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Dec 11, 2010
Widening wage gap. Does it matter?

As Singapore's economy powers ahead at full steam this year, the income gap between the top and bottom earners continues to widen. Is it cause for concern? Does it really matter? And if so, what more can be done about it?
By Li Xueying, Political Correspondent and Zakir Hussain, Political Correspondent

A SOBERING statistic is casting a shadow over the headline-making reports of record gross domestic product growth, record household wealth and record bonuses.

The widening gap between Singapore's rich and poor is now the second largest among the world's developed economies, according to a United Nations report last month.

The Government has flagged it as a concern that it is addressing through education and training. The opposition is calling for more to be done to help those at the bottom. Economists and scholars are exercising their minds on the issue.

But is it really cause for concern? Does it matter if those at the bottom have a reasonable standard of living? If yes, what more can be done?

Singapore's growing inequality has been borne out most recently by the UN Development Programme's ranking of developed economies. It shows Singapore coming in second - after Hong Kong - in income inequality.

Singapore's Gini coefficient - which measures inequality on a scale of 0 to 1 (0 means that income is shared equally among all; 1 means one person has all the income and everyone else none) - for the decade up to this year stood at 0.425, below Hong Kong's 0.434.

Tracking the Gini year by year, Singapore's inequality has increased steadily since 2000. That year, it stood at 0.444, before hitting a peak of 0.489 in 2007. It dipped to 0.478 last year because of the recession.

The situation is, however, leavened by government transfers: After taking into account taxes and social aid such as ComCare payments and Workfare supplements, the coefficient fell to 0.453.

But it remains high - comparable to that of Latin American countries like Argentina (0.457), higher than that of liberal market economies such as the United States (0.408) and Britain (0.36) and heads and shoulders above those in Europe such as Germany (0.283) and France (0.327).

Other statistics point in a similar direction. Last year, managers - Singapore's best-paid group of workers - earned a median wage of $6,300. This is 6.3 times more than what cleaners and labourers, with a median wage of $1,000, earned. In 1997, the gap was 4.13 times.

Slice the data another way, and the same trend stands. Singapore's richest 20 per cent of residents saw their estimated real median monthly income increase from $5,328 in 1996 to $7,278 last year.

In contrast, the poorest 20 per cent struggled to keep up with inflation, with their wages increasing by a mere $32 - from $711 to $749, according to computations by economist Hui Weng Tat of the Lee Kuan Yew School of Public Policy, based on data from the Manpower Ministry's Labour Force surveys.

This means that Singapore's richest 20 per cent earn 9.7 times more than the poorest 20 per cent. In contrast, Japan's gap is 3.5 times, Germany's is 5.2, and the US, 8.5.

Statistical limitation

THERE are, however, certain limitations to the statistics.

For one thing, the Gini coefficient is a relative measure. It 'does not locate where in the distribution the inequality occurs', notes Professor Augustine Tan, an economics professor at the Singapore Management University (SMU).

This means that it is possible for both a very rich country and a very poor one to be deemed equally unequal.

Also, to place the ranking in context, Singapore, as a city-state, accommodates its population's wide spectrum of skills within a limited space compared to larger countries that have non-urban areas for people out of the rat race.

Another shortcoming cited by Professor Tan Khee Giap of the LKY School and Mr Liang Eng Hwa, a PAP MP, is that the statistics do not fully capture non-monetary aspects of the Singapore social safety net such as public housing and subsidised health care.

Noting that 95 per cent of Singaporeans own their homes, Mr Liang, a DBS Bank managing director, says: 'At retirement, most would have owned a fully paid HDB flat. This wealth would be the envy of low-income groups in many countries. If the home owner chooses to monetise his flat, he could receive a steady stream of income for many years.'

That said, those who do not own their homes - usually the poorest with little or no Central Provident Fund (CPF) savings for the down payment for a flat - would not have recourse to this avenue. Housing Board figures for the last financial year show there are 47,532 rental flats.

SMU assistant professor of economics Davin Chor says: 'For just about any conceivable measure of inequality, the message has been very uniform: Inequality has indeed been widening in Singapore, and this increase has been especially sharp in the last 10 years.'

Another worried about the situation is Dr Khor Hoe Ee, previously chief economist at the Monetary Authority of Singapore.

