Sunday, September 14, 2014

Progressive Wage Model Revisited: Please don't stone me



I started out with this video because I think it is a good description that explains the Progressive Wage Model (PWM) rather well.

I decided to revisit this topic again after reading Mr 15HWW's thoughts on it, as well as a very sharp reader of his, BB. I went to her blog and read her views on the PWM and I quite enjoyed reading her writing. I really appreciate them taking time to blog about this issue, because it gives me more angles and new perspectives to ponder about.

I think that I might have started out very harsh on viewing PWM as a cheat-code way of the government to implement minimum wage. The negative effects of minimum wage can be seen in a lot countries (some is highlighted in the video, 0.12-0.41), while many that argue the benefits of it might need a basic course on inflation and the monetary system, globalization and business 101.

Don't get me wrong here. I want nothing more than to see our country, our residents and our temporary residents prosper and enjoy living a decent life in Singapore. I do not hope for low-income workers to have depressed salaries. All workers, from every industry, of every nationality should get paid fairly for their labour provided.

Market Forces

In the video, it was highlighted that the problem with collective agreements is that it takes time. Market forces does time take to identify problems and then fix it. The government has foreign worker quotas, foreign worker levies and also workfare. I think this is an excellent 3-pronged approach that the government has adopted.

Foreign worker quotas ensure that all the low-income jobs are not sourced away to foreign workers who are willing to work at a lower wage than Singaporeans.

Foreign worker levies push up the cost of foreign workers to push companies towards hiring Singaporeans since they will be relatively cheaper.

Workfare boosts the wages of Singaporeans in low-income jobs, while deferring the costs from businesses.

In case it not explicitly clear, these 3 are protectionist policies put in play by the government to protect low-income Singaporean workers. I am usually against such policies, but I understand that citizen unemployment is generally not tolerable when foreigners take those jobs, and that can cause social unrest, even when foreign workers legitimately would be given those jobs if it was free market with no citizenship discrimination.

The main argument of the depressed wages is now widely cited to be because of outsourcing. Contracts are usually awarded to the cheapest bidder, naturally. It is only prudent for any business that outsource to aim for lower costs, as long as quality is not affected. For contracters, the aim is to quote attractive enough prices that will oust competitors in the industry to get awarded the contract. Because of this search for cheap contracts, workers in these industries have suppressed wages. Very logical, I agree.

However, that is not the end of it. If wages are too low (because contracts are too cheap), Singaporeans won't do the jobs. This will also affects the quota and will affect the contractors workforce. Without a workforce operating at 100%, it would only take one contract cycle for the businesses to reject the lower quality service being provided. Company loses the contract, and it will get awarded to the next cheapest bidder. Companies in the industry become wage takers, meaning they will pay any amount required to get Singaporeans to show up. Wages and contract prices shift upwards. It is slow, but it would happen.

PWM jumps the gun on this and pushes wages up, and the market follows. It is not entirely a bad thing, unless they estimate the wages wrongly. Over-estimation of the true and fair value of the labour will lead to costs being pushed up, while under-estimation gives companies the perfect excuse to keep wages at the mandated rate forever. The government have to be very accurate and sensitive to the market, because this PWM system is not self-correcting. That is why ever so often, you will hear the minimum wage hike debate happening in America. Collective agreements are slower to take effect, but they have a self-correcting mechanism built-in.

I shall now flip-flop and agree on the 1 point that if the PWM is correctly implemented at the correct wage levels, this can effectively help the industries' workers by effecting changes more rapidly and bypassing the slow, self-correcting mechanism of market forces.

Before leaving the topic of market forces, I would like to correct Mr 15HWW about labour supply and demand. Although many people want a job, that does not necessary mean that there is a large and ready supply of labour to fill that job. Labour demand requires a specific skill set that is being sought after. Although many people may want to be a doctor or lawyer, not everyone has the necessary skill set to be considered for the job. Thousands of people could apply for those jobs, but if they are unable to actually be employed to do it, is not real.

Unemployment

The reason why I still don't like PWM, is that at the core of it, it is basically minimum wage renamed and applied to certain industries. My main problem with the minimum wage is that it creates unemployment for the people that you are trying to help.

Previously, I said that:
All I can see is that... companies ... reduce their manpower count massively and instead replace manual cleaners with operators of cleaning machines
And now for the supporting evidence which is nicely in BB's post which is from Five Stars And A Moon.


