How Much Should Wages Increase By In Singapore?

I had read Mr Leong Sze Hian’s article on the growth of real median wages in Singapore since the 1990s.

Mr Leong had mentioned that, “the estimated real median wage growth per annum was about 0.4 and 6.4 per cent, from 2000 to 2012 and 1990 to 2000, respectively. If the above figures are correct, why is it that the real median wage growth in the 1990s, at about 6.4 per cent per annum, was so much higher than the estimated 0.4 per cent annum in the last 12 years or so?”

I decided to take a further look at the growth of our wages, relative to GDP growth and inflation rate. At the end of this article, I would like to propose one way in which we can look at how much wages we should grow in the next few years to bring our wages back to parity, and to bring the cost of living down.

In Chart 1, you can see that the growths for GDP, inflation rate and the total nominal wage from 1990 to 2011.

Slide1

Chart 1

In Chart 2, I compared the GDP growth and change in total nominal wage. You can see that on the whole, the total nominal wage change has generally grown at a slower rate than GDP growth. However  you can also see that the growth in nominal wage change is also much closer to GDP growth in the 1990s, as compared to the 2000s. Does this mean that the workers were more likely to share the fruits of GDP growth in the 1990s?

Slide2

Chart 2

In Chart 3, I compared the inflation rate and change in total nominal wage. You can see that on the whole, the rate of nominal wage change has dropped but inflation rate has kept increasing. In fact, in the 1990s, change in total nominal wages outpaced inflation rate, but it was in the 2000s that the change is total nominal wages slowed down significantly, and inflation rate grew by such an extend, that it overtook the change in total nominal wages in the later part of the 2000s.

Slide3

Chart 3

For a clearer comparison, you can see in Chart 4 that after accounting for inflation, the total real wage change has been slower than inflation rate, which means that we are now poorer than before 2008. (I was only able to obtain statistics for the real wage change from 2001 onwards.)

Slide4

Chart 4

In Chart 5, I plotted the trend lines from 1990 to 2011.

Slide5

Chart 5

And in Chart 6, you can see how the trend will go until 2020, if things are as per usual. You can see that the inflation rate will keep increasing, while the change in total nominal wage will become very minimal, or even become negative, which means total nominal wage actually will decrease.

Slide6

Chart 6

In Chart 7, I plotted the trend lines just for the period 1990 to 1997, before the recession in 1998-1999. Here, you can see that the inflation rate has actually dropped in the 1990s. You can see that even though the total nominal wage change slowed down over the period, the drop wasn’t as steep as in Chart 5, over the period from 1990 to 2011. Also, because inflation has also dropped, and even as the increase in the nominal total wage was dropping, it was still growing more than twice as fast as inflation rate.

Slide7

Chart 7

In Chart 8, I plotted the trend lines from 2004 to 2011, after the recovery of the recession in 2001. You can see that even though there is an overall increase in trend for the total nominal wage, inflation rate has also increased, and by a faster rate, which erodes any increase in the total nominal wage.

Slide8

Chart 8

Chart 9 will give you a better idea of how the the increase in inflation rate actually hurts the wage earners. In the 2000s, the trend in total real wage change has actually dropped on the overall, partly as a result of the staggering increase in the inflation rate.

Slide9

Chart 9

From the statistics, you can see that over the past decade, inflation rate has risen by a much higher percentage than the decade preceding. And even as the change in total nominal wages have increased on the overall, the change in real nominal wages has actually decreased, because of the inflation rate.

As such, how can we ensure that workers are paid wages commensurate to the cost of living, and how can the cost of living be maintained on an acceptable standard in Singapore?

Just by looking at the inflation rate and change in total nominal wage, one way to do it is to ensure that the growths in inflation rate and total nominal wage continues continues to increase at acceptable levels.

In Chart 10, you can see that on the overall, total nominal wage change has dropped at a faster rate, as compared to the GDP growth rate. As such, one measure we should put in place is to ensure that the total nominal wage change should be pegged to the growth of GDP, as can be seen in the purple line, and that workers will continue to enjoy the fruits of their production.

Slide10

Chart 10

This means that over the past decade, wages have been depressed to such an extend that wages need to be brought back to parity. One way to do so is illustrated in Chart 11, where wages would need to grow by 2% to 3% over the next 10 years, to bring wages back to parity.

Slide11

Chart 11

This reminds me of how the government had indicated last year that they had hoped to increase wages by 2% to 3% for the next 10 years. Is this because they had also looked at how wages would need to be brought back to parity as well, based on this model?

However, the government’s previous proposal was flawed, because they had purported to increase productivity growth by 2% to 3%, so as to also increase wages by a corresponding 2% to 3%. The proposal was flawed because based on their previous approached, productivity wouldn’t increase and thus wages wouldn’t increase as well.

Thus in Budget 2013, the government has finally embarked on a bolder plan to increase productivity and wages at the same time. As to how they would like to increase wages, they have created schemes such as the Workfare Income Supplement and Wage Credit Scheme. Also, companies are required to pay full-time Singaporean workers $1,000 in salary before they are allowed to hired foreigners, which is effectively a minimum wage. Whether these schemes combined can increase the wages of Singaporeans by 2% to 3%, to bring wages back to parity, will need to be seen. Otherwise, the government would need to adopt bolder approaches in 2015 and 2016.

Finally, in Chart 12, you can see that the government needs to bring inflation down. In this illustration, I suggest that inflation rate should at least be maintained at a consistent level. If so, the government needs to bring down the inflation rate over the next few years to below 2%. This is what they had hoped to do by implementing higher taxes for luxury housing and cars. Again, whether these measures would be effective will need to be seen. I do believe that the government might need bolder initiatives in 2014.

Slide12

Chart 12

All in, it is clear that over the past decade, wages haven’t grown as much as they should have. The government had allowed wages to be depressed, because of a lax manpower policy. Also, the government had allowed the prices of goods and services to increase too quickly, and allowed inflation to erode any wage increases over the past decade, and especially in the last few years.

The government knows what needs to be done since last year, and had thus proposed to increase wages by 2% to 3%. However, their approaches of pegging wage growth to productivity growth, without significant financial investments had caused their past approach to fail.

As such, in Budget 2013, the government has ran out of time, and has thus taken more drastic measures to both improve productivity and wages at the same time, so as to bring wages to parity. At the same time, they have also taken measures to reduce the prices of luxury goods, so as to bring down inflation.

It will take another year to see if their measures to reduce inflation would come to fruit, and another 2 to 3 years to see if their approaches towards enhancing productivity and increasing wages will be successful. Otherwise, in 2014, the government would need to impose a more progressive tax system, and by 2016, introduce bolder initiatives, such as a minimum wage law, to ensure that wages are given the lift required.

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