Lim Chong Yah: Renewed call for 'shock therapy' to raise wages

Expert urges NWC to again ask for specific pay rises for low earners

By Janice Heng, The Straits Times, 26 Oct 2012

VETERAN economist Lim Chong Yah has renewed his call for "shock therapy" to raise wages at the bottom.

Rising income inequality and a falling proportion of gross domestic product going to wages "are telltale signs that our inclusive growth policy requires a relook", he said yesterday at the annual Singapore Economic Policy Forum.

The former National Wages Council chairman praised the NWC's recommendation in May to raise pay by at least $50 for those earning less than $1,000 a month. It was the first time in decades that the council had suggested specific figures.

But quantitative recommendations should also be made in the next two years - and wages at the top frozen, said ProfessorLim, as he revisited the subject of "Shock Therapy II".

Shock Therapy I refers to Singapore's economic restructuring from 1979 to 1981.

In April this year, Prof Lim argued for a second round of restructuring, later tagged by the media as his "shock therapy" proposal.

His Shock Therapy II idea involved a three-year plan that included staggered pay rises for those earning less than $1,500 a month: 15 per cent in the first year, 15 per cent the next year, and 20 per cent in the third year.

He also proposed a three-year wage freeze for those earning $15,000 or more a month.



A public debate on his idea led "in the end" to the NWC's recommendation, Prof Lim noted yesterday. If the NWC continues to recommend specific figures, this would not only help workers, but also aid Singapore's effort to reduce its reliance on low-wage labour, he said. "If you have a quantitative increase for one year only, that does not have an effect on economic restructuring."

But if wage hikes are not a one-off, companies will be forced to be more productive, he added.

Raising wages is also preferable to more government transfers, he said, as the latter may require higher taxes.

Prof Lim also noted that his suggestion of a pay freeze at the top had not stirred much interest, despite it being important to rein in the "unconscionably" high salaries of top executives.

Persuasion, not compulsion, would suffice, he said.

"We can just call for a halt for three years."

Later, he told reporters he has "no fear" of high-earners leaving as the wage freeze is for only three years.

The Singapore National Employers Federation said the recommendations were best left to the NWC to consider.

But it noted "top executives are mobile, and bottling the wages of executives... for three years would lead only to other long-term problems".

Yesterday's forum was co-organised by the Economic Society of Singapore and Nanyang Technological University's (NTU) Division of Economics. Prof Lim is an Emeritus Professor of NTU.

In attendance were 200 economists, policymakers, students and guests.

But the strongest response to Prof Lim came from another speaker, Professor Augustine Tan of Singapore Management University. Help low-wage workers with direct transfers, but "don't interfere with wages", he said.

Higher wage costs could hurt companies or be passed on to consumers.

Meanwhile, NWC chairman Lim Pin said the council had been paying attention to low-wage workers for some years, but Prof Lim's suggestion in April "did contribute to the public discussion".

Labour MP Zainal Sapari added that when the National Trades Union Congress suggested the fixed quantum this year, "it was with the intention of recommending it for subsequent years".

Minimum wage a 'last resort'
By Janice Heng, The Straits Times, 26 Oct 2012

IF WAGES at the bottom remain low in two or three years' time despite National Wages Council recommendations, Singapore "may have to think of introducing" a compulsory minimum wage scheme, said Professor Lim Chong Yah.

His proposal: at least $1,000 a month. But that might be too low if inflation is serious, he said. Assuming a 44-hour work week, this works out to $5.25 per hour. Prof Lim left open the question of whether this might be "too high or too low", but compared it with rates in other countries.

A $5.25 minimum wage is about a quarter of Australia's, a third of France's, and half of Japan's. It is slightly lower than South Korea's but higher than Taiwan's and Hong Kong's. And it is three times the minimum wage in Malaysia.

The idea, however, has long been unpopular here. Yesterday, Prof Lim said he had proposed a minimum wage back in early 1972.

Then, the tripartite partners feared it would create unemployment, and preferred the flexibility of annual recommendations.

"But today, things have changed," said Prof Lim. Firms have become reliant on low-cost labour - a problem that a minimum wage helps address, he said. Yet he stressed it was a "last resort" only if wages cannot otherwise be raised.

Yesterday, labour MP Zainal Sapari said the National Trades Union Congress "is not supportive of the idea", as it fears job losses. Instead, it feels "we should explore other possibilities" - such as the progressive wage approach, which suggests wage benchmarks workers can reach with further training.

