Here is a narrative of the connectivity of low wages, low productivity and inflation……… and greed.
Workers Are Not Commodities
In the TRE editorial “Talk show participants: We can’t get S’poreans to work” restaurant owner Ms Saram said she moved her restaurant business to Japan because she can’t hire Singaporeans. She said that her Japanese staff have been working with her for the past 5 years. Singaporeans, on the other hand, tend to job-hop. (http://www.tremeritus.com/2015/05/21/talk-show-participants-we-cant-get-sporeans-to-work/).
Here are the wage comparisons:
Japanese Waiter / Singapore Waiter
Annual Salary S$22,500* / S$18,000
Employer contributions to social security / CPF S$ 3,100 / S$ 3,060
Total deductions including taxes 37% / 40%
*Excluding mandatory transport allowance
Wages are a little higher in Japan but deductions are slightly lower. Rents are on par or slightly lower. Still, why is it better for Ms Saram to operate from Japan and her Japanese staff are more loyal?
Workers are not commodities
The Japanese obviously felt that with healthcare and pension taken care of they were paid fairly and can afford a sufficient standard of living. The job became something worth holding onto and doing well. It helps that Japanese society is egalitarian. Such perceptions of fairness and equality are extremely important because it promotes 1) motivation 2) productivity. This make a huge difference to margins – a typical restaurant in Tokyo has less staff serving customers than in Singapore and yet achieved tremendously high service level. So despite higher wages, unit labour cost would be lower. US supermarket chain Costco paid its workers more than rival Walmart and yet achieved better margins.
Here is why one gets monkeys for peanuts.
In the US, 2 restaurants had gone out of business because of social media backlashes following the refusal of staff blindly sticking to dress code to serve cancer recovery customers who wore hats to hide loss of hair. The staffs concerned were paid minimum wages. Pay workers the minimal one can get away with, the workers will work to as minimal a standard as they can get away with.
Paradoxical it may appear but higher wages do lead to lower costs and of course more robust businesses.
Wages and Porches
These statistics show why business owners like Ms Saram are bellyaching about FT restriction and rising wages; it hurts their fabulous sacrosanct profits.
Countries Wage Share of GDP
Hong Kong 51%
Rest of OECD 60%
To get from Singapore’s abysmally low level to Hong Kong’s level, wages have room to rise by at least 20% – it just means less Porches and smaller landed properties.
Low Wages and Inflation
Given an extremely business-friendly government, there are few if any structural impediments such as high taxes and labour restrictions that can explain the persistent low productivity. Likely two reasons: 1) high real estate prices 2) rent seeking behavior by government linked corporations.
High real estate prices including rents and cost resulting from rent seeking behavior in effect act like a highly regressive tax on business, sapping revenues that ought to be re-invested in process improvements leading to less use of labour and higher wages. It takes away disposable income from workers, lowering morale and hurting consumption.
Given dependence on low wage, unproductive processes resulting from the rents and rent-like costs coupled with immovable profit margins, then these businesses are unable to absorb any further cost increases such increases in rents and input costs. There can only be one outcome: inflation. A paradoxical situation of low wages and yet high cost of living.
Overly Large Financial Sector
Let us conclude by looking at low productivity caused by an overly large financial sector. The sector is rent seeking which is necessary to a point but all too often pushed to excesses. Such an outcome increases resources committed to rent seeking by drawing away too much talent from innovative, value creating industries. Think of those expensively educated involved in helping foreign companies and multi-millionaires in tax “massaging”. And those back office operations located in Singapore which are cost, not revenue inducing.
This is backed by research by the Basel based Bank of International Settlements, thanks to a heads-up from regular blogger Cynical Investor. A summary is given below
Once private sector debt exceeds 100% of GDP (Singapore 128%) and total financial sector employment exceeds 3.9% of total employment (Singapore 5%), effects on productivity turns negative.
The finance sector tends to favour those firms that have collateral they can pledge against loans. This usually means more money for builders and property developers, notorious for low productivity, than for those with high R&D spending and with less collateral.
R&D-intensive industries – aircraft, computing and the like – will be disproportionately harmed when the financial sector grows quickly.
The productivity of a financially dependent industry located in a country experiencing a financial boom tends to grow 2.5% a year slower than a financially independent industry not experiencing such a boom.
People who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers
In short, the writer recommends reining in real estate prices, the GLCs, the size of the financial sector and the use of low skill, improperly qualified FTs. Most of all, increase wages roughly in line with Professor Lim Chong Yah’s “wage shock therapy”. Finally, welcome innovative, socially responsible entrepreneurs with open arms and wish those like Ms Saram and her fellow panelists Godspeed and good riddance,
* Chris is a retired executive director in the financial industry who had mostly worked in London and Tokyo. He writes opinions and commentaries mostly on economic and financial matters.