Breaking the Poverty Cycle – Minimum Wage is not the Magic Bullet

In an affluent society like Singapore, it is hard to imagine that they are people who are still in poverty or that poverty trap does exist. Though we have both the PAP and the oppositions screaming the “nobody left behind” battle cry, the truth is many are left stranded and trapped in poverty. So what can we do better?

We have heard arguments from PAP and from Oppositions regarding the minimum wage scheme. However, if minimum wage is such an easy way to eradicate poverty, the world would have already adopted it. However, poverty still exists in most countries that have minimum wages in place. Minimum wages, if implemented properly, may have some positive effect on the economy by reducing sweat shops and exploitations. However, there are many side effects of minimum wages that require serious thoughts before it can be implemented.

Minimum wage could really increase unemployment if other policies are not put in place. It is a double edged sword. Whilst it is true that employers may not pay less than the minimum for the workers’ services, it is also true that workers may not offer any services less than the minimum. Using the SDP’s argument of $300 dollars a week argument, would a company hire a cleaner for $1200 monthly to sweep the floor when the equivalent sum could be used to get a trained clerical staff? It is very unlucky and companies may react by migrating the job scope to other staff. Using a domestic helper’s analogy, many Singaporeans would not mind spending $1000 per month to relieve them of some burden and hence enjoy a higher quality of life. However, if the price is prohibitive (uncompetitive in the industry), then they would redistribute the workload of the domestic helpers amongst the family members. Hence, if implemented blindly, these policies could hurt the quality of lives those who remained employed and reduce employability of the lower-skilled workers.

Secondly, minimum wage could also affect the overall wage across all levels. Even for the lower skilled workers, there is great disparity in terms of skills and the current wage has a range that commensurate with their responsibility and skills. If the wages of those who are at the minimum wage level or marginally higher is not adjusted, there would be widespread discontent. Why should a person go for clerical courses and take on additional responsibilities if the pay would be no difference from another who sweeps the floor without any stress? If the pay is adjusted upwards across all ranks, then surely inflation would erode any benefits of the minimum wage. Moreover, these would make people who are lowly skilled resistant to additional responsibilities or skills upgrades as there wouldn’t be any carrots to offer.

Next, minimum wage could also erode our human capital. Even in today’s society, we have heard of many schools students dropping out of school or seeking part time employment. With minimum wage implemented, these students would be tempted with the quick money available and may drop out of schools completely. Hence, we could see a drop in the number of skilled workers in the futures. If the minimum wage policy does not cover certain age group, company could offers incentives to lure students to work for them at wages that are attractive enough and are lower than the minimum wage to save cost. This would harm the employability of the people who really needs the money to support their family.

In short, minimum wage across the board would do no good to alleviate poverty. However, it could be implemented in certain industries (skilled jobs) to prevent the proliferation of sweat shops and exploitation or encourage employers to upgrade the skills of those workers to justify increase in pay. There are already many countries with successful implementation of minimum wage and we should learn from them and not use it as a magic bullet.

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Posted on May 30, 2011, in What's Happening?. Bookmark the permalink. 2 Comments.

  1. I think that you are coming at this subject from the wrong angle.I really do not see how Singapore can implement a Minimum wage when you have such a high import of low wage foreign workers. An average Singaporean worker deserves protection against low hardly sustainable salaries. With such low Corporate tax rates, Low importation duties and high margins on all basic food stuffs, rents, house prices, it is no wonder that businesses are doing OK thank you at the cost of low paid Singaporeans.

    I have seen time and time again where 3 to 4 low paid foreign workers are doing a job that a single person could do. Why is this so? Who really benefits from so many Foreign workers?

    As soon as an activity falls into the realm of a foreign worker, then definitely a Singaporean will not be paid more for the same job, so he has to look elsewhere.

    Food prices I believe are held high, we are told because of overheads such as rental values etc, yet if you compare prices of food sold in HDB supermarket locations, then prices do not seem to be that different than the same supermarket selling from a larger shopping Mall. These supermarkets buy in huge volumes and do what with the profits, open more supermarkets..So they can totally monopolise the market, not to ensure reasonable prices.

    Regarding food…1 observation as an example. Dairy products, definitely in general have to be imported.I can purchase 1kg of Medium mature Cheddar for about S$16 per kg in europe, but the same cheese here is at a minimum S$36+ per kg…Why such a huge difference. Even if you purchase from a smaller local shop, they tend to price about the same. This means that even smaller shops price their products according to the larger retail supermarkets. Where is the competition? Of course there are smaller shops that do try, but they are eventually killed off by high rents.

    I mention all of this because as a PR myself, I feel that many people are in a poverty trap of not only of their own making, but more so by the system, that not only takes away possible employment to foreign workers, but then keeps all the basic food prices inflated, this is not a natural poverty trap.

    So a minimum wage would be a silver bullet for those in the poverty trap, the businesses would then have to make adjustments, businesses do not go hungry, people do.

    There is much that can be done with the system that would not in the least hurt it as much as higher rental, higher dividends, higher electricity do already.

    Anyhow jut though I would respond to your blog…

    • Welcome here Robert and always happy to have friendly debates as it sharpens my thinking. Here’s my response and feel free to add or challenge me.

      1. Implementation of minimum wage

      The numbers of low-cost foreign workers is not an impediment to implementation of minimum wage. The wage control can be on covered professions only. Moreover, it can also cover only local or foreign workers disciminately if required.

      You brought out a good point that the government should do better to protect locals. However, I find it unconvincing in the example you cited that many low cost workers are taking over the jobs of single person. A business primary purpose is to maximise profits as it would be meaningless to hire more than necessary even though it is cheap. Yes, we do not benefit from so many foreigners but neither would exployers.

      2. Poverty trap and minimum wage as a silver bullet

      Poverty trap by definition means that there is an S-shape curve when you plot income today versus income tomorrow (or other substitute of income such as food, education etc). Singapore do not have systematic poverty trap. When I mean systematic poverty trap, I mean that income of a person today has no bearing on the income in the future and neither does it has any bearing on his chidren’s future income due to compulsory education and other welfare measures.

      Most people who are extremely poor in Singapore are people who are unable to hold on to regular job. The implementation of minimum wage would in fact disadvantaged these people. For example, an employer provide janitor services may recruit only strong and able young men who can scrub ten toilets a day due to the increase in wage rather than keeping the current workforce (which may include women or elderly who could do less) as they seek to maximise profits and reduce costs. In real life, businesses do go hungry if they cannot afford the pay of current workforce and minimum wage will force them to restrategise and laying off is an viable option. ‘Poor Economics’ stated a case study in Indonesia when farmers decided that would rather pay stronger workers well during a famine to ensure that they could work hard and as a result, those who were perceived to be weaker were laid off resulting in many people plunging into dire poverty. That in essence is a demonstration of the side effects of minimum wage.

      Moreover, minimum wage tend to attract those poorer families who may not fully appreciate education to encourage (or passive encouragement by not raising objections) children to drop out of schools due to attractive minimum wage. That may hinder social mobility of our country.

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