'When you compare the situation of Singapore with other advanced, high income countries, it looks like we're really way behind in terms of the income distribution relative to our per capita standard of living,' he says, referring to countries such as Japan and Germany.

At the same time, the story of inequality is not simply about the bottom 20 per cent, say those interviewed.

While the wages for the middle rungs have increased, the rise fell far short of that for the top earners. The real median monthly income of employed residents grew from $1,876 in 1997 to $2,420 last year.

In comparison, top honchos such as those in the banking sector took home US$3 million to US$4 million (S$4 million to S$5.2 million) last year.

'The perfect storm'

A TRINITY of inter-related factors led to the situation today, according to those interviewed.

First, the rise of globalisation from 20 years ago saw low-end jobs in manufacturing leaving for much cheaper labour in China and India.

As a result, Singapore workers in this sector are caught in a bind. Their pay stagnates, often dips - and that is if they keep their jobs.

The second factor is that Singapore's growth today is propelled by technology, which favours the skilled and displaces those who are not.

The third is the influx of foreign workers to fill unmet demand in certain sectors, which placed a cap on the earning power of lesser-skilled Singaporeans. As of the end of last year, 856,000 Work Permit holders and 82,000 S-Pass holders made up one-fifth of the population.

Meanwhile, the open-door policy increases the pool of high-income earners which in turn raises the Gini co-efficient, says Bank of America Merrill Lynch economist Chua Hak Bin.

Underlying these developments is the Government's philosophy that Singapore must enlarge the overall pie as much as it can. It can then share the success by redistributing some of the gains to help the less successful help themselves.

But while the three trends helped power the economy's robust growth, they also created what Dr Chor calls a 'perfect storm' of negative shocks for those at the bottom.

Alarmingly, the pool of workers affected by such competition has also grown. Those whose pay stagnated include not just those right at the bottom, but also the lower-skilled professionals, managers, executives and technicians facing competition from S-Pass holders.

As Dr Chor sees it, the pace of economic developments over the last 10 years has made it difficult for Singapore to balance competing priorities.

For instance, the inflow of foreign labour was partly occasioned by the Government wanting to grow the economy as much as possible to make up for several downturns over the past decade.

What's the fuss?

SOME may wonder what all the fuss over inequality is about.

After all, by one broad measure, Singaporeans across the board are better off. The country's GDP per capita rose from $40,364 in 2000 to $53,143 at the end of last year.

Indeed, some argue, it is surely better for people to be richer across the board than they were 10 or 20 years ago - even if some lag far behind the top-earners - than it is for everyone to be more equal but to see slower growth overall.

The rapid growth allows for more jobs to be created across the board, even if they are low-paying ones, they contend.

Mr Liang notes that Singapore enjoys very low unemployment, which is a key measure of social well-being.

Others, like Prof Augustine Tan, feel that some inequality motivates individuals to do better for themselves. 'Some inequality is needed to provide inducements to get better education or training, work harder, be more entrepreneurial,' he says.

Adds Dr Tan Ern Ser, a sociologist at the National University of Singapore: 'As long as all Singaporeans enjoy a decent quality of life and possess the hope that they and/or their children can still move up the ladder, I don't see inequality as a big issue.'

The threshold, he feels, is where the bottom can survive reasonably well, while the middle and top thrive.

The question is, are the bottom fifth of society surviving 'reasonably well' in Singapore? And how does one measure that?

Based on government surveys, a household of four needs a minimum of $1,700 to cover basic costs of living like food and utilities, as LKY School dean Kishore Mahbubani noted in a recent article in The Straits Times.

The numbers affected are significant. The Singapore Workforce 2010 report noted that some 400,000 workers - 20 per cent of the resident workforce - earn $1,200 or less a month.

If there is a glimmer of hope, it is that although these Singaporeans' wages have stagnated, their material standard of living - from upgraded homes to possession of mobile phones - has improved.

As observers note, Singaporeans do generally accept some level of inequality because they believe they have a chance of moving up over time.

So yes, they may be poor today, but they or at least their children can make it tomorrow.

What really matters

WHAT matters therefore is equality of opportunity - rather than equality of income.

However, this hope of mobility is undermined when the latter affects the former: when gaps in income widen to the point that they become ever harder to bridge and the relative poverty of those at the bottom undercuts social mobility.

