Politics and Economics: Who is Speaking the Truth?

Minimum Wage

Let’s take a look at the minimum wage, which found its way back into the centre of the Singapore General Election 2020. Every Economics student can simply tell you that minimum wage refers to a legally established price floor for salaries. This means that employers will have to pay their employees a minimum amount of wages, and anything below is illegal. It was implemented in most countries, except notably Singapore and Scandinavian countries. 

The minimum wage which was suggested, as well as, contested in Parliament by Economist and MP Jamus Lim is universal. This means that everyone, regardless of which sector they belong in, will be entitled to this privilege. [1] [2] According to NTUC deputy secretary-general Koh Poh Koon, an estimated 32,000 full-time workers earn below this amount[1], and it is believed that the minimum wage will drastically improve their standard of living. However, a commonly brought up limitation of the minimum wage is that it brings about unemployment, especially to workers whose professions are easily substitutable by machines and requires little training time (hence |PED|>1 and |PES|> 1 respectively). Thus labour-intensive and menial workers are more vulnerable to retrenchment. 

Isn’t this the opposite of what the government would want, where one of the macroeconomics goals is to achieve low unemployment? Instead of getting a low salary, people now have no source of income anymore! 

Not to fret, as many reports, including that done by research institute Integrity Florida, cited that an increase in the minimum wage does not lead to increased unemployment[3] [4]  [2]which ties in to Singapore, as the rise in salary for these workers will not necessarily lead to a loss in jobs.  As an increase in income leads to an increase in purchasing powers, thus the demand for goods and services will too increase, especially for normal (household items) and luxury goods (items sold by luxury brands), leading to an increase in derived demand for labour. So it should be safe to say that if Singapore does implement a minimum wage, not only will unemployment potentially decrease, but the standard of living will increase. 

But why then, does the PAP stand firmly against the minimum wage? 

Singapore is a nation that heavily values meritocracy, and rewards those who work hard accordingly. It is no wonder that we then choose to embrace the Progressive Wage Model (PWM) instead[3]. Simply put, it is a ‘ladder’ for both employers and employees, whereby employees can improve their skills through workshops and classes, in turn for a higher salary and job stability. Employers benefit too as this increase in skill levels leads to higher productivity at work and an increase in total revenue earned, ‘climbing up’ the mentioned ladder, which is something profit-maximising companies strive for. The national movement SkillsFuture can be said to complement the PWM as it offers Singaporeans from all walks of life the opportunity to, as the name suggests, upgrade their skills for the future. For now, the PWM has been implemented in 3 sectors, namely the cleaning, security and landscape industries, and aims to be implemented in more sectors in years to come. Additionally, evidence has shown that the PWM has been successful, as an estimated 80,000 employees will benefit from the scheme, according to Minister Zaqy Mohamed[4]. The Ministry of Manpower (MOM) has acknowledged that older citizens on the bottom levels of the ‘ladder’ earn little, and multiple schemes have been put in place to help them financially. Examples include the Special Employment Credit Scheme, which automatically pays these individuals more money based on their CPF payments. 

After considering both sides of the debate about the implementation of minimum wage in Singapore, the question remains. Did MP Jamus Lim suggest a populist idea to ‘warm the cockles of our hearts’? Or is there a real need for there to be a minimum wage to improve the societal welfare of our country and assist those who truly need it? 

Taxation

Now, let’s move on to a fairly simple economic policy that most countries across the globe have implemented: taxation. 

The two main objectives of the tax policy in Singapore, according to the IRAS, is to firstly, raise revenue for the government to fund policies or support infrastructure development in Singapore, in order to build a better environment with a more vibrant economy[1], and secondly to promote economic and social goals, by influencing the behaviours of the citizens. This can be seen through the taxing of demerit goods like alcohol and cigarettes, in order to decrease demand and deter people from consuming them. Taxes can come in a variety of forms: GST, Income tax, Property Tax, Road Tax and more.

Another objective of the government taxing the people is to narrow the income inequality between citizens of different socio-economic status. According to the OECD report in 2012, income inequality after taxes and transfers decreased by about 25% as compared to before taxes and transfers[2]. This is a key way in which we can tackle the issue of poverty within nations. Countries like the US employ progressive taxes, when income increases, so does their tax incidence. 

However, does the progressive tax really work? Does it really lead to income equality as most politicians promise? 

Well, a write-up done by several economists says otherwise[3]. Instead, progressive taxes do not lead to income equality but rather the opposite. This seems rather counterintuitive, right? If you increase the taxes on the higher income citizens and lower the tax on the lower-income citizens, wouldn’t that lead to greater income equality? According to the write-up, the increase in purchasing power will lead to an increase in demand for goods and services, which are more often than not, provided by individuals who are already high-income earners. Thus, progressive taxes do not necessarily lead to less income inequality as most people would expect. This can be seen from the figure below that shows how progressive taxes do not perform as what one would expect in the US. (Note: the y-axis refers to the percentage of one’s income and the x-axis refers to the different income groups in America, with the most right as the billionaires): 

A better way to tax the rich (Vox, 2019)[4]

A possible alternative that Senator Elizabeth Warren proposed in 2015 is the wealth tax. Instead of taxing citizens based on their income, the government can instead tax people based on the amount of wealth and assets they own. This includes properties, cars, companies, stocks and their individual income. This is believed to be a better representation of the amount of money one has, and it will be more logical to tax them based on their total wealth. There will be a 2% tax on fortune above $50 million, and a 3% tax on fortunes above $1 billion. In addition, Vox claimed that the government could have raised an estimated $200 million from it. This money would come in useful in building infrastructure and funding policies. 

However, as awesome as it may sound, there are several limitations. For example, how is one’s wealth to be calculated? Will everyone be willing to open up about all the purchases they have made? Would this not infringe on one’s privacy? Another question to ponder about is that if we so heavily tax the rich, are we then dissuading people from working hard to enjoy a luxurious life? Even though politicians have the charisma and persuasion to make policies sound great and life-changing, one should always take a step back to think about who is truly telling the truth. 

The link between politics and economics: 

Well, after looking at the aforementioned case studies, we have examined how economic policies are often found at the centre of politics. Every idea has its pros and cons, so does every system implemented in our society. There is no ‘right’ or ‘wrong’ answer to solving social issues using economics, as it’s all about which bears less harm than the other, which we have learnt about through the use of rational-decision making framework. And as to ’who’ is telling the truth, we have to take a step back to analyse the entire situation. Though politics may make certain economic decisions look rational and effective, there are always hidden constraints and trade-offs that have to be recognised.

Darshan S/O Ganesa Moorthy (20-O2)

References

Minimum Wage:

[1] https://www.straitstimes.com/singapore/politics/32000-take-home-less-than-wps-proposed-1300-minimum-wage?xtor=CS3-20&utm_source=STiPad&utm_medium=share&utm_term=2020-11-24%2012%3A11%3A05

[2] https://www.businessforafairminimumwage.org/news/00135/research-shows-minimum-wage-increases-do-not-cause-job-loss

[3] More on the PWM can be found here https://www.mom.gov.sg/employment-practices/progressive-wage-model/what-is-pwm

[4] https://www.todayonline.com/singapore/progressive-wage-model-be-extended-80000-retail-food-services-workers-2-3-years

Taxation:

[1] https://www.iras.gov.sg/irashome/About-Us/Taxes-in-Singapore/The-Singapore-Tax-System/

[2] http://www.oecd.org/economy/public-finance/49417295.pdf

[3] https://www.stlouisfed.org/on-the-economy/2020/may/could-more-progressive-taxes-increase-income-inequality

[4] https://youtu.be/kXCGbAv8YPw