What makes a fair wage?

Fair Wages

Your next “fair and equitable” pay packet

As they say, a fair day’s wage for a fair day’s work. But what exactly constitute a fair wage?

At the most fundamental level, a fair wage is one that, in exchange for, a worker willingly provides a service to an employer, and that the employer willingly compensates the worker for this service it is receiving. It is simple demand and supply coming together in the labour market where neither party is coerced into entering such a contract of service. In the financial markets, we call this price discovery.

In a closed labour market, wages should adjust to reflect the cost of living. Workers have to consider the cost of living and determine if the wage paid is sufficient for sustenance and upkeep. If it is not, they will struggle and other problems will start to crop up. They may look for other jobs or start demanding for higher pay.

It gets complicated when the labour market opens up internationally. We get bus drivers from China, construction workers from Bangladesh and maids from Indonesia, and all these workers come willingly because wages here are higher than what they can command back home. So with this new supply of workers who are willing to accept lower wages than Singaporeans, employers happily pay lower. Price discovery does not necessarily provide correct valuation, as we see here with external distortion. At this new equilibrium, can employers now claim that this is a fair wage?

Some argue that it is not unfair that pay is now pegged lower because these foreign workers bear the same cost of living in Singapore. If they can still manage to send money to their families back home, why can’t the Singaporean worker survive on the same amount? Unfortunately, life is not as simple as that. Say the foreign worker is using the salary to support two kids back home, while the local worker is using the same salary to support two kids in Singapore. The costs to feed and school these kids will be very different in the two countries. Now is that fair to the local trying to survive in his own country?

I was almost done writing this post when labour chief Lim Swee Say came out to say that based on the same rationale above, wages should be kept different for the same work. It threw me off completely because he has turned the whole argument around. So now we have official word from the union that some are more equal than others. By extension of his theory, we should have means testing to determine a fair wage. A person with a rich daddy should be paid less than another who provides financial support for a sick parent. You will also get paid higher if you have a bigger mortgage than your colleague.

Going back to the price discovery of wages, let’s push the argument further. As wages in countries such as China catch up with ours, employers may start looking to other countries. After all, this is but a price arbitrage of a commoditised resource that is low skill labour. Say there is a country, perhaps one with abject poverty, years of bloody war, or cruel oppression, where people are so keen to escape that they will come as long as you provide a basic shelter and two meals a day, can we now say that this will be the new fair wage?

Minimum wage exists to prevent such scenarios from happening by mandating a base level of compensation that commensurate with the cost of living in the country. For countries like UK, higher cost cities such as London even have a recommended living wage that is higher than the statutory minimum wage. But in Singapore, with liberal immigration policies coupled with the lack of a minimum wage, how does one prevent a downward spiral of wages? If we acknowledge the need to raise wages but reject minimum wage because costs will rise, is that not an admittance that we exploit workers by not paying fairly?

When SMRT CEO Desmond Kuek said the pay for the Chinese bus drivers is ‘fair and equitable’, he was comparing it to their Malaysian counterparts. I wonder how he determines that wages for the Malaysian drivers are fair in the first place. By comparing against drivers in Malaysia? But it’s a different country. Against SBS drivers? But is that a fair comparison since it’s a duopoly?

When our ministers tell us no Singaporeans want to work in these low level jobs because the work is tough and the hours are long, could it not imply that it is not a fair day’s work for our standard of living? Tough work is overcome by working shorter hours; long hours can be broken down into shorter periods. So instead of two workers doing 12-hour shifts at Sakae Sushi, you can have three workers washing dishes in 8-hour shifts. Everything comes down to the wage, no?

Equality aside, what Mr Lim advocates — of paying foreigners lower — could work if there are restrictions and quotas to limit the reliance on foreigners. Else it will just be no holds barred which, unfortunately, appears to be what we are seeing at the moment. The government doesn’t question employers who claim Singaporeans don’t want the jobs. I believe equal wages, incorporating all factors, work better because it creates a natural incentive for employers to choose locals.

Likewise, minimum wage, despite the problems it could create, is a necessary evil because some employers can’t be trusted to pay fairly. But the truth is, neither our businesses nor us Singaporeans are ready for the higher costs. So what now? I’m afraid you have read this far to hear that I don’t have the answers.