Jan 13, 2014

    The real price of progressive wages

    THE latest move by the Government to make adopting the progressive-wage model compulsory for cleaning companies (by tying it with licensing) is an important one. However, it must not be misunderstood to be a capitulation to those who clamour for minimum wage.

    Supporters of minimum wage often ignore the fact that a government can legislate only nominal wages - it cannot mandate that real wages increase. So, the effect of minimum wages always stands in danger of being eroded by inflation, especially if firms, in order to afford those increased wages, raise prices as well.

    A sustainable increase in wages can come only from productivity increases, which come from training, or the adoption of technology or better work processes. These enable the company to lower overall cost and raise efficiency, giving it more leeway to pay higher wages without having to also increase prices.

    The progressive-wage model takes this into account. Firms now have to increase wages, but only after the workers are trained. More importantly, firms have no excuse not to increase wages once their workers are trained.

    Therefore, the important question is whether such a model should be implemented wholesale for other low-wage industries.

    The Government must, however, weigh its options carefully before it extends this scheme. Many small and medium-sized enterprises (SMEs) already operate in extremely competitive and thin-profit-margin environments.

    When firms compete on price, it makes it difficult for them to raise wages. The legislation helps by making sure that all licensed cleaning companies have to adopt this measure, but it still remains to be seen if the companies can adopt a progressive-wage model without increasing prices.

    What the Government needs to do, and to make clear to the electorate, is that wages cannot be seen in isolation from prices. Higher wages could mean higher prices for customers, who are also Singaporean.

    On the other hand, many small business owners who operate in cut-throat industries cannot afford to raise prices. This means they either have to cut costs, including those of staff, or be in danger of shutting down. Business owners are also Singaporean, and many small-business owners are struggling with their livelihoods.

    One problem is that many SMEs which provide services to large corporations and government bodies are asked to tender for projects, and these decisions are mostly made on price. With the price-setting power in the hands of these customers, they have no choice but to cut prices to the bone.

    This is not sustainable. The Competition Commission has already made it clear that industry associations cannot negotiate collectively with their customers, even if their customers are large government-linked companies which clearly have price-setting power.

    Such a dogmatic adherence to competition will only exacerbate the situation of firms that operate in overly competitive environments, especially small businesses that supply to monopolistic large businesses or government bodies.

    The Government, while looking at wages, should thus look at prices, and how excessive price competition among small companies could be a reason for wages stagnating at the lowest end.

    Until the wage-price relationship is properly addressed, and unless the electorate understands the trade-offs, the problem of low wages will continue to be a political thorn in the Government's side.


    The writer is a former Nominated MP.