Shock therapy II revisited
In April this year, Emeritus Professor Lim delivered a lecture on A Proposal for Economic Restructuring II, which sparked a national debate. He revisits his ideas six months on.
by Lim Chong Yah, Published TODAY, 26 Oct 26 2012

My remedial proposal had two parts. One aimed at lessening the number and percentage of workers at the lowest end of the income ladder. Two advocated a three-year pause to the ever-increasing rate of escalation of income of the highest-income group.

Media reports on the salaries of some top executives in Singapore can range from S$2.5 million a year to S$5.5 million a year, or roughly S$208,000 to S$458,000 per month. In one instance, I recall four top family-related directors of a publicly listed company paid themselves between S$2 million and S$3 million each, when the company did not see it fit to pay a single cent dividend to its shareholders.

When a very brave shareholder at the annual general meeting (AGM) asked the Chairman of the Board of Directors for an explanation of this dichotomy, he replied to the effect: "If you do not think this is a good company to invest your money, you are of course free not to invest in our company." The shareholder walked out of the AGM.

Two to three million Singapore dollars is 2,000 to 3,000 times that of S$1,000 per month, the figure later used by the tripartite National Wages Council (NWC) below which a quantitative wage increase guideline was recommended.

Why there has been such a serious upward escalation of pay for the upper-income group followed by a freezing or declining of pay for the lower-income group is another story, another mystery, another enigma. In my view, this is associated with global Darwinian capitalism and, in Singapore's case, exacerbated by the huge intake of cheap, very low-wage workers from our neighbouring countries.

In other words, Shock Therapy II addressed the two extremes in our salary and wage system in Singapore.

NWC'S, GOVT'S STAND

The final outcome of the vigorous public debate that followed my Public Lecture ended up with the NWC on May 23 making a recommendation to increase the pay of the lowest-paid category, that is, workers earning below S$1,000 a month, by at least S$50 a month.

The proposal, I understand, was put forward by the National Trades Union Congress (NTUC) to the tripartite NWC. The employers' and Government's representatives in the NWC, after deliberation, gave the NTUC's proposal their unanimous support. The Cabinet too endorsed the NWC's recommendation.

So, in a sense, to me, "all's well that ends well". A serious attempt to narrow the serious income gap was done. For the first time, after many years, the NWC resorted to a general quantitative guideline recommendation.

3-YEAR FREEZE ON TOP WAGES

However, my proposal to have a three-year pause to the salaries of the highest-income group (the pyramid or apex group) was put aside. Indeed, there was little public interest in this matter.

Actually, I did not propose a maximum salary ceiling. Neither did I propose a super-tax for this group. I only proposed a salary pause for a period of three years, and through moral suasion, or NWC recommendation with the endorsement of the Government.

My fear was that without the recommendation of a pause, the salaries of the top pyramid group would continue its upward trend, as it had come to pass in the last decade or so. As the pause would take the form of a recommendation, prior contracts for salary increases should be adhered to. Legal contracts are sacrosanct and should not be broken.

The pause, however, would have at least the effect of the top-tier salaries not pulling further and further away from the central salaries. Top company executives might even think of rewarding the shareholders and also themselves with dividend payment in lieu of still bigger salary increases.

It is important that our salaries at the top, already at times at stratospheric heights, should not move into a morally indefensible position of unconscionable but perfectly legal rewards. Every procedure and every step as required in the Companies Act has been followed.

Competitive escalation of salaries emanated from the top salary echelon, and its cumulative spiralling effect on the second- and third-tiers could eventually make our companies and our economy internationally uncompetitive to the detriment of all of us - lowest, middle or highest income groups.

IN CASE OF RECESSION OR INFLATION

Since the NWC's quantitative recommendation of increase in pay for those earning up to S$1,000 a month was announced in May this year, the world economy and the regional economy have both deteriorated. One world-pivotal economy, the euro zone economy, unfortunately took the lead in this global contractionary process.

Does it mean that my pyramid pause proposal should be called off? No. In my view, it should go on, though much more so now with the declining global general income tide.

It would serve to drive home the point that in a declining global, regional and international economic tide, top salary leaders too should set an example by having a salary pause, voluntarily of course. Hopefully, the media should give publicity to any breach of this voluntary salary pause or restraint, through national tripartite consensus.

Indeed, Singapore did have, it may be recalled, a nationwide across-the-board pay cut, and voluntarily, not by law. This was necessitated in 1985 and also in 1998. In 1985, Singapore was faced with a serious regional recession, consequent on regional commodity slumps. In 1998, Singapore was also faced with a regional recession, though different in causality; consequent on regional exchange rate crises.

