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[h=2]Good analysis of Prof Lim's shock therapy against miw's workfare....[/h]
[]http://singaporemind.blogspot.com/2012/04/breaking-out-from-cycle-of-cheap-labor.html[]
Breaking out from the cycle of cheap labor and low productivity.
After Professor Lim proposed his shock therapy to push up wages of low income workers earning below $1500 and freeze the wages of those earning more that $15000, Minister Lim Swee Say & Lee Yi Shyan came out to make the standard argument against wage intervention:
"National Trades Union Congress (NTUC) secretary-general Lim Swee Say felt local economist Lim Chong Yah's suggestions for a wage restructuring was 'too risky".....
"However, labour chief Lim Swee Say said that if productivity does not lead to a corresponding increase, competitiveness would be lost which may cause some businesses to close down or re-locate out of Singapore.
This in turn would lead to a higher unemployment rate and structural unemployment."
- Wage restructuring suggestion 'too risky': Lim Swee Say.
When you run an economy, you have to make sure that business don't become too dependent on cheap labor and income inequality does not become too big otherwise you can end up in a situation where there are no good easy risk-free solutions for the problems you face. Professor Lim's proposed approach is risky - that's why he calls it "shock therapy". The only reason for shock therapy is that things cannot be maintain at the current state - societies with this high level of inequality do far worse that societies that have more equality[Link] and the longer you have this level of inequality the deeper your problems become and the harder it is to break out of the vicious cycle[Is Higher Income Inequality Associated with Lower Intergenerational Mobility].The PAP govt took a long time to recognize the problem and do something about it. It was only in 2011 that they saw the trend of falling productivity & low wages and came up with programmes to improve productivity. Lim Swee Say suggests that instead of doing "shock therapy" we try to improve productivity first then wages will improve. Remember the earlier approach of "skills upgrading" to improve the wages of low income earners - after more than a decade skills upgrading we find the wages of these workers either stagnant or falling because they were retrained to fill one low paying job after another.
To illustrate the various approaches clearly, lets look at a simple example. In some parts of India, the wages is so low, they human beings to do what is normally done by machines in developed countries.
Hard to believe but this is a human powered ferris wheel that uses cheap labor. The obvious way to improve productivity is to buy a motor and reduce the number of workers. However, the business man that owns this ferris wheel is not going to do it because he has access to cheap labor - why spend money on a motor when it is cheaper to use humans to do the job. No amount of productivity campaigns and urging by the govt can overcome the business logic of keep cost down by using the cheapest means to keep the wheel turning. The business man is not going to invest in a motor just because Lim Swee Say tells him to do so. There are only 2 ways to get productivity up. The first way is for govt to subsidize the purchase of motors but that doesn't guarantee the boss will pay his workers better after productivity goes up but he will certainly sack the workers he doesn't need. The 2nd way is to make labor expensive by setting a minimum wage. Once the cost of labor goes up, the businessman has no choice but to invest in a motor because he cannot pay all his workers and still make a profit. The workers who are now better paid have more money for consumption and that generates demand which will create employment for workers that were laid off.
When wages are pushed up, there is a risk that the businessman will choose to simply shut down his Ferris wheel and close shop however as long as there is demand for Ferris wheel rides and money to be made, he is likely to stay open for business. Before Malaysia decided to implement minimum wage, Malaysia businesses claimed that 3 million jobs will be lost and lobbied against minimum wage. This is essentially the same argument put up by the PAP govt against minimum wage and Prof Lim's shock therapy. It will be interesting to watch what happens in Malaysia once minimum wage is implemented. Hong Kong implemented minimum wage and saw no significant impact on employment[Businesses still hiring despite new minimum wages].
One of the particularly bad schemes implemented by the PAP that will cause our current problems to be entrenched is Workfare. On the surface it looks like money given to lowly paid workers to keep their heads above water. However, it is actually a subsidy for businesses using cheap labor - business don't pay workers enough for basic living and the govt steps in to make up the difference. Workfare creates no incentive for businesses to improve productivity because it encourages businesses to use cheap labor by subsidizing their wage bill. Workfare traps workers in menial jobs and perpetuates the current state of affairs because the PAP uses this scheme to justify not doing more to break out of the low wage and low productivity cycle.
If we want to break out of this vicious cycle, there is no choice now but to take some risk using wage intervention approaches. One way to do it is set a minimum wage and raise it every year until it reaches living wage level at the same time restricting the access to cheap foreign labor. The rate at which we do it depends on how much time we believe we have to solve this problem of income inequality. Professor Lim recommends a "shock" approach (50% increase in wages low income earners in 3 years) to snap us out of this vicious cycle because he sees Singapore nearly reaching a dangerous situation unless we do something. The PAP on the other hand has gone on a completely separate direction - they seem to think that they have all the time in the world to get this fixed favoring approaches that are so gradual they hardly moves us away from the status quo.
