The Progressive Wage Model benefits workers. But does it lift productivity and help businesses?

There is a consensus in Singapore that the wage level of our low-wage workers is too low.

The challenge is how to help them without hurting them.

The Progressive Wage Model (PWM) is the tripartite partners’ solution led by the National Trades Union Congress (NTUC) for increasing wages of low-wage workers in Singapore.

It is preferred to a minimum wage policy as PWM has more stringent requirements for workers to go through skills upgrading to increase productivity.

In other words, PWM is a productivity-based wage model that seeks to prevent an increase in unemployment typically caused by a minimum wage policy.

Thus, PWM has been termed minimum wage plus by the Government.

Launched in 2015, PWM has been implemented for the cleaning, security and landscape sectors, with more being lined up.

The tripartite partners recently announced that cleaners in Singapore will see their wages increase each year for the next six years to reach above S$2,400 a month by 2028.

This is good news for these low-wage Singaporeans and an important milestone by the tripartite partners to ensure the PWM increases wages for the selected sectors.

However, given that the increment is an aggressive compounded rate of more than 10 per cent annually, how can we ascertain whether the productivity growth is at least the same as wage growth, if not higher?

This is an important question because at its core, the PWM model is premised on raising productivity.

We know there is wage growth under the PWM. We also know workers have attended the training.

But there is no data at the micro-level on productivity at the business operators’ level.

The productivity growth data published by the Singapore Department of Statistics (DOS) is for the entire administrative and support services industry, which also includes companies in sectors such as rental and leasing, travel agencies and tour operators, office administration, office support and other business support activities, and others.

So it is not possible to draw a direct conclusion that there is an increase in productivity growth for the specific PWM sectors despite an upward trend for the entire administrative and support services industry.

But there are other market indicators available that can help us deduce whether there is productivity growth for the PWM sectors.

These indicators include the number of business operators, their operating surpluses as well as the sectors’ unemployment rate and recruitment rate.

Let us explain why and also show that figures we have analysed suggest that productivity has indeed increased for the PWM sectors.

NUMBER OF OPERATORS AND OPERATING SURPLUSES

It is reasonable to assume that if productivity growth is the same as wage growth, then there will be no adverse effect on businesses operating under the PWM.

Also, if the operators benefit from the PWM, we can expect their numbers to increase. The same goes for their operating surplus and staff retention rate.

These indicators can thus be used to show the effectiveness of the PWM.

According to DOS data that we have analysed, there has been an upward trend of operators entering the PWM sectors.

For instance, between 2015 and 2019, there was an average annual increase of 5 per cent in the number of businesses in the cleaning and landscape maintenance sector.

For the security and investigation sector, we observed an average annual increase of 2.5 per cent between 2016 and 2019.

This suggests that the operators’ productivity must have increased as it attracted competitors to enter the market. If the productivity growth rate is slower than the wage increase, firms will suffer, and some firms may exit the industry.

But an increase in the number of operators suggests that the PWM has not hurt the operators and may even have benefitted them.

In addition, the operating surplus for businesses in the PWM sectors had increased gradually before Covid-19.

DOS data shows that the cleaning and landscape maintenance sectors saw an average annual increase of 10 per cent in operating surplus between 2015 and 2019. By comparison, the security and investigation sector observed an average increase of 5 per cent annually in operating surplus between 2016 and 2019.

This is another indicator that the PWM has not hurt the operators.

UNEMPLOYMENT RATE

Service providers will transfer the higher labour costs to those who buy the service if the wage increase due to PWM outpaces the productivity growth and exceeds the market wage level under competitive labour markets.

Alternatively, some service providers may overload their employees, while others may find ways to substitute the costlier Singaporeans with cheaper foreign workers.

Economics 101 tells us the unemployment rate would increase if the wage is significantly above market levels.

The Ministry of Manpower’s (MOM’s) unemployment statistics show that the resident unemployment rate for cleaners, labourers, and related workers was around 4 to 5 per cent from 2011 to 2014.

It dropped below 4 per cent after the implementation of PWM in the cleaning and landscape sectors.

RECRUITMENT RATE

Another indicator worth a look is the recruitment rate of companies under the PWM model.

We found from MOM’s labour turnover statistics that the recruitment rate was consistently higher than the resignation rate by an average of more than 0.5 percentage points for the cleaning, security and landscape sectors from 2013 to 2019.

It shows that companies do not slow down hiring as a result of PWM. In fact, most companies continue to hire at the same rate despite having to pay higher wages to the workers after the PWM.

It is a positive observation as it implies that most firms do not force their workers to overwork due to higher wages and consistently backfill their workers who have left the organisations.

Therefore, we can conclude that the PWM is an effective tool to retain workers and increase productivity.

Then how about the aggressive compounded rate of wage increase for cleaners and our earlier question on how to justify this based on increased productivity?

Clearly, it is necessary for the tripartite partners to benchmark wage increases to labour productivity to avoid labour substitution with foreign workers that could mean Singaporeans end up moving from earning low wages to earning no wages.

The PWM wage ladder can be set using the blended growth rate of the four market indicators we listed above.

If any of the indicators shows negative signs, it means the wage increase may have exceeded productivity growth.

Thus, the rate of wage increase needs to be reviewed frequently rather than be fixed over a set timeframe. 

ABOUT THE AUTHORS:

Lim Kok Leong recently completed his master's degree in public administration from Nanyang Technological University (NTU). Chew Soon Beng is a senior associate with the Centre for Liberal Arts and Social Sciences at NTU where he was previously a professor of economics for nearly 20 years.