Friday, 21 November 2014

The Persistence of Inequality

Inequality is unnatural. Sort of.

Really. In a fundamental way, the universe tends toward equality.

Left to themselves, concentrations of energy will dissipate. Energy will move from high concentration to low concentration. This is called entropy. Or heat death. It is in a way, the equal distribution of energy.

Life, on the other hand, is fundamentally about inequality. It is about creating inequality.

Every living thing accumulates energy to grow, to live, to reproduce. It creates a concentration of energy and resources, in order to struggle or resist entropy (a.k.a. "Death").

And life is persistent. And so inequality is persistent.

But we are more than just living things. We are social creatures. We are political creatures. And we are moral and ethical creatures. Well, some of us are.

And because we are socio-political moral-ethical creatures, we have values. Like equality.

But if we value equality, why are we moving towards greater inequality? Particularly, in Singapore?

Our Gini Coefficient is rising. A high Gini = income inequality; the unequal distribution of income. SG's Gini is about 0.45. The most equal countries are in Scandinavia and their Gini is about 0.25

Reasons for the Persistence of Inequality/ increasing inequality

1 No Ceiling on Income

One reason is simply that there is no upper limit for income. If you don't work, you have no income. But if you are a star athlete, musician, artists, actor, technology wizard, software genius, CEO, doctor, lawyer, you could earn millions. And whatever is the highest salary today, it can be/will be exceeded tomorrow or next week.

Zero will always be the lowest "income", the "floor". But there is no upper limit for income. No theoretical or actual "ceiling".

Twenty-five years ago, a University graduate might have a starting salary of about $1200 to $1500. Now the starting salary would be about double that.

An astute doctor or lawyer could make millions a year, while a cleaner would make in a year, what the lawyer makes in a month. Or less.

As the ceiling rises without limit, but the floor never rises, rising income inequality is inevitable.

2 Our Ageing Nation

Another reason for the increasing inequality (as measured by the Gini Coefficient) in Singapore may simply be structural.

Inequality is usually measured by the Gini Coefficient. which measures the distribution of income (usually by households). So if there are a lot of retirees (and retiree households) with NO income, there would be more household with no income, while households with income might well have greater income (because no upper limit), and there would be greater income inequality.

As Singapore's population ages, and the number of elderly increases from the 8% currently to 20% in a few years time, there will be more retiree households with no income, and we can expect the Gini to rise - implying greater income inequality.

3 Capitalism favours the Capitalists

A third reason is something Thomas Piketty wrote about: the discrepancy in the rate of returns for capital and labour.

His hypothesis in brief is this: The general rate of return for investment is about 8% to 12% (IIRC). The average GDP growth for a developed economy is usually less than 4%. GDP growth corresponds approximately to wage growth, while the rate of return for investment is the return on capital. Hence, Capital-owners are seeing their wealth grow faster (8% - 12%) than workers are seeing their wage grow (4% or less). Hence growing inequality.

He backs his hypothesis with lots of facts which is why his book is considered ground-breaking.

Singaporeans instinctively know this (advantage of being a capital-owner as opposed to just being a working class) which is why we are crazy about "investing" in property.

Similarly, the Chinese (PRC) also instinctively know about the value of capital (maybe more so since they are nominally communists) and have been part of a property boom/bubble in the Chinese economy.

In short, the rich (asset owners) get richer, and the poor working class (who don't get richer as fast) stay poor. Also because poverty is relative. If you earn $1000, but everyone else earns $500. You're rich. But if everyone else earns $2000, even if nothing else changes (e.g. cost of living), you would consider yourself poor. Or poorer. And the rich-poor gap widens.

[Side note:While Singaporeans strive to be asset-owners, or home owners, and while the value of their homes may rise, the problem as started in this article is:
... they may not be able to afford another home after selling the current one... So while they might be sitting on an S$800,000 property, they may well have much less in the bank for their daily needs.
In other words, most home-owners in SG are not true asset-owners. Their only "asset" is their owner-occupied home. And while it may have risen in value, but they are unable to liquidate this asset (without evicting themselves from their home).  ]

4 Globalisation and the globalised value of labour

Related somewhat to the third reason is the fourth reason. Which is a complex or complicated reason or argument. It's about China, India, and Globalisation.

It is about the value of labour. In a globalised economy.

When China was actively practising communism, or at least non-capitalism, or not plugged into the global economy, their GDP was inconsequential, and their people were very poor.

However, globalisation meant growth and increasing prosperity for China. But it had a tremendous impact on the rest of the world.

A factory worker in Singapore may be employed for $1500 to $2000 (maybe?). However, A Chinese worker could be had for a fraction of that.

So a lot of factories moved out of Singapore.

The obvious reason is that these other countries had lower labour costs. But it's not just that. China with over 1 billion people were plugging into the global economy, the global marketplace, and the global labour market. Singapore with 3.4 million workers could not compete against China with over 700 million workers in the labour force.

