Don’t Close Off Options in Tackling Income Gap

ETHOS Issue 11, Aug 2012

Can wage inequality be tackled by raising productivity?

Focusing on productivity growth alone may not close the wage gap because productivity does not rise evenly across all sectors. Technology has allowed productivity in manufacturing to rise manifold, but society has not yet quite figured out how to make less standardised work, like domestic work or food services, a lot more productive. You are not going to make someone 100 times more productive at hair-cutting, for instance. In such cases, wage growth may not hinge so much on productivity but rather on the options available to people holding those jobs.

This is where education comes in. If you make people skilled in doing other things, they will demand higher wages to do their current jobs, because they have other opportunities. Barbers have not grown their productivity much over the past few decades, but are paid more over time because they have to be compensated for cutting hair instead of doing something else.

People care a lot less about inequality when everybody is getting wealthier, but economic growth does not reduce inequality. If everything grows at the same rate together, then inequality does not increase.

You have advocated making higher education available to as many as possible. How will this be paid for?

Raising the education level of your population increases productivity and incomes. In many ways, educated people also do better in life. However, not all of it has to be paid for publicly, because a lot of the benefits are private. The fact that more people go for college education does not mean the government has to spend an ever larger share of national income subsidising higher education.

Over time, I would hope that higher education becomes more efficient. Currently, it is an elite system and carried out in a very expensive way. You have educator-scholars, but they are expensive because they do not spend most of their time teaching. A lot of their salaries goes into allowing them to conduct research. But that need not be the case. When college education is universally provided, the teaching does not necessarily need to come from frontier scholars.

Singapore’s leaders have called for businesses to be more inclusive, to create better jobs for those in the lower rungs and give them a fair share of the productivity gains. What do you think about this?

If you said this in the US, I would say it is not viable. In Singapore, the power of public officials to influence behaviour of corporations through moral suasion and through examples is probably much larger. But, to the degree that equality is a public good, it is very difficult to get private actors to provide it.

The nature of a public good is that we all benefit from it but it does not make sense to do it on our own. We all believe we should have taxes, but if we made taxes voluntary, you would be an idiot to pay them. If you want to have a military, you cannot hope that people will just donate weapons and show up for military training; you tax people in order to form a military.

It is not logical to expect individual companies to provide public goods, because it may hurt their competitive position to do so. For example, it will be very expensive for one company to provide maternity leave when others do not, because a lot of people who know they are going to have kids will choose to work for that company. But we can all agree that these things need to be provided, and so collectively pass a law to say we are all going to do it.

Recently there has been discussion about the low salaries paid to cleaning contractors, which then depress the wages of cleaners. What is your view of the practice of outsourcing functions like cleaning?

Having companies specialising in contract cleaning, contract security, and so on is not necessarily a bad thing. But if you are concerned about labour standards — whether cleaners are given vacation time, guaranteed hours and reasonable wage standards — you want to make sure those standards are applied regardless of whether they do it at a contract labour firm or at the primary employer. It is a matter of legislating in a manner that does not create special advantages in one sector at the expense of another.

Traditionally, many employers who hired their own cleaners would treat them well because they were long-term employees. They did not want to give the impression that some workers were treated badly while others were treated well. When they moved to contracting, they said, “Well, it’s not our problem anymore”. Therefore, it may lead to the effect of reducing labour standards in those activities. But if you are concerned about that, it is not outsourcing per se that is the problem. It is about not having labour standards.

What do you make of the common lament that locals simply will not do certain jobs, like construction and waiting on tables?

We have this debate in the US all the time about agricultural work. People say if we did not have Mexicans illegally coming into California and Texas to work the fields, then it could not be done because no native would do it. Of course, what they really mean is that “no native would do it at the wages we are paying”. It could well be that locals would have to be paid twice as much as immigrants before they are willing to work in these unpopular jobs. But if you set the wage high enough, people will do it. People will do a lot of things for money.

The problem with filling low-wage positions with immigrants from poorer countries is that it not only depresses wages in those sectors, but also makes those jobs unappealing to locals. Once jobs are perceived as immigrant jobs, natives are less likely to take on the work as it diminishes their status.

Are there any other areas worth looking into as Singapore tries to tackle wage inequality?

It could re-examine its stance on the capital gains tax. Taxation is the most common way of transferring resources from the rich to the poor, but choosing to tax income and not capital gains — as Singapore does — is not necessarily efficient. People can always try to reduce their tax burden by transforming their earnings into capital gains. The idea that a capital gains tax will drive the rich away is largely unfounded. There are reasons why people want to be in Singapore. It is a dynamic society; it is a great place to live; it is safe and a great place to do business; and it is not corrupt. The circumstances in Singapore are not such that if you make just one small adjustment, the next day you wake up and there will be no rich people left. True, some wealthy residents may choose to pack up and go if taxes rise, but many countries with high tax rates, like Norway and Germany, continue to retain large numbers of wealthy, productive citizens.

Another area worth looking into is minimum wage. It has not had a destructive effect on jobs in countries that have implemented it. Instead, it means that workers are used more productively, because workers are not so cheap that you can use them unproductively. And neither will it stop low wage workers from working harder. A government would not set the minimum wage at a level where people can say, “Wow, I’ve got a minimum wage, I can just chillax for the rest of my career”. People aspire for much more. As growing incomes put erstwhile luxuries within reach, people tend to strive harder in order to be able to afford these goods and services.

What are some potential stumbling blocks that Singapore might face?

It is important for Singapore not to close off any option. You do not have to choose between extremes. There is a lot of room to adjust at the edges. I fear that Singapore’s policymakers perceive the country to be far more economically vulnerable than is warranted — as if the game is over if they make one false move. In reality, and to the credit of Singapore’s sound public policies, the country is in an enviable position, with a well-educated workforce, quality business environment, robust institutions and access to a dynamic Asia which provide a lot of room for economic expansion in the future. There is scope to experiment with new policies — such as a minimum wage or more progressive capital taxation — without needing to fear disaster. Singapore could raise labour costs a bit; it could tax this or that. And it might, after a while, say this was a good or bad idea, but it would not make some horrendous irreversible error that would cause the country to be ruined within a year, or anything along those lines.

Singapore’s foundations are quite solid. There are countries that get wealthy quickly in ways that are not sustainable, primarily through the export of natural resources. When the oil runs out, the whole game is up. Singapore, in contrast, has something more durable — skills, good government and social harmony. Those tend to reproduce themselves. They are very difficult to replicate. And they do not fade away quickly.