Why aren’t wages increasing fast enough?

An increment in wages is what workers want, but if wage increments are rapid and excessive, it will affect the overall economy via wage push inflation.

What is wage push inflation?

Wage push inflation occurs when the prices of goods and services go up due to the increment in wages of employees.

How does wage push inflation occur?

For a company to maintain its profit at the same level after increasing its employees’ wages, it has to increase the prices which it charges for its goods or services. Furthermore, as wages increase, the customers have larger spending power, resulting in a higher demand for goods and services and leading to an increase in the prices as well. This becomes a vicious cycle because when prices of goods and services rise, the increment in wages is no longer enough to compensate for that increase in goods and services. As a result, employees will require another increment in their wages, which leads to an inflationary spiral effect.

Relevance to Singapore’s current day economy

Speaking at the National Wages Council (NWC) 50th Anniversary Dinner on 28 September 2022, Deputy Prime Minister and Finance Minister Lawrence Wong mentioned that it will be challenging for Singapore’s workforce to sustain the past wage and productivity growth it has achieved as Singapore faces the immediate challenge of rising inflationary pressures and potential global economic slowdown ahead.

To ensure Singapore doesn’t fall into a wage-price spiral for the country to move forward, wages and wage increases must be in line with productivity. Acknowledging that the tight labour market Singapore experiences may propel wages to increase, DPM Wong cautioned that “we cannot afford for wages to increase too quickly, which will cause us to lose our global competitiveness,” and “it will be the most vulnerable workers who will ultimately bear the brunt of the impact if companies cannot sustain themselves.”

What can be done?

Hence, it is important that wages are kept sustainable through encouraging skills upgrading and productivity improvements for workers and businesses through Industry Transformation Maps as well as structured training and workplace innovation that NWC has been calling for employers to champion.

DPM Wong appeals to companies to work together with National Trades Union Congress (NTUC) to set up Company Training Committees (CTCs) upskill their workers and keep their skillsets relevant to the rapidly changing economic landscape and tap on the Support for Job Redesign under the Productivity Solutions Grant and other reskilling programmes offered by Workforce Singapore.

Welcoming participation from tripartite partners, DPM Wong urges sharing of ideas, feedback and suggestion on policies through the Forward Singapore exercise to forge consensus and rally society around shared aspirations and ideals.

“More than ever, NWC will have an important role to play in bringing partners together to champion fair, inclusive and sustainable growth for all. In these challenging times, I’m sure that our instincts to collaborate, to cooperate and to find consensus will see us through.”

A little backstory to the National Wages Council (NWC)

Singapore enjoyed unprecedented growth due to the introduction of several significant policy measures that proved effective for the economy. However, the economic growth that continued into the 1970s was a double-edged sword as while it led to more jobs and higher incomes, it resulted in rising wage expectations. There were growing concerns that high wage expectations would lead to serious industrial disputes that could deter foreign investment and hinder the economic progress of Singapore.

This led to the formation of NWC in 1972, to formulate wage guidelines so that it aligns with Singapore’s long-term economic growth. The Council is a tripartite body that has representation from three bodies: the employers, the unions and the government. Once every year, the NWC will convene to discuss wage-related matters and decide on the guidelines that are agreed upon unanimously by the three parties.

The core belief that underpins how the NWC formulates its guidelines is that the increment in wages should be in line with long-term productivity growth. This will ensure that the increment in wages is sustainable over time and will keep Singapore as a competitive nation.

How does NWC help workers?

The NWC and its work resulted in a decrease in time-consuming union negotiations and provided workers with an incentive to improve productivity. Wage guidelines recommended by the NWC are based on the performance and growth rates of the national economy. The flexible wage system introduced by NWC in 1986, right after the 1985 recession, included an annual variable component (AVC). After the 1999 financial crisis, an additional monthly variable component (MVC) was set in motion. These two components allow employers to adapt to financially challenging times as they can adjust wages during financially difficult times, and reward employees when the business is prospering.