Difference between minimum wage & Progressive Wage Model, explained by NTU professor

Ongoing discussion.

Mothership | August 08, 2020, 11:25 AM

PERSPECTIVE: What is a national minimum wage and how is this different from Singapore's Progressive Wage Model?

Mothership asked Christos Sakellariou, Associate Professor of Economics at Nanyang Technological University (NTU), to explain the basic theory behind a national minimum wage, and whether it actually leads to higher unemployment.

Context behind discussion

A conversation surrounding a national minimum wage became one of the central debate topics that emerged from GE2020.

During GE2020, the Workers' Party (WP) put forth a proposal for a national minimum wage, arguing that this was a way to ensure that workers can "work with dignity".

In the WP's manifesto, they called for all working Singaporeans to receive a minimum take-home wage of S$1,300 for full-time work.

The People's Action Party (PAP) as well as opposition parties have since made their case for the pros and cons of having a minimum wage and how it compares to Singapore's Progressive Wage Model.

As answered by Christos Sakellariou

What is minimum wage?

A minimum wage is the lowest wage or remuneration that employers can legally pay their workers.

The official definition (the ILO Minimum Wage Fixing Convention No. 131) does not provide enough clarity, since it does not clearly indicate what components are included in the minimum wage.

In one country its application may include only basic wages, in another it may include other components as well.

Is minimum wage the only way to help people who earn a low salary?

There are alternatives to implementing a minimum wage.

One is implementing a more targeted policy which ties wages to skill upgrading, such as Singapore’s Progressive Wage model.

What are the costs of minimum wage?

James Kwak, Professor of Law at the University of Connecticut, in his book Economism: Bad Economics and the Rise of Inequality, refers to “economism” as a misleading application of basic economic analysis to real-world problems.

The economic effects of minimum wage in real world markets can be a complicated question. Even conventional economic theory is more nuanced on its analysis of minimum wage.

For example, when the employer has monopoly power in hiring workers, he will restrict the number of workers hired and pay the lowest wage a worker is willing to accept.

Such employers with market power employing a rather uniform group of low-skilled workers (e.g. workers in fast food establishments), are a good target for minimum wage, according to economic theory.

A minimum wage could force them to pay a higher wage, by eliminating the incentive to limit the workforce.

Those opposing minimum wage, economists as well as politicians (for example in the U.S.), almost exclusively base their opposition on basic economics.

For example, they argue that a minimum wage will increase labour costs and employers will substitute labour with machines.

But with the availability of new labour-saving technologies, some firms will seek to make such substitutions - with or without a minimum wage - as long as they can operate with fewer workers; this depends on a particular firm’s wage “elasticity” of demand for labour.

Despite the fact that many economists view the potential costs of a minimum wage through the lens of basic economic theory, there is no lack of academic economists in the US and elsewhere who are in favour of increases in the minimum wage.

In 2014, more than 600 economists, including seven Nobel prize winners, signed a letter in support of an increase in the US Federal minimum wage to US$10.10 (S$13.84).

What about Singapore's Progressive Wage Model (PWM)?

Singapore’s Progressive Wage Model (PWM), introduced in 2012, was designed to serve as a more targeted, less blunt approach than a minimum wage.

It links wage increases to skill upgrading and productivity increases. It currently coves specific industries (cleaning, security, and landscaping), it sets different salaries for different industries and it is a work in progress.

In the cleaning sector for example, the PWM covers outsourced resident cleaners and from July 2020, mandates a salary of S$1,236 for indoor cleaners. However, it is required that cleaners meet the PWM’s training requirements.

While the PWM model shares similarities with the minimum wage, there are also differences.

The PWM is not applied to all sectors; for example, it does not cover the F&B, or the construction sectors and it is tied to training requirements.

Therefore, it would be reasonable to argue that the PWM has the advantage of tying wage increases to skill upgrading, while the minimum wage approach may have an advantage in ensuring that low wage workers earn a “living wage”, and in the words of Ambassador at Large, Tommy Koh, promote inclusive growth.

Impact of possible expansion of PWM to address inequality

With a future expansion of the PWM, it could very well be able to address wider wage inequality.

If every cleaner and other menial worker were paid a salary as specified by the guidelines of the PWM (for example, S$1,236 for cleaners), this would be a significant improvement compared to what they would be paid otherwise.

After all, this amount is not much different than the suggested S$1,300 minimum wage for all low wage workers in the Workers’ Party manifesto.

However as it stands now, the implementation of the PWM, while correctly identifying the sectors with the most vulnerable workers, is not where it aspires to be down the road in terms of identifying groups all workers who should be paid a higher wage.

Does increasing minimum wage significantly impact employment?

A significant amount of research on the real impact of minimum wage and its relationship to unemployment exists, especially in the U.S. context.

While evidence is mixed, it is far from conclusive about the textbook prediction that a rise in minimum wage increases unemployment. Indeed, one might be tempted to conclude the opposite.

Early on, a study by Card (1992) used the 1990 increase in the US federal minimum wage for young workers, using the regional (state) variation in wages as an experiment to measure the effects of this increase.

His findings contradict conventional predictions based on economic theory, as well some previous estimates in the literature that in response to a minimum wage increase, teenage employment would decrease by 1-4 per cent.

Neumark and Wascer (2006) reviewed the international literature on the employment effects of minimum wages in the United States and other countries and found a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage.

However, they do find that a plurality of studies are indicative of negative employment effects of minimum wages.

On the other hand, Dube, Lester and Reich (2010), after comparing changes in employment levels between neighbouring counties in the U.S. found strong positive earnings effects (increase in wages) and no adverse employment effects of minimum wage increases.

About Christos Sakellariou: He received his PhD in Economics from the University of Ottawa, Canada. He has been conducting research in Applied Microeconomics, with particular focus in certain areas of Labour Economics such as the Economics of Education and the Economics of Gender.

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Top image via NEA/FB.