Sunday, 19 January 2014

Secrets of the NWC's success

A new book by Prof Lim Chong Yah, founding chairman of the National Wages Council, gives the reasons for the success of the council since its establishment in 1972 and why it may be difficult for other countries to follow its example.
By Chew Soon Beng, Published The Straits Times, 18 Jan 2014

By Lim Chong Yah
World Scientific, 397 pages

EMERITUS Professor Lim Chong Yah, 81, was the founding chairman of the National Wages Council (NWC) and was at its helm for three decades, from 1972 to 2001.

His book on the NWC discusses four main questions:
- Has the NWC been successful as a wage-fixing institution?
- What is the secret of the NWC's success in achieving consensual guidelines?
- How have the NWC's objectives evolved?
- Why is the NWC as a wage-fixing institution not exportable?
Wage fixing

THE original objective of the NWC was to facilitate an orderly increase in wage rises. In other words, the NWC aimed to influence workers' wage expectations. However, there is a fundamental difference between the goal of wage fixing in Singapore under the guidance of the NWC and wage fixing in developed countries. In the case of the United States, Britain and Canada, the purpose of wage fixing was to tame wage inflation.

But in Singapore, exchange rate policy is the main way in which inflation is contained. The NWC's main goal was to achieve full employment by influencing wages to promote industrial development.

Because Singapore is a small and open economy, there is nothing inevitable about wage rises. Indeed, in 1986 and 1998, the NWC recommended a wage freeze as well as various other measures to reduce labour costs, including the reduction of the employer's CPF contribution rate.

During these two periods, however, there was no industrial strike due to the store of goodwill among society's stakeholders, something the NWC helped to forge. As the NWC focused on wage-cutting and at the same time promoted the training of workers, the Singapore economy rebounded in 1987 and 2000.

For about 40 years since the NWC was set up in 1972, Singapore has enjoyed industrial peace, an impressive inflow of foreign investment, a strong Singapore dollar, low unemployment rate, high GDP per capita and acceptable income re-distribution after transfer payments.

Consensual guidelines

THE original purpose of the NWC was to recommend a wage increase each year. It was a tripartite council, with representatives from the Government, the trade unions and the employers. There were nine council members in the first council in 1972, but in subsequent years the number of council members increased to 30.

Members had different and, at times, contradictory perspectives on wage increases. But there was only one chairman, Prof Lim Chong Yah. How did the council get these members to come to an agreement? Prof Lim explains in the book that there was no secret formula. But the chairman did formulate two important rules. They were the unanimity principle and the Chatham House principle.

The unanimity principle implies that all members of the council must agree on the wage recommendations. This effectively means that one member could ransom the entire council.

So, how did the chairman get each council member to agree on the wage guidelines? The book provides some examples of how the chairman used his skills of persuasion to coax and win over those members who expressed reservations.

For instance, according to Prof Lim, if a member disagreed with the guideline, the chairman would say, "Let us discuss more", but suggested a Sunday for the extra meeting.

This member would have to tell his wife that he had to work on Sunday. His wife might start asking questions like "Why do you have to work on a Sunday?"

Other members would not be happy either as their wives would also ask the same question. The dissenter would then, under peer pressure, be likely to change his position from one of disagreement to one of support.

The second rule was the Chatham House principle. This means that anything participants say during council deliberations is non-attributable. All minutes are confidential and the NWC will not disclose the topics of their discussions with members of the public or to the press.

The unanimity principle made the job of the chairman more difficult. But it also encouraged council members to take ownership of the wage guidelines. Another reason the unanimity principle worked was that the wage recommendations were not mandatory. Nor were they sectoral.

But the fact that the NWC wage guidelines were non-mandatory also meant that they could be ignored by employers. Fortunately, this was not the case. The council introduced two guidelines. The first was the "Single Party Initiative". It meant that when there was a dispute between the management and the union, and one party wanted arbitration, both sides would have to go. The second guideline was a request to the mediators and arbitrators to take cognizance of the NWC decisions.

Equally important was the NWC's ability to get the Government to endorse the wage guidelines, thus making them mandatory for the public sector. Council members representing large firms would also implement the NWC guidelines following the account of the unanimity principle.

Evolution of objectives

THE role of the NWC has gradually evolved from influencing wage increases to wage reform, to the promotion of the training of workers, to the extension of the retirement age, and to looking after the needs of low-wage workers.

In 1988, it recommended wage reform, moving the economy away from the seniority-based wage system to the flexible wage system. In 1999, it suggested the addition of a Monthly Variable Component.

As a development economist, Prof Lim was naturally concerned with the retirement age, which was 55 since the 1950s. Under his chairmanship, the NWC recommended changing the age of retirement from 55 to 60 in 1988, allowing workers to continue working if they were healthy.

But change was difficult as the seniority system was still in place. Prof Lim approached Dr Albert Winsemius for assistance, asking him to get political support to extend the retirement age. The outcome exceeded Prof Lim's expectations. The highest quarters in the country subsequently became willing to support the age of retirement being raised to 65 in due course.

System not exportable

BOTH New Zealand and South Korea set up a committee similar to the NWC but with limited success. The South Korean NWC failed because it breached the principle of unanimity. The New Zealand NWC failed because it breached the Chatham House principle.

In Prof Lim's opinion, the most fundamental precondition for success in the context of any NWC is whether the trade unions will cooperate closely with the Government and the employers, and vice versa. In his words, it takes, in tripartism, three to tango.

I fully agree with Prof Lim on the need for tripartism. In my view, the effectiveness of tripartism largely depends on the orientation of the union.

The typical union is an institution which must create a union wage premium in order to attract workers to join it. The union wage premium would increase labour cost, and most employers would respond by reducing the number of workers they employ.

This type of union, which can be regarded as being micro-focused, would achieve higher wages at the expense of employment. This would bring the union into direct collusion with the government, whose objective is to attain and maintain full employment. Most governments would not want to tolerate micro-focused unions if they have their way.

At the other end of the spectrum, we have macro-focused unions, whose main objectives include full employment. Macro-focused unions would not seek higher wages at the expense of employment but aim to secure higher wages by working with the government and employers to achieve higher productivity via training of workers and stronger inflow of foreign investment.

In the case of Singapore, the National Trades Union Congress (NTUC) is, for the most part, macro-focused. The leaders of the NTUC and Singapore's Cabinet ministers come from the same political party, the People's Action Party. It is thus natural for the NTUC to be macro-focused. This is why the NWC could work so well in Singapore because the pre-conditions for unions to work with the Government and the employers are present.

Put it differently, as the NTUC can be said to be macro-focused, the NWC has not been politicised. Indeed, during his chairmanship from 1972 to 2001, no one has ever accused the NWC of being used in any general election that took place during this period.

The NWC version of wage fixing has not been exportable worldwide because the unions of most countries are micro-focused.

Some people regard the NWC as one of Singapore's competitive strengths. In other words, the NWC is Singapore's Blue Ocean strategy, a term that describes a competitive strategy which cannot be emulated by rivals.

The writer is Professor of Economics and Industrial Relations at the Nanyang Technological University.

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