A Two-tiered Economy?

I recently came across some very positive comments on the Singapore economy on a popular US financial website. The author of the article (about overseas opportunities for Americans) and a reader commented that the Singapore economy was booming and that there were plenty of business and employment opportunities. The tone was consistent with other reports in the mainstream media, including those concerning higher pay raises and bonuses this year.

In contrast, I have various Singaporean friends who are having difficulties finding work. I also noticed that the licensed money-lender down the corridor from where I am doing a brisk business, with a lot of desperate looking people knocking on its door looking to borrow money.

Looking at the anecdotal evidence, it would appear to me that we now have a two-tier economy. Not everyone is enjoy the fruits of the rapid growth that we have in 2010.

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.

Rising global unemployment

According to a joint report by the International Monetary Fund (IMF) and the International Labour Organisation (ILO), 30 million jobs had been lost since the start of the global economic crisis in 2007/08, as reported in this article. Furthermore, with global unemployment reaching 210 million people, long-term unemployment in the richer economies have become very high. Given that consumption is such an important component of GDP in developed countries, one can easily argue that without any meaningful recovery in jobs growth, economic growth in these countries would be tepid at best.

Back home here, we can see this increased concern about economic prospects reflected in the recent debate on immigration after the Prime Minister's National Day Rally speech, which despite attempts by the government to soothe nerves shows no sign of abating. While we have (still) have a relatively strong stock market and a booming property market (not always a good thing!), the middle-class here is increasingly worried about its long-term economic prospects, and this is not helped by what is perceived as unbalanced economic policies. There is, it seems to me, a disconnect between what the markets are saying and what the people are recognising as their reality. Who is right?