For instance, when the bottom 20 per cent of households struggle to make daily ends meet, they are hard-pressed to set aside extra for what some call investments in human capital - to nurture their children in education, improve their own skills, or buy a computer and subscribe to broadband access for the home.

While government schemes go some way towards helping such families, the reality of Singapore - with its tuition culture, for example - is that such enrichment extras matter.

So over and beyond the 'minimum subsistence line' of $1,700, a family of four would need the 'social inclusion level' of $2,500 to $3,000 a month, as some economists calculate, to have a fighting chance of having their children move up in life.

A prolonged exclusion of these children from equal opportunities of moving up in life - occasioned by wage stagnation and growing inequality - could, in the words of social work academics Irene Ng and David Rothwell, 'signal that economic mobility may be less common, a trend that threatens Singapore's venerated notion of meritocracy'.

'Intergenerational economic mobility - the extent to which children's economic outcomes depend on parents' economic status - is relatively low,' they wrote in a 2009 article. 'It is lower than most developed countries and similar to the United States and United Kingdom - two countries where concerns have been expressed over their low intergenerational mobility.'

Inequality, in and of itself, also matters when it comes to social cohesion. Left unchecked, it could entrench a class divide.

It is human nature to compare oneself to one's neighbours, colleagues, countrymen. As Prof Augustine Tan puts it: 'Inequality is always an emotive issue because of envy.'

And in a small, densely populated city like Singapore, where inevitably urban poverty runs up against displays of wealth and affluence, such relative inequality could breed social tension.

The implications are worse if such inequality is more pronounced along ethnic lines. Already, minorities have lower median incomes and are disproportionately represented among low-wage earners.

Nanyang Technological University economist Ho Kong Weng says that, based on national surveys of youth, minorities appear to have a lower level of intergenerational social mobility. If such trends are left uncorrected, the risk of racial cleavages will grow and the social compact could unravel.

Psychologically, worker morale could also be affected. Scholars note that it is more stressful living in a more unequal society, as there is a greater struggle to achieve a certain level of income.

A more equal society - where the lot of the bottom is nearer the median, would raise the level of the country's competitiveness if the skills levels of the poorest are also lifted.

But the way forward, caution those interviewed, should not be to cap the income levels of the rich, who create jobs and contribute a large share of tax revenues.

The challenge, instead, is to raise the boat for the bottom fifth of households.

Minding the gap

INDEED, the Government is lifting the boat through a variety of schemes.

Its social safety net is upheld by four key pillars: public housing (HDB), affordable health care (the 3Ms - Medisave, MediShield, Medifund), enforced retirement savings (CPF), and a wage supplement for low-wage workers (Workfare Income Supplement).

Then, there are the initiatives to equip Singaporeans for a knowledge economy: education for the young (top-ups and bursaries) and training for the workers (from the Skills Programme for Upgrading and Resilience to the Workfare Training Scheme).

Cash handouts are given out as a last resort through ComCare (limited to three months of aid although there is flexibility for deserving cases) and Public Assistance for the old and disabled.

At the same time, the Government is tightening the flow of foreign workers, forcing employers to boost productivity - leading, hopefully, to higher wages.

All those interviewed are unanimous in giving the Government credit, saying it is on the right track. But more, they argue, should be done (see other report).

What would happen if Singapore maintains the status quo?

The pragmatic may note that natural attrition will take place - it is a matter of time before the generation of older, poorer-educated Singaporeans passes on.

Yet not addressing the problem now will mean not according due respect and recognition to the pioneers who helped to build Singapore with their blood, sweat and tears.

And if wage stagnation at the low end becomes persistent, there will be long- term trickle-down effects for future generations.

Says Dr Chor: 'One of my greatest fears would be if the children of low-income earners themselves become discouraged in the face of the large income divide, and view their own chances for social mobility to be low.

'If this is not addressed, it could really undermine our ethos of meritocracy of opportunity, at least in people's minds and perceptions.'

On a more philosophical level, as Singapore moves ahead, the problem of inequality strikes at the heart of the country's perennial policymaking struggle between two competing demands:

How can it continue to seize opportunities in a globalised economy and still ensure that no segments of society are left trailing far behind?