The Real Reasons Why Wages are Failing to Keep Up with Inflation
In a recent ST article* headlined, “How households can tackle inflation”, the journalists state that:
“…MPs who spoke to The Straits Times for this special report said the key to battling inflation lies in each household becoming more aware of where its dollars are going, and then making temporary changes in lifestyle that help to cut down on costs.”
Then they go on to report that:
“Other MPs urged frugality – but not at the expense of nutrition. People can save money, for example, by cutting down on eating out.
‘On the ground, everybody is saying that prices have gone up,’ said Aljunied GRC MP Cynthia Phua. ‘(But) cooked food and uncooked – there’s a difference. Take advantage of lower prices for uncooked food.’”
Several thoughts spring to mind. Firstly, it is a distasteful spectacle that the government is urging frugality on ordinary people after engaging in an orgy of self-congratulation over supposedly record economic growth last year. After all part of ministers’ pay is directly linked to economic growth. We have just seen the President receive close to an additional $1million in compensation this year because of the booming economy and presumably this must be echoed by increases in the pay of government ministers. Secondly, how can we have record economic growth with real wages falling behind the rate of inflation?
In my recent article, “Should We Worry About Inflation”**, I pointed out that the main source of inflation was domestic given that the index of import prices in Singapore dollars was basically flat on the year. In 2009 the import price index fell by 8% yet inflation was still positive. Despite the government saying that the average CPI increase was only 2.8% for 2010 the index was 5.5% higher in January 2011 then it was in January 2010. As I pointed out in “About Your Landlord”***, published on 17th February, the median monthly income from work for all resident households rose by only 3.1% in 2010 and thus the median resident household would have suffered a real pay cut of approximately 2.4%.
The culprit in this is the competition our workers face from the rest of Asia due to our government’s liberal immigration and foreign worker policy. The elastic supply of labour means that Singaporeans have little bargaining power and their wages have not gone up even with a supposedly booming economy. It is very common on walkabout for people to tell us how they used to have a regular job but can now only get contract employment with little job security and periods of unemployment between contracts. Despite the government’s generous subsidies for training courses of arguably dubious value, which serve to keep attendees from being counted as unemployed, the resident labour force’s participation rate is still not markedly different from that of the US or UK. This suggests that there is a lot of disguised unemployment or Singaporeans who are unwilling to work at the wage rates that the foreign workers are willing to accept.
While there is a cap on wages set by the elastic supply of foreign labour, there is no such cap for inputs in limited (economists would say inelastic) supply such as land and this is what is driving domestic inflation. We have had rapid economic growth fueled by generous tax breaks for foreign investment and cheap foreign labour from abroad without any rise in underlying productivity and a 25% rise in population over the last ten years. This has pushed up property prices and rents and undoubtedly been a big contributor to domestic inflation. However the CPI fails to reflect this in full because it uses what is called an imputed rent for owner-occupied housing instead of an index of mortgage servicing costs plus depreciation. Thus the CPI for housing only rose by 5.3% between January 2010 and January 2011 while the HDB resale price index was up by 14% between the fourth quarter of 2010 and the fourth quarter of 2009. So we are getting in all likelihood a serious understatement of the true inflation rate and an even more serious erosion of the purchasing power of Singaporean workers.
Another factor, also touched on in my article about inflation, is the pricing power enjoyed by the GLCs and statutory boards which on some estimates control over half of the domestic economy and the resultant lack of any real competition in so sectors. This is true whether we look at public transport, power distribution, mobile and telecom services, television, newspapers, shopping malls, or housing for the bulk of the population. Ultimately the government is the major landowner, owning approximately 79% of the land in Singapore, and thus is the major beneficiary of the rise in land prices and rents, a subject touched on in my article “About Your Landlord”.
I am certainly not anti-growth or foreign investment, in fact very much the opposite. However I believe that, given Singapore’s limited ability to absorb further increases in population, economic growth should primarily take the form of raising the productivity of our own domestic workforce rather than being fuelled by the import of cheap labour from abroad. I would continue to provide incentives for companies to invest in productivity improvements while auditing the incentives already provided for effectiveness and, well, productivity. At the same time I would also restrict the flow of foreign workers either through higher levies or tighter quotas, while at the same time implementing a minimum wage. In my last article****, I pointed out how the government now seemed to be adopting what we have been saying since 2009 without giving the Reform Party any credit. While higher wage costs might lead to some domestic inflation in sectors that were shielded from competition or that were unable to raise productivity this could be dealt with by the introduction of more competition or greater regulatory powers. In any case higher real wages accompanied by the substitution of both labour-saving machinery and domestic labour for foreign labour would be better for most Singaporeans than the current erosion of real wages despite record economic growth.
The government has made much of its one-off “Growth and Share” package of $3.2 billion in supposedly helping Singaporeans combat the effects of rising inflation. In the Reform Party’s response to the Budget*****, we pointed out that in fact the surplus was of the order of $15 billion last year and thus much more could have been given back in the form of lower taxes and higher spending. In the first month of 2011 alone the government recorded a total surplus of $5 billion.
So my advice to the government is to stop patronizing us with exhortations to be frugal while congratulating itself on achieving record economic growth. Instead start adopting relevant performance targets rather than ones that are easy to hit and provide a misleading indicator of Singapore’s economic success as well as an excuse for excessive compensation.