COVID-19 has shone the spotlight on inequality in Singapore. What are the underlying root causes of wage inequality in the Southeast Asian city-state and what can we do about it?
By Dora Heng
The COVID-19 pandemic has peeled open the cracks of inequity in Singapore, dividing society across the lines of the “haves”—those who have the luxury of a skilled remote job or the financial cushion to weather the storm—and the “have-nots”—low-wage workers who cannot risk losing their jobs and essential workers on the frontline who cannot risk getting sick.
Ironically, as recently as February, Singapore’s progress on inequality was reported in a self-celebratory tone, with headlines reading “Income inequality falling to lowest…”. To be fair, while Singapore has made recent progress in reducing inequality through government schemes like Workfare Income Supplement, more must be done to address the root causes of this unequal society.
Despite government efforts at redistribution, the crux of the issue lies in the persistent trend in wage inequality. Between 2004 to 2014, growth in real incomes of households in the bottom 20%, before taxes and transfers, has been the slowest of any group, resulting in a 13.8% gap in growth rates between the lowest and highest quintile. Around 440,000 Singaporeans earning less than SGD$2,000 (US$1,415) per month fell into the bottom 20% of the resident workforce.
Source: Ministry of Finance
Loose foreign labor policy depresses wages, while vulnerabilities as a small open economy and persistent anti-welfare ideology constrain real wage growth at the bottom
The complex issue of wage inequality in Singapore can be understood from three separate perspectives A) labor policies, B) vulnerabilities of small open economies and C) ideological inertia.
In the early 2000s, Singapore pursued an aggressive labor expansion policy which led to a substantial influx of foreign labor. Between 2002 and 2008, the percentage of foreign employees in the labor force increased, particularly in low-skilled industries like manufacturing and construction.
This surge in the number of foreign workers from low-income neighboring countries inevitably resulted in a fall in the share of national wages as a percentage of GDP—it depressed wages at the bottom, widening the inequity gap.
Trends in Foreign Employment and Wage Share
Source: ILO report with data from Department of Statistics, Ministry of Manpower
The heavy lifting in growth was mainly borne by the expansion of the labor force instead of real productivity gains. In the 2000s, employment growth outpaced productivity growth. This slow growth in the productivity of labor limited the ability to increase real wages, resulting in a vicious low-wage cycle for Singaporean low-skilled workers.
As a small open economy, Singapore faces the challenge of safeguarding its global competitiveness while keeping inflation at bay.Without substantial productivity gains, sectors in non-tradable industries—sectors that consist of locally-rendered services such as construction, retail and cleaning services—are unable to raise wages without leading to the negative ramifications of higher inflation. Likewise, sectors in the tradable industries—sectors that serve the export markets such as manufacturing and wholesale trade—must be conscious of wage increases to retain competitiveness in the global market. The debate on wage inequality must keep in mind these real and pressing concerns around the unique vulnerabilities and constraints that small open economies like Singapore face.
Encoded in the DNA of the political ruling class in Singapore is a strong aversion towards the ideology of welfare.Lee Kuan Yew, the first Prime Minister of Singapore, was quoted to have said, “If you bring a child into the world in the West, the state cares from him. If you bring a child into Asia, that’s your personal responsibility.”
Compared to the Scandinavian economies, Singapore’s disposable income GINI inequality coefficient is noticeably higher after tax and transfers, while the total tax burden is conspicuously much lower at 16%. Given the broad based support Singaporeans have for low tax rates, the push towards greater social welfare requires an evolving and honest dialogue between citizens and the state.
Source: Ministry of Finance
Government needs to actively support labor productivity and protections for those at the bottom
Going back to economic fundamentals, real wages can only increase if labor productivity increases. As such, addressing the complex problem of wage inequality requires a strong push on two fronts: 1) to support gains in labor productivity while 2) increasing labor protections, especially for those at the bottom. To achieve these aims, the government should play multiple roles, using both carrots and sticks.
The role of the state as knowledge provider
Small- and medium-sized enterprises (SME)s that struggle with low productivity also typically face time and cash constraints on investing in R&D for innovation. State and parastatal organizations like trade and industry organizations (Enterprise Singapore, the Building and Construction Authority and tripartite partners in the cleaning and landscaping industries) can support SMEs by providing advice and technical assistance to consolidate jobs and redesign processes, including to incorporate digital technologies and automation while creating new learning paths for older employees. Workfare Singapore has already developed resource guides on job redesign, but more investment is needed in high-touch support for SMEs.
Likewise, the government can support workers through job counselling and career coaching services for low-wage workers. It is important to tailor these services to the varied needs and preferences of low-wage workers. Initiatives can be customized either through one-on-one counseling or group sessions, tailored to the age, language and education level of workers, and rolled out in partnerships with grassroots organizations such as community centers and people’s association centers.
The role of the state as legislator
As a ‘stick’ towards businesses, the government needs to be more stringent on setting a minimum wage floor, tailored to sectors and their respective productivity levels but adequate for the minimum standard of living in Singapore. In this role, the state is articulating regulations that reflect a normative mandate, and one that ideally reflects the social obligations of all citizens. The progressive wage model (PWM), a wage structure that sets out the minimum pay for different job levels in the cleaning, security and landscaping sectors, is a step in the right direction. More can be done to expand the scope of coverage to include more sectors such as building and construction and also the gig economy.
COVID-19 serves as a wake-up shock to the system. It offers Singaporeans a chance to reflect on the social compact and economic fundamentals the country is built on and requires Singaporeans to demand more to protect the most vulnerable in society. Addressing the productivity gap and creating the dialogue to shift regulatory norms are critical actions Singapore society can take to close the gap in wage inequality.