A minimum wage may bring more pain than relief to low income workers
Posted by wayangparty on December 9, 2008
By Fang Zhi Yuan and Lim Yii Tong
In recent years, there have been calls for the government to impose a minimum wage to help the low income workers who have seen their take home pay remaining stagnant for for over a decade, the latest coming from Mr Tan Kin Lian in a speech made at Hong Lim Park last Saturday.
A minimum wage is the lowest daily, hourly or monthly wage that employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor.
Supporters of the minimum wage claim that it increases the workers’ earning power and protects them against exploitation by the employers. They argue that the widening income disparity between the rich and the poor in Singapore merits a relook at the minimum wage to prevent the low-income workers from being trapped in a vicious cycle of poverty.
The government has so far resisted political pressure to set a minimum wage by arguing that it will retard competitiveness and lead to multi-national companies (MNCs) relocating elsewhere to offset rising labor costs, resulting directly in the efflux of precious Foreign Direct Investments (FDIs) out of Singapore.
As a small country heavily dependent on trade and industry, Singapore cannot afford to enact labor laws which contravene principles of free market economy.
Is the minimum wage really a panacea for all the woes faced by the low income workers ?
On paper at least, the arguments sound pretty convincing. Low income and unskilled blue collar workers are hardly earning enough money to support a decent standard of living because a free, unregulated labor market has allowed employers the leeway to depress their wages to keep their profit margins high. Setting a minimal wage to offset rising inflation will allow workers to take home more cash.
Proponents of the minimum wage often forgot the potential repercussions which may arise from it, including the possibility of causing a paradoxical increase in unemployment.
A classical economics analysis of supply and demand implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment.
This is because a greater number of workers are willing to work at the higher wage while a smaller number of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and inexperienced will typically be excluded.
A minimum wage will reduce the profit margin of businesses employing minimum wage workers, thus encouraging a move to businesses that do not employ low-skill workers.
In response to larger labor costs, businesses will try to compensate for the decrease in profit by simply raising the prices of the goods being sold, thus causing inflation and increasing the costs of goods and services produced hence eroding the gains made by the workers.
According to Linda Gorman, a senior fellow at the Independence Institute, a free market think tank, there is broad consensus among economists in opposition to minimum wage laws: “Most economists believe that minimum wage laws cause unnecessary hardship for the very own people they are supposed to help.” (http://www.econlib.org/library/Enc/MinimumWages.html)
In a 1997 response to a request from the Irish National Minimum wage Commission, economists for the Organization for the Economic Cooperation and Development (OECD) summarized economic research results on the minimum wage: “If the wage floor set by statutory minimum wages is too high, this may have detrimental effects on employment, especially among young people.” (Organization for Economic Cooperation and Development, OECD Submission to the Irish National Minimum Wage Commission, Labour Market and Social Policy Occasional Papers no. 28, 1997, p. 15.)
Sociologist Lewis F. Abbott, has argued that employing companies are economic organizations, not charities or welfare agencies, and that national minimum wage fixing is a comparatively inefficient, costly, and dysfunctional method of raising the living standards of poorer households. (The Effects of Minimum Wage Controls on Incomes and Welfare”, in Abbott, Lewis F. Statutory Minimum Wage Controls: A Critical Review of their Effects on Labour Markets, Employment, and Incomes. Industrial Systems Research Publications, Manchester UK, 2nd. edn. 2000)
It is far more practical and cost-effective for governments to assist low income workers directly through income tax relief or direct cash subsidies instead of introducing legislation to artifically inflate the minimum wage which will have a detrimental impact on the economy as a whole.
The Singapore government has put in place several measures to help low income workers:
1. Income tax reliefs - most low income workers pay little or no income taxes at all.
2. Workfare bonus and ComCare funds to help retrenched and unemployed workers tide through the period in which they are laid off till they find another job.
3. Continuous retraining and upgrading of skills to keep Singapore workers competitive and employable in the job market.
More research needs to be done by the relevant government agencies to determine if these schemes are adequate enough to support needy workers without causing excessive financial hardship to them and to explore other possibilities such as a basic living wage and collective bargaining to be set by the individual industries on their own.
Given the economic downturn and rampant inflation which has led to a rising cost of living, we are of the view that present schemes may not be sufficient in the long run.
It is not the duty of the government to make every citizen rich, but it is their responsibility to ensure all Singaporeans are guaranteed a minimal standard of living - a roof over their heads and three basic meals a day. No Singaporean should ever go hungry or sleep in the streets due to extreme poverty.
Populist calls for a minimum wage in the name of social justice may be appealing to the ears, but in reality are hollow, impractical measures which will bring more pain than relief to the problem it purports to solve.
