Wage subsidy could blunt Singapore’s edge

February 26, 2013

By Andy Mukherjee

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Singapore’s government hopes that new subsidies for low-wage workers will fix two problems: pressure on company profits, and income inequality. But in doing so, it will just create new problems later on.

The government has offered to reimburse private employers as much as 40 percent of future pay increases for Singaporean nationals who earn below S$4,000 a month. The S$3.6 billion, three-year plan is equivalent to 1 percent of the city-state’s annual GDP. The idea is to lend a hand to struggling employers who are finding it hard to fund pay rises, because of increased rents and curbs on hiring cheaper foreign labour. It should also please local workers, who complain that foreign hiring has kept wages down in the past.

In an economy already at full employment, there is little doubt that the subsidy will get used. The tight labour market means employees have strong negotiating leverage. And the benefits will be widespread. About 1.3 million people out of a total employed resident population of 2 million earn less than S$4,000. While that figure doesn’t sound much for such a prosperous country, a household with two such earners can be considered middle class.

The concern is what happens to companies’ costs when the subsidies end in 2016. Imagine a worker paid S$3000 a month gets a five percent raise a year over the next three years. After the payouts stop, the employers will need to fund future increases – including the S$190 paid by the government as its 40 percent contribution in the third year – entirely out of their own resources. By then, employees may also have grown to expect generous salary increases.

Inflation is the other concern. If wages grow faster than productivity, it may add to the pressures that are already driving up prices in Singapore’s small, open economy – particularly in the property sector. There should be a check on employers increasing pay faster than output, since they still have to pay 60 percent of the cost of higher wages. But the pressure to retain labour may override common sense.

Singapore needs to address resentment over a high and widening wealth gap. But in a small, open economy already struggling to prevent its property market overheating, wage subsidies may only blunt the city’s competitive edge.

 

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