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The bigger devil of Minimum Wage is really Substitution of Labor

One of the main topics discussed during this election period is the proposal of Minimum Wage. The call is to set a minimum wage such as this to ensure that those falling through the cracks are able to navigate their situation better.

This is not a new topic per say, as in the past 12 months, there have been increase discussion on this topic in the USA. In certain places, the minimum wages have been set.

One of the places set is San Francisco. There is a report on Forbes on how the result have been.

Respected Economists, when asked about this topic of minimum wage, says its not that big of an issue. The issue is more how it will be implemented.

People look at it as an absolute. Raise from $7 to $15. Or don’t raise.

There is always an in-between figure, which gives time for the companies to adjust and work in.

However, the way I look at it is psychological. Setting a minimum wage, seem to be a message from the Government to the companies that you guys earn too much, you all can do this or you all can do this and you are on your own.

This create a mentality of us the company as the losers and the workers being the loser. So they cut the number of hours the workers work.

Back to square one.

If it does not come to this, these businesses are profit driven. More so, many of these business that depend on large pooled of low skill workers are struggling with daily operations.

They will do anything to survive. So do not blame them for raising prices and cutting working hours. If they earn this much revenue, do you expect them to just surrender and give workers higher wages and go into losses?

No. They think of different ways to survive.

That’s how real businesses work, and something we stock investors do not always see because we look at ticker prices every day. It is tough.

And one of the ways they thought of is to increase their productivity with technology.

This is a bigger danger for those low wage workers who is looking forward to the minimum sum.

Substitution at work

We used to be 9 people looking after 5 projects. Now we are 13 people looking after  10 projects. Not a lot of difference. But when you look at the number of servers we administer now, it is a huge difference.

We are still gainfully employed. However, you realize we do more things now.

This means that we hire less people.

This is the government’s call: To increase productivity.

And there are much benefits because, to do so much things, we need to be a better skilled labor. When we become better skilled labor, we became harder to replace, and that is value.

With value we keep our jobs and command a better pay.

Sounds good.

The bad part is that, many of the jobs that were supposed to be helped by minimum wage is being replaced.

  • You are starting to see self checkout counters in NTUC
  • The culture now have been online purchases, which requires less labor in supermarket
  • We replaced a bunch of skilled workers with an incredible machine that does everything automated
  • Nordic’s Austin Energy have a machine that is able to cut many different shapes of insulation materials
  • Micro Mech have always said that they are ramping their capex on Automation.

Minimum wage is likely to be a bigger trigger to speed things up.

Here are some more rather old examples of substitution.

The pace is accelerating

Part of the solution for the government is to support the low earning family through education, then the next generation would bring the family out of poverty.

The accelerating pace however, means that there is a likely hood that the environment that the young generation that grew up in will be totally different.

They may have a job, then they get substituted.

Retraining and Second Skilling to improve the situation

The freaking keyword that we hear a lot in the 1999 to 2002 is the work retraining. Or structural unemployment. And there was a ramp up on retraining very qualified degree holders in one field into another low skill field.

The result is that there is a gap in income. But at that time, better than nothing. Who ask you didn’t study hard enough, get into a civil servant job where your rice bowl is iron.

I find the only solution to this is to create a culture somewhat similar to the retraining that time.

On the same tangent to retraining, the difference now is that the amount of knowledge that can be acquired 14 years from that time, is much larger. We have online university courses and mini courses on platforms such as Udemy that equips a person with more than their primary competency.

The person starts from novice to become competent and that might open a route to an alternative employment.

But the problem always is that we have created a culture where we look for official qualifications.Perhaps we need to create more of a technical internship structure for businesses. Do it for 6 months to see if the person can do it, without the qualifications.

The government, if they see a demand in certain skill set, may work with companies to come up with a part time weekend working office, where these folks build up competency with some experience folks to produce real goods to sell. This lets the folks see if they really like doing this as a second career and it builds up their income as well since they get paid to do it. The company get a ready pool of people where they assess their attitude, competency, potential and can tap them to be full time folks.

It is a solution that needs the government to listen, for the industry to be engaged as well.

We cannot solve this problem immediately and perhaps there needs much much more support for those falling through the cracks. The cost of living is not fun. This coming from a frugal financial blogger whose personal cost at bar minimum is like $1200/person.

Let me know what you think. No right no wrong. No political agenda. Just exercise my brain from what i see and observe.


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Friday 11th of September 2015


My view is that a Minimum Wage would be a win-win solution, if we subscribe to what MOM Lim Swee Say said previously. He mentioned previously that Singapore allows a large influx of foreign workers such that in the event of a recession or other situations whereby a company is forced to downsize, the foreigners will be the first to go. Thus, a minimum wage will 1) increase the wages of workers, increasing the disposable income, leading to increased spending, higher revenues for companies / government, stimulating the economy. 2) foreign labor will be let go, decreasing the congestion faced by the nation, requiring less resources such as water, food, security forces etc as well as other social benefits which I shall not mention here for fear of going off-topic.

Another consequence could be the emergence of a lean mean economy, whereby companies who are unable to survive without cheap labor are phased out, and more efficient companies expand to fill the void. Right now SMEs are all competing against each other in a highly saturated market, whereby the only way to increase profits is to lower down costs. Since rental costs are fairly fixed and likely to increase in the future, the only way to do so is to lower labor costs, ie wages. This leads to a neverending cycle of wage depression. Weeding out inefficient companies in this way would lead to higher productivity, as espoused by the govt repeatedly.

The post below talks about how increased taxes and minimum wages improved the economy in the States.


Friday 11th of September 2015

The link below is to a YouTube video with a presentation about the right amount of Minimum wage. It's applied to US and may not be 100% applicable to Singapore.

As a heads-up it's "anti" minimum wage and has some good points to support it. Minimum wages are a difficult topic with a lot of points for pro and con.


Friday 11th of September 2015

Hi Unluckid,

that was fast! I thought I just posted it. Thanks for the article and it was a good alternative view albeit we might need to see some other articles talking about this Minnesota case study.

The direction of what Mr Lim Swee Say said seems to be what some companies are trying to do having permanent workers and contract folks that can let go.

The end result is yes, those that stay are the lean and mean ones. But at this point, with the tough operating environment, you can only be lean enough to survive isn't it. So sometimes the words you have to increase productivity to these lean companies sometimes may be a smack in the face. The example Mr Lim gave is very theoratical (just like mine) where in reality, we have many foreign folks hiring their own. that might not happen in tandem.

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