Growing need for fairness and respect. Negative income tax is better than welfare or workfare for the unemployed

BT 20120724 NEGINCOME 74621
Growing wealth gap: As artificial barriers to success have fallen and logistics have become easier, the highly educated, skilled or productive earn more of the income – PHOTO: FILE PHOTO

FAIRNESS in society and among societies has recently become a major topic among the chattering classes. The phrase “the 99 per cent versus the one per cent” has in a simple, yet simplistic way identified inequality in wealth between “us” and the wealthiest in developed countries during the five-year downturn.

Leaders of countries rich in natural resources have declared that the assets belong to their people, not foreign miners and petroleum companies that negotiated their rights during an earlier period of lower prices.

All of these comments sound reasonable, at least on the surface. Yet, warm words and political expediency mean adding to the cost and risk of “doing business”: these second-order effects will likely in the medium term deliver fewer benefits to the 99 per cent, whether in developed or developing countries.

Singapore ranks top in the Ease of Doing Business survey. Yet, politicians face a call for changes to the social contract, including the institution of a minimum wage. The wealth gap has grown. As artificial barriers to success have fallen and logistics have become easier, the highly educated, skilled, productive or differentiated earn more of the income.

The remainder have seen their relative incomes stagnate or fall. With politicians in neighbouring countries fearing instability and bowing to pressure, Singapore stands out – so far – in holding to its principles. Should it?

Companies that could choose neighbouring countries for their regional headquarters (HQ), pick Singapore even if operational HQs are elsewhere. The country attracts expatriates and capital because foreigners trust the Singapore brand – capital is safe; the city is safe; taxes are low; the bureaucracy works efficiently; skills are aplenty; and low skilled labour costs are low.

Yet, if politicians agree to a minimum wage, even if low, they will signal to foreign firms that other regulations are possible. And, if the relative benefits of doing business in Singapore fall, then businesses may move their HQ to a neighbouring country where they have most of their operations. And, if the cost of labour rises, at what point will Singapore’s low – and relatively low – level of unemployment rise?

Nonetheless, the arguments for fairness and respect are gaining traction as inequality grows. Singapore citizens take on jobs that they would not were they not competing with so many foreign labourers – they earn less than they would without competition.

Foreign “guest workers” demand more as more countries need their services. Their governments are demanding better treatment, as stories emerge of deaths, disability and defilement. The Singapore government is not immune to these views even if they fear the brand devaluation of a change in policy. But is a minimum wage the best solution?

A minimum wage would distort markets by artificially increasing the wage of some employees above the rate at which their supplied skills are demanded. It is likely to lead to higher unemployment (or less employment), to a replacement of labour with capital, and to fewer hours worked by employed labour.

It may lead to more part-time work, meaning greater instability for those unable to work full-time. Some will certainly benefit. But many more will lose out. There are better ways to increase fairness and share the wealth created by the society without distorting the labour market.

Many look to the “Scandinavian model” where a strong private sector and a large public sector function in parallel. Relatively low unemployment and competitive labour markets are coupled with state largess. This model took many years and growing pains to become successful. It benefits from a relatively homogenous population and social welfare mindset.

Yet, in Singapore, the government may find adopting such a model for all quite complex and cumbersome. It would require much greater taxes and government intervention. It would dramatically change the city-state.

A bolder alternative

A negative income tax is a bolder alternative that fits the Singapore brand. It lets the labour market determine the wage that matches the skill set. It allows the government to decide what the base wage should be, for each level of employee or type of job, not only the minimum level. The difference between labour market pay and the government specified wage would be provided by the state, as a subsidy.

If market wage for a particular job is $5/hour, but the government believes that such an employee should earn $7/hour, then the government would add $2/hour to enhance the total wages.

The government subsidy could vary over the business cycle so that public policy encourages employment.

Employing the aforementioned employee for $5/hour may be $6/hour in an expansion and $3/hour in a recession. If the government prefers to maintain employment, then the subsidy could be $1/hour in a period of growth and $4/hour in a period of contraction.

This type of subsidy maintains stability and the self-confidence of employees; shares the wealth of the society; and does not distort the labour market. It is certainly better than welfare or workfare for the unemployed. By providing cash, the government does not decide the goods that people desire such as housing, transport, food or health care.

Using examples from other markets, the government can calculate what this subsidy should be for different types of jobs or level, or age – the younger and less experienced are usually expected to earn less than the older and more experienced, for a given job – aligning with the traditional Asian respect for elders.

A negative income tax supports the Singapore philosophy to minimise the distortion of markets, whether the movement of capital, labour, products or services. It would enhance the brand of Singapore, a country that already provides a safe, clean, and well-managed society, tolerant of differences in sex, race, religion, creed and colour – neither favouring nor discriminating against particular groups.

A negative income tax would build on this Singapore-specific definition of freedom and fairness, further distinguishing Singapore from its neighbours and peers, whether developing or developed societies, and keeping the island state admired and respected at the top of the table.

By Erik Stern, PUBLISHED JULY 24, 2012
The writer is president (international), Stern Stewart & Co, a business consultancy
Source : BT Premium : Growing need for fairness and respect. Negative income tax is better than welfare or workfare for the unemployed

Comments from netizens :

  • I am not sure what to think of this.

    It bring to mind “Workfare”. Isn’t workfare similar to the proposal?

    At the same time, I am concern with this:
    “The difference between labour market pay and the government specified wage would be provided by the state, as a subsidy. If market wage for a particular job is $5/hour, but the government believes that such an employee should earn $7/hour, then the government would add $2/hour to enhance the total wages.”

    What’s there to stop companies lowering the wage they pay, knowing that the government is oblige to top-up the difference?

    This is similar to the complains about increasing Chidcare Subsidy, Childcare center increase their fees when Childcare subsidy increases?

  • My understanding of his negative income proposal is :
    I think the writer’s proposal would require a mechanism to determine the market wage in addition to what the government believes the wage should be for a particular job. The ‘market wage’ here is based on what employers are paying for a particular job but it does not refer to the wage that an individual employer is willing to pay. For each job covered under the proposal, there will only be a single market wage.

    If implemented, those in the same job may not be paid the same wage even though the subsidy for each worker is the same. The employer’s share of the wage can still vary from worker to worker.

    So the problem raised by above may not arise.

    The negative income tax proposal will however require considerable effort and resources to implement if the number of jobs covered is large and if the frequency of reviews is high.

  • I am thinking along another line.
    Say Market rate is $5/h and Government Rate is $7/h, subsidy is $2/h.

    By virtual of Market rate, means there are ample supply of labour at that rate, ie there is a significant number of people willing to work at that rate?

    So knowing the subsidy is $2/hr, employers may choose to offer only $3/hr because the total is still market rate $5/hr where there are ample supply of willing labour.

    But my assumption is that the subsidy are pay out every month. Given it is term negative income tax –> implying a payout on a yearly basis, my concern may not be rightly placed.

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