Breaking out from the cycle of cheap labor and low productivity.
After Professor Lim proposed his shock therapy to push up wages of low income workers earning below $1500 and freeze the wages of those earning more that $15000, Minister Lim Swee Say & Lee Yi Shyan came out to make the standard argument against wage intervention:
"National Trades Union Congress (NTUC) secretary-general Lim Swee Say felt local economist Lim Chong Yah's suggestions for a wage restructuring was 'too risky".....
"However, labour chief Lim Swee Say said that if productivity does not lead to a corresponding increase, competitiveness would be lost which may cause some businesses to close down or re-locate out of Singapore.
This in turn would lead to a higher unemployment rate and structural unemployment."
- Wage restructuring suggestion 'too risky': Lim Swee Say.
When you run an economy, you have to make sure that business don't become too dependent on cheap labor and income inequality does not become too big otherwise you can end up in a situation where there are no good easy risk-free solutions for the problems you face. Professor Lim's proposed approach is risky - that's why he calls it "shock therapy". The only reason for shock therapy is that things cannot be maintain at the current state - societies with this high level of inequality do far worse that societies that have more equality[Link] and the longer you have this level of inequality the deeper your problems become and the harder it is to break out of the vicious cycle[Is Higher Income Inequality Associated with Lower Intergenerational Mobility].The PAP govt took a long time to recognize the problem and do something about it. It was only in 2011 that they saw the trend of falling productivity & low wages and came up with programmes to improve productivity. Lim Swee Say suggests that instead of doing "shock therapy" we try to improve productivity first then wages will improve. Remember the earlier approach of "skills upgrading" to improve the wages of low income earners - after more than a decade skills upgrading we find the wages of these workers either stagnant or falling because they were retrained to fill one low paying job after another.
To illustrate the various approaches clearly, lets look at a simple example. In some parts of India, the wages is so low, they human beings to do what is normally done by machines in developed countries.
Hard to believe but this is a human powered ferris wheel that uses cheap labor. The obvious way to improve productivity is to buy a motor and reduce the number of workers. However, the business man that owns this ferris wheel is not going to do it because he has access to cheap labor - why spend money on a motor when it is cheaper to use humans to do the job. No amount of productivity campaigns and urging by the govt can overcome the business logic of keep cost down by using the cheapest means to keep the wheel turning. The business man is not going to invest in a motor just because Lim Swee Say tells him to do so. There are only 2 ways to get productivity up. The first way is for govt to subsidize the purchase of motors but that doesn't guarantee the boss will pay his workers better after productivity goes up but he will certainly sack the workers he doesn't need. The 2nd way is to make labor expensive by setting a minimum wage. Once the cost of labor goes up, the businessman has no choice but to invest in a motor because he cannot pay all his workers and still make a profit. The workers who are now better paid have more money for consumption and that generates demand which will create employment for workers that were laid off.
When wages are pushed up, there is a risk that the businessman will choose to simply shut down his Ferris wheel and close shop however as long as there is demand for Ferris wheel rides and money to be made, he is likely to stay open for business. Before Malaysia decided to implement minimum wage, Malaysia businesses claimed that 3 million jobs will be lost and lobbied against minimum wage. This is essentially the same argument put up by the PAP govt against minimum wage and Prof Lim's shock therapy. It will be interesting to watch what happens in Malaysia once minimum wage is implemented. Hong Kong implemented minimum wage and saw no significant impact on employment[Businesses still hiring despite new minimum wages].
One of the particularly bad schemes implemented by the PAP that will cause our current problems to be entrenched is Workfare. On the surface it looks like money given to lowly paid workers to keep their heads above water. However, it is actually a subsidy for businesses using cheap labor - business don't pay workers enough for basic living and the govt steps in to make up the difference. Workfare creates no incentive for businesses to improve productivity because it encourages businesses to use cheap labor by subsidizing their wage bill. Workfare traps workers in menial jobs and perpetuates the current state of affairs because the PAP uses this scheme to justify not doing more to break out of the low wage and low productivity cycle.
If we want to break out of this vicious cycle, there is no choice now but to take some risk using wage intervention approaches. One way to do it is set a minimum wage and raise it every year until it reaches living wage level at the same time restricting the access to cheap foreign labor. The rate at which we do it depends on how much time we believe we have to solve this problem of income inequality. Professor Lim recommends a "shock" approach (50% increase in wages low income earners in 3 years) to snap us out of this vicious cycle because he sees Singapore nearly reaching a dangerous situation unless we do something. The PAP on the other hand has gone on a completely separate direction - they seem to think that they have all the time in the world to get this fixed favoring approaches that are so gradual they hardly moves us away from the status quo.
