Minimum Wage and Competitiveness

In the recent debates about the possibility of a minimum wage in Singapore, both the government and the Singapore National Employers Federation came out against the idea with the textbook objection that higher wages will lead to jobs being moved overseas to cheaper locations. The argument implies that in an era of free-trade and globalisation, a minimum wage policy will lead to high wages and thus job losses.

In this context, I would like to share quotations from a blog post by Charles Hugh Smith entitled Why America Is Slouching Toward Third World Status:

Free trade fanatics would do well to study Germany and South Korea, two blatantly mercantilist export giants. German wages are among the highest in the world, yet their industry has not been boxed up and shipped to China; why?

Germany made a series of political and cultural trade-offs. Please examine their apprenticeship programs, the manner in which their unions accepted cuts in pay, benefits and working hours in order to sustain their own jobs, and that nation's political balancing of issues around jobs, trade, currency and security. Please educate yourself about the trade-offs made by South Korea.

To believe that an open market would solve everything is akin to believing in a Marxist paradise: all trade is deeply, fundamentally political. Free trade, like Marxism, promises an emotionally appealing perfection but in the real world, it is a tangled series of trade-offs that are guided by those Elites with the most to gain from one "trade" or another.

While Germany does not have a national minimum wage, it does set by law the minimum pay for several types of jobs. For the rest of the economy, wages are set by collective bargaining and are enforceable by law. As Smith rightly pointed out, the high wages in Germany has not resulted in the wholesale loss of manufacturing jobs to China, unlike in the US.

Some food for thought for us here in Singapore, especially when examining textbook arguments in economics.