So, my call for a pyramid salary pause or moratorium hopefully would not have to end up with a more unpalatable apex salary cut instead as in 1985 and in 1998 in the next round of NWC deliberation! I doubt this will happen, as I doubt the world is heading for a second dip in the Great Recession of 2008-09, despite the austerity measures taken by so many highly-indebted developed countries.

Since September, a new monetary easing policy has been pursued by the European Central Bank (ECB), the United States Federal Reserve Bank and the Japanese Central Bank. The US Federal Reserve Bank calls it Quantitative Easing III (QE3).

Should their actions result in serious global inflationary pressures by early next year, Singapore's responsive strategy may have to alter pari passu, bearing in mind the increasing income inequality gap would remain, if not further aggravated. I think a pause or a cut policy in Singapore would still be in order for the top executives, coupled with another respectable increase in pay for those drawing S$1,000 to S$1,500 and below.

In other words, Shock Therapy II should continue for the remaining two-year period. Indeed, the disadvantage of announcing one-year's pay increase without the commitment to the two more years would hardly have favourable impact on economic restructuring: The substitution of capital for labour and the reorganisation of workforce to raise productivity.

MINIMUM WAGE PROPOSAL

Coming back to the wage pyramid base, some responsible public opinion-makers in Singapore have proposed a statutory minimum wage as a way out, as an "open sesame" for extremely low wages to exit, to disappear.

It may be of interest that way back in early 1972 when the NWC was formed, I did submit a memorandum to the NWC for the adoption of a minimum wage scheme. Brainstorming sessions followed in the NWC. All three social partners disagreed, and my proposal was put in cold storage.

Of course, there were pros and cons in such a proposal. But as Chairman of the NWC, I must abide by its decision, unanimous decision.

One main reason for objection was that it would create unemployment. Those workers with marginal productivity value below the minimum wage would be unemployed. The NWC then had among its top priorities optimum employment. Indeed, even today, Singapore still has an unemployment rate of only 2 per cent, one of the lowest and one of the most enviable in the world, contrasting with Greece 25.1 per cent, Spain 25.1 per cent and the US 7.8 per cent.

Another explanation for non-adoption of my 1972 minimum wage proposal was that the NWC then had a yearly quantitative wage guideline system, and that gave flexibility to yearly wage adjustments bearing in mind the optimum employment objective or target. In other words, the NWC preferred a more flexible wage system. The Chairman went with the NWC.

Soon after the NWC rejected my proposal for a minimum wage scheme for Singapore came the publication of Milton Friedman's very widely read book Free to Choose. Indeed, I suggested, and Professor Kernial Singh Sandhu, then the well-known and very able Director of the Institute of Southeast Asian Studies, arranged for our television station to have Professor Friedman's television version telecast.

In it, inter-alia, the globally influential American, Prof Friedman, disagreed with the minimum wage system. In the US, he maintained, thousands of Americans would have been employed but for the minimum wage. He warned that most of those forced to be unemployed in the US by the minimum wage system were blacks, African Americans. The NWC's decision was thus reinforced by Prof Friedman's stand on the subject.

QUO VADIS

Since 1985, the NWC has moved into a qualitative guideline system. For the last decade or so, the floodgate for low-wage foreign workers was opened. Our economy continued its impressive growth rates, no doubt the low-wage foreign workers must have contributed enormously to its continued spectacular growth.

Where do we go from here? Quo vadis? In May this year, the NWC had recommended a quantitative guideline aiming at raising the pay of all the lowest-paid workers in Singapore. I hope, as stated earlier, that this "partial shock therapy" would continue for the next two years with the addition of apex wage pause for the next three years as well.

If these measures do not succeed in halting the further decline in the ex-ante gini coefficient, perhaps a compulsory minimum wage scheme should be seriously looked into by the NWC and the Government.

WHY SET IT AT S$1,000

If a minimum wage scheme were to be adopted, perhaps a figure like S$1,000 per month should be looked into. This would mean an estimated 120,000 full-time resident workers (approximately 6.7 per cent of full-time employed resident workers) in Singapore would fall below the minimum wage.

However, by 2014, hopefully this number would be considerably reduced, perhaps to a minimum, if in the interim some deliberate upward adjustments of their wages are done.

If inflationary pressures turn out to be more serious, then even the S$1,000 a month norm might turn up to be a non-starter: It would be too low. En passant, in the 1974 inflation, the NWC recommended a wage increase of S$40 plus 6 per cent net, amounting to an approximate 17 per cent general wage increase. The country sailed through with it with a flattering outcome.

