Singapore’s 2020 General Elections are in full swing. Brought to the forefront of the conversation again is the minimum wage policy that has been soundly rejected over the years by the PAP, while continuously being championed by parties on the opposition.
For instance, the minimum wage has been heavily pushed by the latest darling of the Internet, Dr. Jamus Lim, a newcomer in the Worker’s Party. His charismatic and down-to-earth manner has won much public support. He also boasts a stellar background in economics that his fans have been rapidly reproducing across social media.
Unfortunately, economists rarely remain economists when they step into politics. The Nobel Laureate Keynesian economist Paul Krugman made such a famous U-turn on his views on the minimum wage, going from condemning it in 1998 to endorsing it in 2015.
Why the inconsistency? The obvious answer is that figures in public policy face political pressures of a different kind, where academic honesty is sacrificed for political popularity. Supporting the minimum wage is good politics, but bad economics.
And the minimum wage is indeed a politically popular tool. It’s no surprise then to see Dr. Jamus Lim, who is directly running for office, throwing his full support behind it.
‘… paper after paper has shown little to no employment losses from the introduction of minimum wages & improvements in worker welfare.’
He even goes as far as to conclude:
‘Resistance to such a policy is based on outdated ideas and is not supported by evidence, while imposing significant social costs.’
The problem is that anyone who even superficially looks at the actual research on the minimum wage will know that the evidence is far from as conclusive as he tries to portray.
Alas, much of the opposition Left that are predominantly on social media have practically consumed and reproduced it religiously.
The evidence on the minimum wage
In his posts, he cites the famous Card & Krueger minimum wage study which finds that a wage hike in 1992 New Jersey led to a slight increase in employment.
For context to readers from a non-economic background, Card & Krueger is a landmark 1993 paper in the minimum wage literature and no discussion on the minimum wage policy is complete without reference to it.
Yet, popular as it may be, Card & Krueger has been heavily discredited by other economists and dozens of studies over the years.
If the Workers’ Party’s latest economist had bothered to consult the work other economists before him has done — the usual procedure in honest work — he would know that the study he confidently cites to the voting public is abound with measurement errors and irregularities.
For instance, dissect the Card & Krueger study and you will find shocking anomalies in its data. For example, one data point (see below picture) actually shows that there were zero full-time workers before the minimum wage. After the minimum wage was implemented, it increased to 35 full-time workers and all without any change in part-time workers.
Employers were ordered to pay its workers more, and employment shot up? What is the likelihood of that?
Moreover, instead of measuring official employment data that would have been typically released by government bureaus, Card and Krueger employed an unreliable method of surveying fast food store managers by telephone, asking whether the managers were planning to or already hired or fired their workers.
The most prominent critique of Card & Krueger belongs to economists David Neumark and William Wascher, who replicated the study years later with the added advantage of using officially released payroll data. This study found that unemployment rose in the fast-food industry after the New Jersey minimum wage — directly contradicting Card and Krueger’s conclusions.
Understanding the minimum wage
Supporters of the minimum wage, like Dr Jamus Lim, Dr Chee Soon Juan, and many other opposition politicians, often insist that it may not necessarily lead to higher unemployment. I agree that this is technically true.
Although public policy debates on the minimum wage tend to be framed as a trade-off between higher wages or higher unemployment, the reality is that the costs of minimum wage policies can manifest in a multitude of different ways.
Even if employers are not giving employees the boot, they might cut their working hours, reduce non-monetary benefits, pass the increased costs onto consumers, raise prices on their suppliers or return lower profits to shareholders.
For instance, if McDonald's is forced by minimum wage laws to pay higher wages and does not want to pass the costs onto its employees or consumers, it may demand lower prices from its meat suppliers which will then hurt low-wage workers in other industries.
Of course, minimum wage supporters rarely extend their analysis outside of one industry. Yet, the unseen costs of minimum wage policies are very real, even if unaccounted for.
In this vein, David Neumark and William Wascher conducted arguably the most comprehensive study of the minimum wage to date, which looks beyond the usual employment effects and also to other effects such as the acquisition of skills and longer-term labour market outcomes. This book, published by the MIT Press, comes to an unambiguous conclusion:
“A comprehensive review of evidence on the effect of minimum wages on employment, skills, wage and income distributions, and longer-term labor market outcomes concludes that the minimum wage is not a good policy tool.”
Minimum wage in the Covid-19 era?
The last thing Singapore needs right now is a policy that discriminates against low-skilled workers, especially in a post-coronavirus world where even university students struggle to find jobs.
If the goal is to enrich the least fortunate, policies ought to equip them with the experience that allows them to earn higher wages. Mandating higher wages without giving workers the ability to earn them on their own is a pipe dream.
As former Manpower Minister Lim Swee Say once said, a minimum wage might end up becoming the worker’s maximum wage.
Moreover, the Worker’s Party economist neglects to mention that the government has long compromised to calls for the minimum wage via the “Progressive Wage Model”, which targets several low-wage sectors that are vulnerable to automation such as cleaning, security, and aviation.
Employers in these sectors are expected to pay their workers a minimum, but on the condition that workers are sent for retraining to learn the use of motorized equipment and increase their productivity. Where typical minimum wage legislation simply expects employers to pay the required wage floor, the PAP’s approach is sensitive to economic realities and goes further in its encouragement of productivity improvements.
The Progressive Wage Model is therefore a hybrid market-based policy that both recognises the economic vulnerability of our lowest wage workers and the realistic need to raise economic productivity at the same time.
And yes, productivity is a serious concern. As Minister Vivian Balakrishnan acknowledged in the political debates, Singapore’s labour productivity fell in 2019 for the first time in ten years. This productivity slump has been exacerbated by the coronavirus, with latest GDP growth forecasts by the Ministry of Trade and Industry of -7.0 to -4.0 percent.
The government that leads parliament after the 2020 elections must be able to deliver on the productivity front in a post-coronavirus world.
Contrary to Dr. Jamus Lim, the minimum wage policy is far from held up by robust evidence. Simply mandating higher wages by the stroke of a legislative pen would likely hurt businesses. But more importantly, it would hurt the very low wage workers that it claims to help.
Donovan Choy is co-author with Bryan Cheang of an upcoming book published by World Scientific titled “Liberalism Unveiled: Forging a New Third Way for Singapore”.