Explain how possible demand and supply factors might contribute to widening income inequality in Singapore

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(a) Explain how possible demand and supply factors might contribute to widening income inequality in Singapore. [10]

Introduction

Income inequality refers to the unequal distribution of income among individuals or households in an economy. It is commonly measured using the GINI coefficient, which ranges from 0 to 1. A GINI coefficient of 0 represents perfect equality, where everyone has the same income, while a GINI coefficient of 1 indicates maximum inequality, where one person holds all the income. In Singapore, rising income inequality has become a concern as wage disparity between high-income and low-income workers continues to widen. Both demand and supply factors play a role in exacerbating this trend.

Demand factor (and PES inelastic)

On the demand side, changes in technology and the evolving structure of the economy have contributed to increasing demand for workers in high-skilled industries such as artificial intelligence (AI), electric vehicle (EV) manufacturing, and financial services. The demand for labor is a derived demand, meaning that the demand for workers depends on the demand for the goods and services they produce. For instance, as demand for AI-related services or EV production rises, the demand for workers in these sectors also increases.

These high-skilled workers, who are typically employed in sectors that require advanced qualifications such as degrees or specialised training, already face strong demand. However, the supply of these workers is relatively inelastic in the short term because the process of training and educating them takes time—typically several years. This inelasticity means that when demand for these workers increases from DD0 to DD1, a shortage of qualified workers arises at the initial wage rate P0, leading to a sharp upward pressure on wages. As a result, wages in these high-skilled sectors rise from P0 to P1. This phenomenon benefits high-income workers, exacerbating the income disparity between them and low-skilled workers.

Supply factor

On the supply side, Singapore's globalised economy and relatively open immigration policies have led to a significant inflow of foreign workers, particularly in low-skilled industries. Despite foreign worker levies and the dependency ratio ceiling, the foreign population in Singapore grew from 1.47 million in 2021 to 1.86 million in 2024. Many of these foreign workers are employed in low-wage sectors such as construction, retail, and food and beverage (F&B). The increase in the supply of low-skilled workers shifts the supply curve from SS0 to SS1, creating a surplus of labour in these sectors. This surplus exerts downward pressure on wages, as the abundance of available workers reduces the bargaining power of individual low-skilled workers. Consequently, wages in these sectors decrease from P0 to P1, further contributing to the growing income inequality in Singapore.

In summary, demand and supply factors interact to widen income inequality in Singapore. On the demand side, high-skilled workers in sectors such as AI and financial services see their wages rise due to increased demand and inelastic supply, while on the supply side, the influx of low-skilled foreign workers suppresses wages in sectors like construction and F&B. The divergence in wage growth between high-income and low-income workers exacerbates income inequality, as measured by the GINI coefficient, contributing to a widening gap in Singapore's income distribution.