Limits in linking productivity to wage
increases
By TAN MENG WAH
FOR THE STRAITS TIMES
THE recent headlines and debate over Professor Lim Chong Yah's
"wage shock" therapy were in fact a diversion from a deep-seated
and long-standing problem: how to raise the incomes of low-wage
workers.
Concerned that the "shock therapy" of a mandated
across-the-board wage increase may derail economic development, the
Government fell back on the hard-to-refute economic maxim that link
wages rises to productivity growth.
That sounds perfectly reasonable, but this strategy has
its own failings.
Other factors
at play
FIRST, the "no productivity growth, no wage adjustment" approach
assumes that low productivity is the key, if not the sole cause of
low income growth for less-skilled workers.
In reality, other factors may also be at play.
For example, business costs may have gone up rapidly in
recent years. Rental for retail outlets, for instance, has shot up
because of the growth of REIT (real estate investment trust)
activities. This dampens employers' ability to raise the salaries
of the large number of low-wage workers in the retail sector.
Secondly, increasing workforce productivity both at the
sectoral and the national levels is easier said than done.
Multinational corporations in high value-add
manufacturing operations can recoup aggressive capital investments
to raise productivity becasue of their high profit margins and
economies of scale.
Local manufacturing small and medium-sized enterprises
(SMEs), on the other hand, will find it hard to defray their
capital investment from a lack of scale.
SMEs in the low value-add labour-intensive service sector
face even more severe limits in boosting productivity through
capital investment.
How can a bus driver who is already driving a
double-decker bus increase his total value-add? He can't drive two
buses at once.
Elusive
quest
THE elusive nature of productivity growth is hardly peculiar to
Singapore. Other developed countries face the same problem. A
developing economy like China has tremendous room for productivity
growth because of market inefficiencies attributable to
anti-competitive and rent-seeking actions and policies.
For an ultra-efficient economy like Singapore's, any such
room for productivity growth has long been exploited. Research by
McKinsey in 2004, for example, revealed that over a period of 30
years, Japan's economic growth was generated more by increases in
the number of hours worked and the amount of capital equipment used
than by an increase in the workforce's productivity.
A small, mature economy like Singapore faces constraints
in boosting productivity. Simply put, there are limits to its
factors of production.
Even if capital is pleniful, but labour and land are
scarce, there is a limit to how much growth can be achieved even
with more productive use of labour and land.
Further captal investments may even result in diminished
marginal returns.
If that happens, what recourse is there for workers but
to work longer hours to boost income? And for more members to join
the workforce to boost household income?
This might explain policymakers' increasing use of
household rather than individuals to track income data.
Undervalued
workers
ANOTHER limit in linking productivityto wage increases is that
the concept of productivity tends to undervalue the efforts of
low-wage workers while overvaluing those of the top executives.
In a tightly integrated value chain, the sum is usually
more than its parts.
Productivity takes into account the value created
directly by each worker but not the surplus value created by the
company as a whole.
That surplus value, which shows up as profit, ends up
frequently as big pay packets and bonuses to top management as well
as fat fees to the board of directors who have a say in the pay of
top management.
In the United States, for example, even through output
per hour rose by 70 per cent between 1981 and 2006, average real
hourly wages were virtually flat, increasing from US$7.88 in 1981
to US$8.23 in 2006.
In contrast, the share of corporate profits in national
income in 2006 was close to the highest levels since 1947, and the
share of wage income of the top 1 per cent of wage earners was
almost double the level recorded in 1980.
Based on data from the US Census Bureau, about 5 per cent
of annual income shifted from the middle class to the richest
households between 1980 and 2010. In 2010 alone, the wealthiest
5,934 households reaped an additional US$650 billion (S$816
billion) more than what they would have got had the economic pie
been apportioned based on the ratio in 1980.
Blame
game
FINALLY, blaming the income gap on productivity may conceal
underlying and fundamental issues that need to be relooked.
The unfettered pursuit of market fundamentalism, for
example, may allow power to be skewed towards increasingly
well-organised capital owners.
The entire capitalist system is more attuned to rewarding
capital owners who use money to make more money, while shunning
workers who have to sweat and toil to barely earn a decent living.
It is timely in Singapore for policymakers to re-evaluate
priorities so that workers can reclaim the dignity and full value
of their labour.
In the end, productivity growth is hardly the panacea to
the problem of rising inequality in income distribution: because
other factors dampen wage growth; because productivity gains are
hard to come by and may be severely limited in a small, mature
economy like Singapore; and because gains from productivity, if any
may accrue more to management than to workers.
But even if productivity growth is achieved, it is likely
that income growth for PMETs (professionals, managers executives
and technicians) will outstrip that of unskilled workers,
broadening the wage gap.
Wage policies underpinned by productivity growth may
allowed incremental pay increases to keep up with inflation, but
can do little to narrow the sizeable income gap that already
exists. Such fundamental adjustments can realistically only take
place by giving employees a larger share of the economic pie.
However, this entails encroaching on the deep-rooted
vested interests of other stakeholders, and can only be effected by
leaders with strong political will.
In short, simplifying the issue by falling back on an
economic maxim about productivity and wages makes good economic
sense, but may lose out in overall effectiveness.
The writer,
who recently finished his PhD in world economics at Nanjing
University, is an associate faculty member of UniSIM.
Opinion, The Straits Times, Saturday, June 9 2012, Pg A36
