Lower wage share doesn't mean wages are lower

Salaries are correlated with productivity, says MTI

By Fiona Chan, The Straits Times, 24 May 2013

THE salaries earned by Singapore's workers amount to a smaller proportion of the overall economy than in many other developed economies.

But this does not necessarily mean workers here earn lower wages than they do elsewhere, the Trade and Industry Ministry explained yesterday.

In a special report published in the quarterly Economic Survey of Singapore, the ministry acknowledged that Singapore's wage share of gross domestic product (GDP) is lower than in advanced Western countries and in other industrialised Asian economies.

However, it said salaries are correlated not with wage shares but with productivity levels.

Between 2000 and 2009, wages made up about 43 per cent of Singapore's GDP, compared with 45 per cent in South Korea, 51 per cent in Japan, 52 per cent in Hong Kong and Germany, 54 per cent in Britain and 57 per cent in the United States.

This means that profits earned by companies, and taxes earned by the Government, made up a higher share of the economy in Singapore than in other countries.

Profits accounted for 50 per cent of GDP here, while taxes made up the last 7 per cent.

Over the years, this trend has led economic watchers as well as the Workers' Party to argue that Singapore's workers are underpaid and that economic growth has benefited companies at the expense of workers.

But the ministry said yesterday its analysis shows no clear relationship between wage shares and actual wage levels.

In fact, the average wage of workers between 2000 and 2009, adjusted for purchasing power across different currencies, was higher in Singapore than in South Korea, Japan and Europe, it said.

Further, real wages per Singapore worker grew by 1.4 per cent per year between 1992 and 2012, compared with -0.2 per cent in Germany, -0.1 per cent in Japan and 0.9 per cent in the US, the ministry added.

It is also not true that sectors in Singapore with a lower wage share, such as biomedical manufacturing and electronics, pay lower salaries, as some have argued.

The biomedical cluster has by far the lowest wage share at 5.8 per cent, but paid an average of $4,320 per worker between 2000 and 2009, the ministry said.

In contrast, workers in accommodation and food services, which has the highest wage share at 60.5 per cent, earned an average of only $1,810 in the period.

This is because a country's wage share of GDP is affected by several factors in addition to wage levels, according to the ministry.

For instance, industries that require a high level of capital investment - such as biomedical and electronics manufacturing - will need higher profits in return.

Economies that have more of such industries may then have higher profit shares than economies with more labour-intensive sectors, said the ministry.

Open economies, such as Singapore, also tend to attract and retain the most profitable companies, which could easily move elsewhere if they did not achieve their required returns, it added.

Finally, labour market regulations and trade unions also affect wage shares, although the impact differs across countries.

While wage shares have an uncertain relationship at best with actual wage levels, what does lead to higher pay for workers is greater productivity, the ministry said.

"Sectors that are more productive tend to pay workers higher wages," it said.

"A more meaningful discussion on how to raise wage levels in Singapore should thus focus on tangible measures such as ongoing efforts to raise productivity across the economy and policies to encourage employers to share these gains with employees."

Concerns over low wage shares of GDP are not limited to Singapore. US economists are also worried, after US wages last year fell to 43.5 per cent of GDP, their lowest share ever.