With a minimum wage of S$1,000 a month and assuming that full-time workers work 44 hours a week (or 2,288 hours a year), it would be S$5.25 per hour. The per hour yardstick is meaningful to the 194,700 resident part-timers in Singapore.

Is S$1,000 a month too high or too low? This reminds me of a Chinese proverb, which means "better than some and worse than some".

As compared to Australia, France and Japan, S$5.25 is about one-quarter of the Australian minimum wage of A$15.96 (or approximately S$20.10), about one-third of the French minimum wage of €9.40 (or approximately S$14.95) and about one-half of the Japanese average minimum wage of ¥744 (or approximately S$11.70).

But as compared to the other three Newly-Industrialising Economies (NIEs), S$5.25 is slightly lower than the South Korean minimum wage of 4,860 won (or approximately S$5.40) but higher than the Taiwanese minimum wage of NT$103 (or approximately S$4.33) and the Hong Kong's minimum wage of HK$28 (or approximately S$4.40). S$1,000 is also three times the Malaysian minimum wage of RM800-M900 (or approximately S$322-S$362)

One must bear in mind the median wages of these countries are not the same as ours, and so are their per capita incomes and their income distributions, besides changing exchange rates.

SPURRING PRODUCTIVITY

As an addendum, I shall touch on a point of serious concern to many public opinion-makers in Singapore. It is the absolute necessity of wage increase to be commensurate with productivity increase. This is a good basic guideline principle; one that has been faithfully followed by the NWC since its inception in February 1972.

Three concepts of productivity change would, however, be identified here. One, national productivity increase. A good proxy for this is productivity increase per worker.

Two, company productivity increase. The usual practical measure is company profit. Three, personal productivity contribution.

Of the three, the third is often the most difficult to measure. This is thus best left to the company management to handle, as is required under our Industrial Relations Act and the Employment Act. Each company too has its own performance appraisal system to take care of individual assessment.

For the NWC and for the country, the national measure is used, and has been used for the last 40 years. This national concept may involve the wage to gross domestic product ratio as well. This ratio is relatively very low for Singapore. In other words, the sharing of the national cake is involved.

At the national guideline level, the decision must be made on the equitable sharing of the national income. Also of importance is that money income is used, not real income. Profits and payment of wages are in money terms, not real or physical terms. This point is of particular importance if inflationary pressures are high, and more often than not our inflationary pressures are import-generated.

For company productivity growth, this has been handled at the company level. The company, however, should take and has taken cognisance of the national guidelines. At the company level, this may involve, unfortunately, adjustment to the profit margin in a situation where profitability has not increased.

Since the guidelines are not law, a lot of flexibility is there in rewarding workers by the company according to the national guidelines. The increase in wages of the low-wage workers could be the impetus to the restructuring of the companies' production processes towards the greater use of labour-saving devices and the substitution of capital for labour.

Lastly, the NWC system is unique to Singapore. It is one of those exceptionalisms which are associated with Singapore.

Dr Hilton Root, an impartial American observer, in his book Small Countries, Big Lessons says of the Singapore wage system: "The NWC allowed Singapore to overcome labour unrest, thereby transforming a liability into an asset.

"Labour relations have improved to the point where firms can respond efficiently to economic indicators without the typical strife that accompanies rapid economic transformation in both developing and mature economies. Moreover, the council is an outstanding example of how consultation can promote growth with equity."

Ms Cleopatra Doumbia-Henry, Director of the International Labour Standards Department of the International Labour Organization, also says: "This tripartite culture has enabled Singapore to create a climate of industrial harmony leading to a favourable investment climate, economic growth, social and political stability and a higher standard of living and better quality of life for Singaporeans. Tripartism has become Singapore's competitive advantage."

When the NWC in May recommended a minimum S$50 increase for workers earning below S$1,000 a month, it must have had in mind the national definition of productivity and not the company or personal definition.

Whatever it is, the NWC recommendations have always in mind the continued ability of Singapore to create the national cake, not to diminish it. One certainly does not want to throw the baby out with the bathwater. One certainly does not want to frighten the goose that lays the golden eggs.

That, however, does not mean that a society should ignore excessive income inequality altogether.

Lim Chong Yah is the former Chairman of the National Wages Council. He is Emeritus Professor at the Nanyang Technological University and the National University of Singapore. This article is based on excerpts from his paper presented at the Singapore Economic Policy Forum 2012 yesterday.

Related
Economic Restructuring Round 2