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13 September 2010

Of Minimum Wages and Productivity

13 September 2010


The recent articles in The Straits Times and Lianhe Zaobao shared insights on whether Singapore should follow Hong Kong’s footstep in setting a minimum wage to boost the wages of low-wage workers in Singapore. Associate Professor Hui Weng Tat commented that having a minimum wage would help to raise wages, leading to higher productivity and improved welfare. Professor Lim Chin, on the other hand, remarked that minimum wage would hamper employment and preferred the wage supplementation approach to help low-wage workers. 

The main arguments for a minimum wage usually emphasise protection for low-wage workers by ensuring that they receive minimum level of income. Supporters say it reduces wage inequality by narrowing the salary gap.  They believe that as workers get more expensive, employers will invest more in capital and technology and thus raise productivity.

Calls for a minimum wage in Singapore as a means to raise labour costs and thereby incentivise investments in productivity are well-intentioned. However, simply putting a minimum wage in place is no silver bullet.

One person who does not agree with the efficacy of a minimum wage policy is Professor Lim Chin. He pointed out that a minimum wage will distort market mechanisms and also makes the labour market more rigid. In fact, it can even hurt employment opportunities for low-skilled workers, making it harder for them to find jobs.

Artificially raising the wages of these workers without commensurate improvement in productivity may cause them to become uncompetitive and employers will be less willing to employ them. Minimum wage also raises labour costs, making it more difficult for small businesses to operate.

In European countries with a minimum wage, unemployment was typically close to 8% during the pre-recession period in 2007. Indeed, Professor John van Reenen from the London School of Economics cautioned that a minimum wage should not be seen as a panacea to achieve higher productivity as it may also bring about negative spill-over effects, such as higher unemployment.

Singapore’s approach therefore is to leave wages determined by market forces – supplemented by orderly wage adjustments in tandem with Singapore’s economic performance through the mechanism of the National Wages Council (NWC).

However, specifically for low skilled, low-wage workers, we’re determined to help them raise their earning capacity by raising their employability.  We do so through two Workfare programmes.

The first is called the Workfare Income Supplement (WIS) scheme. Through WIS, the Government would top up cash and CPF of older low-wage workers so long as they try to work for a reasonable period of time.

The second programme is called the Workfare Training Support (WTS) scheme.  WTS encourages low-wage workers to upgrade their skills through training. Employers get financial support for sending their low-wage workers. Even self-employed low-wage workers get training allowance while under training.

What we are trying to do through Workfare is also to preserve work ethic and personal responsibility. These are fundamental values that drive individual and societal improvements.

The basic and long term solution to helping low-wage workers earn higher wages is productivity improvement, which means enhancements to workers’ skills, business innovations and value creation.

The National Productivity and Continuing Education Council, which I’m a member of, will develop productivity roadmaps for 12 priority sectors to tackle obstacles to productivity in a comprehensive way. The Council will also guide the building up of a first-class national Continuing Education and Training system as a key institutional infrastructure for the most productive workforce.

Singapore’s economy is dependent on and integrated with the global economy. We’ve to accept competition as it is and carve out our own niches. By investing in our human resources, by encouraging our companies to innovate and by helping our low-wage workers acquire new skills, we’re confident that we can grow as a whole, and grow inclusively. The concept of a minimum wage policy is appealing politically but its implementation is not without pitfalls. We’ll stick with Workfare as a better policy option.


Lee Yi Shyan
Minister of State for Trade & Industry and Manpower

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