Fantastic, 5 unemployed people now. Instead of 6 men cleaning 2 carparks, now you have 1 person cleaning 2 carparks. Unless the demand of cleaning services increases, there are only finite space that have been contracted out, so these people would have a high chance of losing their jobs in the industry. Sure, not all of the 5 unemployed people are Singaporeans, but definitely at least 1 of them will be. It is too late and I don't want to do fractions now, but take my word for it.

Now comes another problem. If all these people are now ejected out from the cleaning industry, where do they find jobs? They will most likely have to find a job in one of the other low-skilled industries. However, if all companies are at full manpower capacity or the unemployed workers do not have the abilities or will to take on other jobs, what do we get? That's right. Unemployment.

To be fair, this isn't unemployment directly caused by minimum wage. It is the secondary effect of what minimum wage does. This is unemployment caused by adopting technology that is more COST-efficient than humans. While this technology existed before, it is only because of the increased labour costs that businesses decided to move to machinery because it is cheaper.

Unless new industries that require low-skilled workers appear, this creates structural unemployment, which is many levels harder to deal with than cyclical unemployment.

So, bringing it all back to PWM. My take is that the PWM will definitely benefit the cleaning industry workers - if they still have their job.



Productivity

I concede that a boost in productivity will benefit both workers and businesses, with one caveat. Workers must still be and remain more cost-efficient than machinery. If their cost efficiency ever drops below that of a machine, it is a simple, unemotional, business decision to now use machinery instead to combat rising costs. And that creates unemployment.

The harsh truth that affects low-skilled workers is that technology is increasing enroaching on their livelihood because their jobs are the most easily codified to be done by machines. This is by no fault of their own, technology is just making them obsolete. How can someone be obsolete? It sounds like a very heartless and inhumane thing to say, I admit. However, this has happened before in the past, where horses became obsolete because of the advent of cars. Replace <horses> with <humans> and <cars> with <future technology> and this silly example now becomes chillingly plausible.

Not having any form of minimum wage helps to ensure that people are still employable because they are still more cost-effective than machines.

My point on productivity is best illustrated by this video by CGP Grey:

 
This video isn't about how automation is bad - but rather automation is inevitable.
We need to start thinking now about what to when large populations of our society are unemployable - through not fault of their own. What to do in the future where, for most jobs, humans need not apply.

Although I don't believe that automation will come so fast, it is inevitable. However, my proposal of a solution is what I advocated before in another post about minimum wage:
The only way to stay ahead of the labour curve as an individual is to learn, progress and keep running faster than everyone else to keep the advantage you have. The Red Queen Theory.
Instead of just competing with cheap labour (because of a globalized workforce), we now also face the competition that comes from technology that may one day be cheaper and more effective than us.

With that I shall end my post. I am going to sleep very well with all these thoughts finally out of my head. I wrote this at 6am and I'm not going to proofread this until tomorrow. I look forward to any comments about this. I think this is an issue that ought to be looked at more closely!

12 comments:

  1. Hi MH,

    Enjoyed your write-up and (sort of) reply.

    With regards to the supply and demand part, I agree that you are right that even if I wanted to become a doctor, I might not have the skill-set and thus, I do not 'effectively' become part of the supply.

    In the goods market, a Hermes bag can become 1000 times more expensive than another because of supply and demand. One could argue that the labour market is just another clearing market.

    Unfortunately, I am not of that view. As I already mentioned in my post, talent (just another word for skill-set) and market forces have determined that Mr Rooney is earning 1,000 times more than a local cleaner. Is this outcome really good for society not to warrant government intervention?

    There is this group of elderly, uneducated locals who chose (or had no choice) to become cleaners. But because there is a lack of local supply, large numbers of foreigners have been brought in. Since most young Singaporeans would not flock to this sector even if the wages double, as long as the foreign worker quota is tweaked to be more in favour of locals, unemployment of locals can be snuffed out even when some form of automation comes in after the implementation of minimum wage.

    But obviously, either profits drop or costs rise. The question is if most Singaporeans are willing to pay this price to help the bottom strata (in terms of income) of society.

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    1. Hi Mr 15HWW!

      I really like your statement that you said in your post, "And anyway, I am willing to pay 50 cents more for every hawker dish if the bulk of it goes to raising wages for our cleaners. Or higher conservancy fees."

      The problem is that businesses determine the wages of their employees, and they are unemotional entities that make decisions based on numbers. So as much as Singaporeans are willing to pay this price to help, what is the best way for it to be delivered?

      I too am willing to fork out more for these low-income workers, but I think it should come in the form of Workfare and skills upgrading (heavily subsidized or even free). Slowly tweaking the quota is a good idea to ensure that Singaporeans still have jobs as long as they are productive.