<HR>
Posted by wayangparty on December 9, 2008
By Fang Zhi Yuan and Lim Yii Tong
In recent years, there have been calls for the government to impose a minimum wage to help the low income workers who have seen their take home pay remaining stagnant for for over a decade, the latest coming from Mr Tan Kin Lian in a speech made at Hong Lim Park last Saturday.
A minimum wage is the lowest daily, hourly or monthly wage that employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor.
Supporters of the minimum wage claim that it increases the workers’ earning power and protects them against exploitation by the employers. They argue that the widening income disparity between the rich and the poor in Singapore merits a relook at the minimum wage to prevent the low-income workers from being trapped in a vicious cycle of poverty.
The government has so far resisted political pressure to set a minimum wage by arguing that it will retard competitiveness and lead to multi-national companies (MNCs) relocating elsewhere to offset rising labor costs, resulting directly in the efflux of precious Foreign Direct Investments (FDIs) out of Singapore.
As a small country heavily dependent on trade and industry, Singapore cannot afford to enact labor laws which contravene principles of free market economy.
Is the minimum wage really a panacea for all the woes faced by the low income workers ?
On paper at least, the arguments sound pretty convincing. Low income and unskilled blue collar workers are hardly earning enough money to support a decent standard of living because a free, unregulated labor market has allowed employers the leeway to depress their wages to keep their profit margins high. Setting a minimal wage to offset rising inflation will allow workers to take home more cash.
Proponents of the minimum wage often forgot the potential repercussions which may arise from it, including the possibility of causing a paradoxical increase in unemployment.
A classical economics analysis of supply and demand implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment.
This is because a greater number of workers are willing to work at the higher wage while a smaller number of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and inexperienced will typically be excluded.
A minimum wage will reduce the profit margin of businesses employing minimum wage workers, thus encouraging a move to businesses that do not employ low-skill workers.
In response to larger labor costs, businesses will try to compensate for the decrease in profit by simply raising the prices of the goods being sold, thus causing inflation and increasing the costs of goods and services produced hence eroding the gains made by the workers.
According to Linda Gorman, a senior fellow at the Independence Institute, a free market think tank, there is broad consensus among economists in opposition to minimum wage laws: “Most economists believe that minimum wage laws cause unnecessary hardship for the very own people they are supposed to help.” (http://www.econlib.org/library/Enc/MinimumWages.html)
In a 1997 response to a request from the Irish National Minimum wage Commission, economists for the Organization for the Economic Cooperation and Development (OECD) summarized economic research results on the minimum wage: “If the wage floor set by statutory minimum wages is too high, this may have detrimental effects on employment, especially among young people.” (Organization for Economic Cooperation and Development, OECD Submission to the Irish National Minimum Wage Commission, Labour Market and Social Policy Occasional Papers no. 28, 1997, p. 15.)
Sociologist Lewis F. Abbott, has argued that employing companies are economic organizations, not charities or welfare agencies, and that national minimum wage fixing is a comparatively inefficient, costly, and dysfunctional method of raising the living standards of poorer households. (The Effects of Minimum Wage Controls on Incomes and Welfare”, in Abbott, Lewis F. Statutory Minimum Wage Controls: A Critical Review of their Effects on Labour Markets, Employment, and Incomes. Industrial Systems Research Publications, Manchester UK, 2nd. edn. 2000)
It is far more practical and cost-effective for governments to assist low income workers directly through income tax relief or direct cash subsidies instead of introducing legislation to artifically inflate the minimum wage which will have a detrimental impact on the economy as a whole.
The Singapore government has put in place several measures to help low income workers:
1. Income tax reliefs - most low income workers pay little or no income taxes at all.
2. Workfare bonus and ComCare funds to help retrenched and unemployed workers tide through the period in which they are laid off till they find another job.
3. Continuous retraining and upgrading of skills to keep Singapore workers competitive and employable in the job market.
More research needs to be done by the relevant government agencies to determine if these schemes are adequate enough to support needy workers without causing excessive financial hardship to them and to explore other possibilities such as a basic living wage and collective bargaining to be set by the individual industries on their own.
Given the economic downturn and rampant inflation which has led to a rising cost of living, we are of the view that present schemes may not be sufficient in the long run.
It is not the duty of the government to make every citizen rich, but it is their responsibility to ensure all Singaporeans are guaranteed a minimal standard of living - a roof over their heads and three basic meals a day. No Singaporean should ever go hungry or sleep in the streets due to extreme poverty.
Populist calls for a minimum wage in the name of social justice may be appealing to the ears, but in reality are hollow, impractical measures which will bring more pain than relief to the problem it purports to solve.
<HR>
