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Debunking Popular Myths On Minimum Wages

 

Last year, we wrote an article expressing our views on why we do not think having a minimum wage policy will be bad for Singapore. Since then, we have received some comments on our article, especially in light of the new “progressive wage” model that has been advocated by NTUC and which would be implemented within the cleaning industry from the 2nd half of 2014.

We think the “progressive wage” model is definitely a step in the right direction. We like to, however, follow up on Minimum Wages in light of some good questions that have been asked by readers of DollarsAndSense.sg.

Here are the questions, and our views on it. It’s always good to clear some common misunderstanding on this favorite pet topic.

 

Question 1:

Popular belief is that minimum wages will result in an overall increase in prices and does not help the lower income sector. As things normalise, the status quo will be back to before. Any increase in wages will be passed on to consumers and that negates any wage increase in the first place.

Yes. Minimum wages will result in an overall increase in price, and yes, the increase in wages will be passed onto consumers, unless government intervention takes place, which is not ideal in the long run anyway.

However, it doesn’t mean that the lower income groups would not be aided. This is especially true if there is already large income inequality in the country. Large income inequality means that the money is in the economy, somewhere, but not well distributed. Singapore is a prime example.

Will it be fair for everyone to be paying more for their Fish n Chips at the foodcourt so that the cleaners get fair wages?

The truth is that we are already paying more for our meals at food court in recent years only for the extra dime to be going into the pockets of already rich landlords. At the same time, our cleaners have seen their wages stagnate, while the prices of everything else around them have increased.

 

Question 2:

In the circular flow of income theory, how does minimum wages improve the economy and the workers because it seems to bite back at the workers after one cycle?

If inflation arises, and everyone’s income increases by the same proportion, economists consider this as nominal changes occurring with no real changes.

Firstly, it is important to remember that inflation arises not only because of labour costs, but also a whole bunch of other reasons (some of which are not within anyone’s control). Raw material costs, rental charges, government taxes and even inflation from other countries will affect the inflation rate in Singapore regardless of whether we increase the salaries of our lower-end workers.

However as the cost of living in Singapore increases, it is unrealistic to expect our lower wage workers to continue taking on salaries of $850 under the flawed reasoning of “cost-control,” when everything else around them are increasing.

Inflation will “bite back” at workers regardless. Not increasing their salaries will only act as a double whammy.

It is silly to continue believing the myth that minimum wages will increase our cost substantially and cause the end of the Singapore economy in an era where rental rates at shopping malls have shot through the roof. The real problem exists elsewhere.

 

Question 3:

Does minimum wage restrict employability as it becomes the onus of the worker to meet the wage scale.

This is a common argument put forward by detractors of minimum wages and it is somewhat true, if you are a poor developing nation.

Poor developing nations are generally never in a position to be legislating a minimum wage law (and unfortunately many do) because this will hinder their own growth. A developing nation needs to grow the wealth of its overall economy, and that means getting as many people off the streets protesting, and into jobs that will actually help both the people and the economy. Most jobs in developing nations are low level and hence a blanket implementation of minimum wages will raise costs across the board and stiffen employability of workers.

On the other hand, developed nations, especially those with low unemployment rates (like Singapore), are in a different situation. A developed nation with a strong pool of talent can attract and retain MNCs to operate within its boundaries. MNCs will continue to operate in the country not because of the easy access to low wage workers, but because of the availability of skilled talents needed for business growth.

In such a scenario, the implementation of minimum wages for the lower-end workers will have a much smaller impact to the bottomlines of companies. The majority of employees in a good company are likely to be earning above a minimum wages that would be fair, anyway. Hence, this will affect no one except help the bottom level of wage earners.

A practical way to understand this will be to ask ourselves a simple question of whether Rolls-Royce, Procter & Gamble, Accenture, Microsoft & Samsung will move their offices away from our country if we stipulate a minimum wage system in Singapore?

We will let you decide for yourself. Share your thoughts with us on the DollarsAndSense Facebook Page.

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