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(b) Discuss the extent to which a minimum wage law is more appropriate than tightening foreign worker quota policy to reduce income inequality in Singapore. [15]

RI 2024

A minimum wage law and a tightening of the foreign worker quota policy are two strategies aimed at reducing income inequality in Singapore. Both policies target the wages of low-skilled workers, but they operate through different mechanisms. 

Minimum Wage Law

A minimum wage is a legally mandated price floor on wages, set above the equilibrium wage level for low-skilled workers. The intent of a minimum wage is to raise the incomes of low-skilled, low-wage workers to what is considered a living wage. By increasing their wages, minimum wage laws aim to reduce income inequality, as higher wages would narrow the income gap between low-skilled and high-skilled workers.

By setting the wage floor above the market equilibrium wage Pe, the quantity demanded of workers by firms falls from Qe to Qd, as firms face higher labour costs and thus have less incentive to hire. At the same time, the quantity supplied of workers increases from Qe to Qs because higher wages attract more individuals to the labour market. The result is a surplus of workers, represented by the gap between Qd and Qs, which effectively leads to unemployment. This unemployment problem is especially pertinent in industries where firms may opt to reduce their workforce due to higher labour costs, ultimately undermining the policy's goal of reducing income inequality.

Furthermore, minimum wage laws raise the cost of production for firms, especially in labour-intensive industries, resulting in a leftward shift of the SRAS from AS0 to AS1, causing prices to increase from P0 to P1. Firms may pass on these higher costs to consumers in the form of higher prices, leading to cost-push inflation. For example, higher wages for workers in the retail or food and beverage (F&B) sectors could lead to higher prices for goods and services, affecting overall price levels. This inflationary effect could disproportionately harm low-income households, whose real incomes may not rise in line with price increases, thus negating the potential benefits of a minimum wage law.

Additionally, firms may respond to higher wage costs by investing in automation to replace low-skilled labour. For instance, companies such as McDonald's have adopted self-checkout kiosks to reduce reliance on low-wage workers. Similarly, firms like Amazon have increasingly automated their warehouse operations. This shift toward automation could exacerbate structural unemployment, as low-skilled workers may find it increasingly difficult to secure jobs in a technologically advanced labor market.

In the context of Singapore, the appropriateness of a minimum wage law is questionable. While it may raise wages for low-income workers in the short term, the risk of unemployment, inflation, and structural changes in the labor market make it less attractive. Furthermore, Singapore is a highly export-oriented economy, and higher wage costs could hurt the country’s export competitiveness. As firms face rising costs, they may either pass these costs onto consumers or cut back on production, both of which could negatively affect the broader economy.

Tightening Foreign Worker Quota Policy

An alternative policy to reduce income inequality is the tightening of the foreign worker quota policy. In Singapore, the Dependency Ratio Ceiling (DRC) limits the proportion of foreign workers a company can hire relative to local workers. Tightening this policy would involve reducing the DRC, forcing firms to hire more local workers if they wish to employ foreign labour. By increasing the demand for local low-skilled workers, this policy can potentially raise their wages, thus reducing income inequality.

Reducing the supply of foreign low-skilled workers or restricting their growth would increase the bargaining power of local workers, driving up their wages. In theory, this could help reduce income inequality as low-income local workers benefit from higher wages in sectors like construction, retail, and F&B. However, a tightening of the foreign worker quota policy could also lead to higher production costs for firms, as foreign workers generally accept lower wages than their local counterparts. Firms may pass these higher costs on to consumers, leading to inflation, similar to the effect of a minimum wage policy.

One advantage of tightening the foreign worker quota over introducing a minimum wage is that it targets the root of the wage disparity—an oversupply of low-cost foreign labor. By limiting the number of foreign workers, the policy increases demand for local workers and raises their wages without directly imposing a wage floor that could create labour market distortions. Additionally, the impact of tightening the foreign worker quota may be more gradual, giving firms time to adjust, unlike a sudden increase in wages through a minimum wage law.

However, this policy is not without its drawbacks. As with the minimum wage law, firms facing higher labour costs due to the reduced supply of foreign workers may turn to automation. This could again lead to structural unemployment, particularly in industries where tasks are routine and easily automated. Moreover, in sectors where foreign workers are vital—such as construction—tightening the foreign worker quota could result in labour shortages, slowing down projects and increasing costs across the board.

Conclusion

In the case of Singapore, both minimum wage laws and tightening foreign worker quotas can address income inequality by raising the wages of low-skilled workers. However, the risks associated with minimum wage laws—such as unemployment, inflation, and increased automation—make this policy less appropriate. Tightening the foreign worker quota policy, while not without its challenges, seems to be a more targeted approach that avoids the rigidities of a wage floor and can gradually improve the wage prospects of local low-skilled workers.

Therefore, while both policies have their merits and drawbacks, tightening the foreign worker quota policy is likely more appropriate for Singapore in reducing income inequality, especially considering the country's reliance on foreign labour and the potential negative consequences of a minimum wage law on inflation and export competitiveness.