      From an income inequality aspect, someone earning 1,000 times more than someone else is hard to stomach. Then again the average Singaporean earns 135 times more than the average person from Congo. Income inequality only matters once it can be seen and felt. Of course, we don't have to care about people from Congo since they are from a different country, right? Out of sight, out of mind.

      World Bank - Singapore
      World Bank - Dem. Rep. of Congo

      Both cleaning companies and Manchester United are for-profit companies. From that perspective, how much do the employees contribute to the bottom line? I looked at the 2013 annual reports of 800 Super as a rough proxy and ManU to try and get a perspective.

      800 Super
      Manchester United

      800 Super spent $43.5 mil on employee compensation and made $5.7 mil profit. Every $1 spent on employees generated 13c profits.
      ManU spend £180.5 mil on employee compensation and made £146.4 profit. Every $1 spent on employees generated 81c profits.

      Of course it isn't a fair comparison in many ways, but Mr. Rooney, as part of all employees of ManU, helps to rake in a lot of profits for the company. Some might argue that everyone in ManU may need a payraise!

      Is his talent worth 1,000 times of a cleaner? Unfortunately, the answer also makes me sick to say, but the free market have determined it to be so. A footplayer earns a sick salary because he can bring in sick amount of revenues and profits for his club. His branding and skill set are shared by no other person, making any replacement of him an imperfect one. The same goes with CEOs of many companies.

      CEO Compensation

      Bottom income earners will never be satisfied with the disparity between the top income earners. Instead on focusing on the presence of inequality, it would be better to address how to shift the bottom income earners to better jobs and better pay which benefits them in an absolute way. Even if CEO compensation ratios dropped to 20 because CEOs cut their pay, or skyrocket to 2,000, the bottom income earners still won't see a difference to their paycheck.

      I think that better jobs and better pay can only come along from better skills. Paying someone more for doing the same thing is quite hard to justify. Which is probably why my boss doesn't want to give me a payraise, haha.

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  2. Hi MH,

    Enjoyed this "debate" with you. Don't worry, I won't be stoning you. =)

    Anyway, to be fair to PWM, minimum wage is just a small part of it and the government is indeed looking more at leveling them up and introducing a concrete career progression for them. That has always been the long-term solution and what the government has been preaching all these years.

    But I have to admit that I am heartened that there is the minimum wage to provide immediate help to these workers and help to partially address the "extremely unequal" (to me) treatment accorded to them.

    Your points are pretty valid and I have to admit that not so long ago, I probably wouldn't have argued for minimum wage. And kudos to you for performing that research on 800 Super and Man U. I definitely didn't know there was a big parity in those ratios, which might help to justify those footballers' salary.

    Regarding Congo and the rest of the world's poor, I don't really believe in "out of sight, out of mind". In fact, I strongly feel that they deserve as much, if not more help from the privileged, which obviously includes people like you and me. =)

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    1. Yes, I enjoyed it too. Definitely much better to have interaction to improve my point of view on this subject instead of just rambling to myself! I admit that thinking about this topic kept me up at night, haha! We shall wait to see how this policy goes, it is too early to know about what the future has yet to bring!

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  3. Got Money, Got Honey and 15 HWW,

    Must say I quite enjoyed this intellectual debate between you two ;)

    And the more pleasing thing is that you both were able to put forth your views vigorously without losing civility.

    Being young, your skins and bones heal faster; don't worry too much about sticks and stones least you write not what you want to say but what you think others want to hear.... (Easy for me to say since I've no skin in the game! LOL!)

    Instead of being overly sensitive to flip-flops, perhaps you can consider these re-phrasing:

    I've now reconsidered my earlier view in light of new evidence (new data, new information, etc)

    Touche! You have highlighted my blindspot...

    Interesting... I never thought of it that way...


    Hey! We are not infallible! Who says we can't change our minds?

    You both continue to battle it out in future OK?

    It's always nice to hear BOTH sides of the arguments :)


    P.S. Got Money, Got Honey, hope you don't mind I address you this way. There's another blogger around my age that also have a nick and blog that's called Money Honey. He got first mover advantage in my mind-share ;)

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    1. Hi SMOL,

      Honoured to have you around! I like to think of this as an honest and friendly sharing of views with my online friend, Mr 15HWW!

      I only realized that there was such another blogger only after a while. I feel like such a knock-off :(

      PS. I am too shy to comment on your blog, but I like to think of scaling in as "diversification of time"

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    2. Got Money, Got Honey,

      No worries. Comment at my waterig hole only when you feel like it, or when you get used to my nonsense and don't feel shy anymore ;)

      Hold that "diversification of time" thought. You're on to something!

