasing power in Singapore declined 10 spots to 50th place, behind cities like Bratislava in Slovakia, Johannesburg in South Africa and Kuala Lumpur in Malaysia.
While some observers question the accuracy of such comparative studies, one inescapable conclusion is that wage increases have not been on a par with economic growth.
What accounts for this phenomenon?
IT GOES back to the issue of low wage share - for two main reasons.
One, the dominance of foreign multinationals, which are likely to repatriate a large proportion of their profit rather than distribute it back to workers as wages, Citigroup economist Kit Wei Zheng noted in a paper last November.
He pointed out that the Economic Survey of Singapore in the first quarter of 2004 made the same point.
'The success of Singapore's efforts to attract foreign investments meant that foreign investors also earned a larger proportion of the returns to capital in Singapore...Partly reflecting this, the growth in personal disposable incomes, from which households could finance their consumption, was lower than GDP growth in Singapore.'
Two, an increase in the number of lower-skilled jobs created over the last decade, many of which are filled by foreign workers who depress the wages of the bottom fifth of workers here, says labour economist Hui Weng Tat from the Lee Kuan Yew School of Public Policy.
Both trends are worrying.
As Mr Bhaskaran puts it: 'It is certainly a cause for concern since the point of economic growth is to improve the welfare of the people.
'So if the rise in GDP is increasingly going to companies rather than individuals and most of the profits go to foreign companies, the welfare improvement from economic growth in Singapore is not as great as it might have been.'
Yet, some labour economists such as Professor Hoon Hian Teck have a different outlook.
'It would be misleading to suggest that because Singapore's wage share is low, its workers' wages are stagnant despite economic growth,' says the Singapore Management University professor.
'Basically, the idea is that even if the wage share is comparatively small, workers as a whole can still benefit enormously from growth because the size of the national pie is growing strong.'
National University of Singapore economist Shandre Thangavelu also notes that wages here remain very competitive.
He cites international data which shows that the average hourly pay in Singapore was consistently higher in the past decade than that in Taiwan, South Korea, Hong Kong, and Asean and Latin American countries.
Widening wage gap
BUT whatever the difference in views, there is consensus on one issue: How the gains of growth are spread among the different groups of workers is critical.
In this regard, low-skilled workers tend to get the short end of the stick compared with their higher-skilled peers, as their wages have stagnated while salaries of the rest have improved over the years.
For instance, the median monthly wage of cleaners and labourers was $1,270 in 2008, lower than the $1,389 in 1998. They were the only group of workers whose wages did not progress, according to the Manpower Ministry's report on wages last year.
The result is a widening wage gap between occupations at the top (managers) and bottom (cleaners and labourers). Those at the top earned four times more than those at the bottom in 1998; this grew to 5.12 times in 2008.
This means the low-skilled workers 'have a less than equal share in the fruits of rapid economic growth', notes Associate Professor Hui.
Associate Professor Shandre adds: 'Income distribution is a key concern and this might be driven by economic shocks as skilled workers are better equipped to ride the business cycles as compared to the unskilled.
'As industries restructure to higher value-added activities after each business cycle, the demand and wages for skilled workers increase.
'It is likely that we will see some vulnerable groups that might not be able to keep up with structural changes in the economy, and thus we need more social welfare to help them.'
Other developed countries have also not been spared the spectre of a growing income gap, with wages rising rapidly for the top 10 per cent - especially the top 1 per cent - at a much faster pace than for the rest.
Part of the explanation again leads back to how the profit share of GDP has risen at the expense of wages, as some top earners such as business owners also reap a bigger proportion of profits.
According to the Bank for International Settlements, wages as a share of national income in the Group of 10 countries - the US, Japan, Germany, the United Kingdom, France, Italy, Canada, the Netherlands, Belgium, Sweden and Switzerland - declined from 63 per cent in 1980 to less than 59 per cent in 2006.
In the meantime, the profit share of GDP in these countries increased from around 11 per cent to more than 15 per cent in the same period.
This shift is due in part to the massive surge of workers from developing countries such as China and India into the global market, which has weakened the bargaining position of workers in the advanced economies.
Does the solution for more even growth distribution lie in increasing the wage share of GDP, to tilt the balance in favour of all workers, including the low-income earners?
THE reactions are mixed.
Yes, says Assoc Prof Hui, as this will ensure better returns to workers.
'But given our resource limitations and the need to maintain cost competitiveness, we should aim for a moderate increase in wage share but not to the level of those such as the US,' he notes.
Not quite, says Prof Hoon.
'It does not appear to me to be helpful to think of attaining a given wage share of GDP to be the right target to focus on.
'What should be a matter of focus is to generate an environment for productivity to grow because both wage gains and boost to business profits can occur even if the wage share of GDP is constant.'
But all agree that attention ought to be paid to increasing the wages of low-income workers through skills training, the creation of better-quality jobs, and the transferring of income to the poor through employment subsidy schemes like the Workfare Income Supplement (WIS).
Indeed, the Government has promised to pay special attention to low-wage workers as it aims for inclusive growth, by enhancing WIS payments and adding training to the scheme.
It has also made increasing productivity a key priority over the next few years - a new growth model for Singapore, which used to rely more on importing foreign workers to expand the economy.
As a result, it has raised the foreign worker levy and pledged to slow the inflow of foreign workers into Singapore.
Will all these work to ensure Singapore's wage levels measure up to its First World economy status?
It would go some way towards increasing workers' wages, but whether pay packages will be commensurate with growth figures depends on how Singapore innovates and transforms its economy.
Mr Bhaskaran concludes: 'Whether we are a First World economy depends not just on our wage levels but on a whole array of other factors.
'Do we really have the inherent capacity to create, innovate, produce and drive our economic destiny that smaller, developed countries such as Sweden, Finland or the Netherlands have? When we have that inherent capacity, then we can say we are First World.'
Source: SG, First World country, but third World wages - Singapore Bikes Forums