Before China plugged into the global economy, a Singapore factory worker may be valued for skills (or "semi-skills"), literacy, and productivity. We could choose to compete on the quality of our workforce, rather than on costs.

However, when China plugged into the global marketplace (of labour), they changed everything. For every one quality factory that we can offer, China could offer the possibility of 200 factories of varying quality, but at a fraction of the costs.

So wages in SG could not rise. And would in fact fall.

Think of it this way, as a factory worker, you could get a job for $1500. But before you can be hired, 200 - 300 others offer their services. Your would-be employer says you have skills and experience (which you have), but the other 300 says they are willing to learn, they are willing to work twice as hard, and they are willing to do it cheaper. One offers to work for $1200. And is immediately trumped by another that is willing to work for $1000. Before the words have left his mouth, another offers to work for $900. $800. $600. $500.

And the Singapore worker's wage is bidded down in a reverse auction.

So let's protect our low wage workers! Let's set a minimum wage!

Minimum wage will only work for some type of jobs, and we're getting there. But jobs that can be moved out of SG, that doesn't have to be based in SG, we can't set minimum wages for those jobs. Setting minimum wages for those jobs simply means that those jobs are leaving SG.

Take the factory workers. Yes, there is a set-up costs and other advantages of being located in Singapore. But at some point the wage cost will exceed the other advantages. And then they will move.

The simple fact is that if you are an unskilled worker, if your job can be done by anyone with 30 minutes of training, then anyone can do your job, and the cheapest 'anyone' will be setting the market rate. If you are an employer, and you can get someone to clean the tables for $500, why would you pay someone else $501 to do the same job?

That is as much the reason for why wages for low value jobs do not rise very much - the answer is in the definition: low value jobs.

To be fair some "low wage jobs" are low wage by custom. For example hawkers.

[A good hawker may make a lot of money. But if he does, he probably had to work hard for it. He would have put in the hours, and the days, and the years, to get to the point where he is famous  by word-of-mouth and can draw in the crowds without fancy expensive publicity. And it is not a low value service, but it is our culture to see hawker food as cheap and good. In other words, good hawkers are the exception to the "low wages = low value, low skills". They are highly skilled, but they can't profit from their skills usually. ]

But Singaporeans and Singaporean parents understand this - that low skills = low wages.

So now 25% of every cohort will be a degree-holder. Another 40% will have a diploma. With 65% of every cohort with a tertiary education, 2/3 of every cohort aims to be a Professional, Manager, Executive, or Technician (PMET).

So who's going to do the low-skilled, menial jobs in SG? The remaining 35%?

They want to be be property agents, and insurance agents. Unless those are already included in PMETs?

Menial jobs which are 3 "D" - Dirty, Dangerous, and Demeaning - will be done by Foreign workers.

I think, if the Gini were to include foreign workers, our Gini coefficient would be even higher.

We can argue that FW should not be included because they are not citizens and so therefore do not determine the policies and politics of Singapore.

But their presence here is also because of globalisation.

The foreign workers here are not uneducated. They may have diplomas or even degrees in their homeland. But there are too many educated people over-qualified for the few jobs that are there. But most importantly, they may have no jobs there for them for their qualification.

Is this their fault?

No. The economy is the responsibility of their government. Employment opportunities need to be created by competent government by attracting investments, growing industry, and encouraging demand. And ensuring that a decent wage can be earned.

Healthcare workers from the Philippines working in Singapore are a case in point. There is a desperate need for healthcare workers in the Philippines. But these workers are coming to Singapore to work. Why? Because the pay here is better, and they can send money back to support their family.

BUT if equality or need were the working principle, then it would only be fair for Filipinos to have the same ratio of healthcare workers to citizens as Singapore. But we have more. We have 1 doctor for 520 population. Philippines have 1 to 800.

But I digress.

The point is, these foreign labour are here because of income inequality. No, not the income inequality within Singapore, but the income inequality between Singapore and Philippines and between Singapore and South Asia, and Myanmar, and Indonesia, etc.

Because they will get paid better here for the same job or they will get paid better here for a lesser job than for a higher ranking job in their home country. They would rather be a cleaner here, than say a teacher in India (maybe, I'm guessing).

There is greater inequality within countries (like Singapore), but the interesting thing is the world as a whole is equalising. There is less extreme poverty in the world (see #1 on this webpage).

And you may ask, "why should we care what happens to people in India or China or Vietnam?"

Well, maybe you do, and maybe you don't.

That's not the point.

Singapore's income inequality is rising.

If nothing is done, it will continue to rise because

a) the difference between those with unique and valuable skills and those with no skills will only widen.

b) we are ageing.

c) owners of capital have an inherent advantage.

d) globalisation will level up the standard of living for the lowest income. But Singapore's low income are already above that level.

So left to themselves, income inequality will rise inevitably.

Can nothing be done?

There are things that can be done.

-- To be continued --

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