      See if you recognise it during my next post ;)

      Delete
  4. The reason why there is shout for 'minimum wage' is due to perceived by inequality in society. If zero inequality in opportunities/ happiness were perceived, then likewise, there will be no demand for 'charity' be it in the guise of 'minimum wage' or otherwise.

    The call for minimum wage is thus a SYMPTOM of moral shortfall/ a deficit of charity in our society...

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    1. Hi bic_cherry,

      Glad to have some more opinions on this issue!

      I personally shudder at the notion of zero inequality. How can that be possible? Every person is different, born with different physical attributes and talents.

      I agree that inequality that is too wide is not good for society, it breeds unrest. Inequality should be dealt with, but I am not certain that minimum wage is a good option to address the issue.

      It is always easy to compare within a society. However, when we look at the median and average person in our society, I think we are doing quite well for ourselves with a quality of life many people would be jealous of.

      This leads to a philosophical question, When is it ever enough? Is it when you are satisfied, or it is when there is nothing left to gain?

      If enough is when you are satisfied, then who cares about inequality? It should not matter at all.
      If enough is when there is nothing left, then are you not propagating inequality? Or is inequality okay, but only if we are on the favourable side?

      I feel that the argument for equality within Singapore is the localized version of arguing for equality around the world, what do you think about that?

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  5. harlow harlow!
    read this a couple of days ago, but been wanting to leave a comment here, but.... oh well, work sorta got in the way ^.^;

    thanks for dropping by my blog and even reading those loooooong posts!

    anyway, wanna let you know i thoroughly enjoyed reading your posts on PWM. yup, even the older piece where you were quite strongly against it. happy to hear that you've softened your stance about this. yes, it's minimum wage, but no, not really. i guess PWM is probably best described as sectorial minimum wage. generally, i'm with you that minimum wage ain't the one-size-fits-all solution to all the woes in the world, but i think there is a need to 'intervene' in some sectors else the low wage workers might be made to suffer way too long. they might not outlast the time it takes for the market to correct itself naturally...

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  6. Hi I enjoyed reading your post, you do have a point there about PWM being another name for minimum wage, however there are two other ladders in PWM besides the productivity ladder that make PWM more than plain vanilla minimum wage: skills training and career responsibilities.

    Minimum wage may price some workers out of the market, where they may have to seek jobs in other sectors, hence there's where skills training comes in. Where? E2i has a Centre for low wage workers to seek help for jobs and training.

    As for those who keep their jobs, they aren't always stuck at minimum wage. PWM seeks to create a career ladder for them to climb, with higher levels of wages per higher job position.

    I'd love to hear your views on these other 2 ladders.

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    1. Hi deneiza,

      I am glad you enjoyed my article.

      My personal view on skills training might seem very politically incorrect, but people who have jobs that are in the "minimum wage" category that might be affected, are the people with the lowest level of skills and the ability to learn new ones. Even how you retrofit and "zhng" a bicycle, beyond a certain travelling distance, a car, train or plane might be the only practical mode of transportation. Why outlaw the bicycle, even when people just need to go 5 minutes away? That said, of course skills training should be advocated. What other alternatives are there? The percentage of successful outputs is what I am skeptical of. I have absolutely no data at all to support my thought process though. I would love to see an independent review about how effective low skilled re-training is! If it is effective, my gripe with the effectiveness of pushing unemployed through skills training will be null.

      Having a career ladder doesn't mean actually climbing it. I think from a guy's perspective, it is most easily visualized using examples from our time in the SAF. We all know that the regulars only get promoted when someone above them "vacates". Even how good they are, you will still get stuck if people are relatively better than you and are still occupying the spots above you. There can be only one CoA, just like there can be only one CEO. Although it is a very nice picture to paint that it is possible to eventually become a supervisor and earn $1.6k instead of $1k, you will always need rank and file because not everyone can become indian chief.

      If we agree that minimum wage causes unemployment, we need to think how to tackle that unemployment. Structural unemployment is not an easy problem to solve and career ladders don't create more employment vacancies, neither does skills training. Forcing the unemployment from Singaporeans to foreign workers could work, but that will also make businesses even more cost uncompetitive and may eventually force them to close down and push more people into unemployment. I don't know how unemployment should be tackled other than the individuals personal desire to upgrade and improve themselves, which is why I rather unemployment not be legally sanctioned in the first place.

      Just my ramblings on this, I'm not trying to be aggressive or prove I'm right!

      MH

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