WCS: for better or for worse?

WCS: for better or for worse?

SINGAPORE - One of the most notable measures introduced in the latest budget is the Wage Credit Scheme (WCS), under which the government will co-fund 40 per cent of wage increases given to Singaporean employees earning up to $4,000 a month, for the next three years. This scheme amounts to a wage subsidy, albeit a temporary one, and is intended to encourage firms to share productivity improvements with their workers.

One way to look at the WCS is to see it as a way for firms to reduce the cost of wage increases that they were planning to give regardless of whether the scheme exists.

But, as with any wage subsidy, the resulting wage increases will not be set unilaterally by firms but rather through the interaction of both firms and workers in the labour market.

The likely effect of a subsidy such as the WCS is to push expectations of wage increases for local workers upwards. Although not all firms will achieve significant productivity gains, a substantial number will, especially given the strong incentives offered by the slew of productivity-enhancing measures put in place by the government. The additional wage increases at such firms might therefore set norms and expectations in the labour market and generally drive wages further upwards. Such norms play an important role in the labour market, as shown by the significant role that National Wage Council guidelines play even though compliance with them is voluntary.

Indeed, despite the similarly voluntary nature of the WCS, even firms that do not experience substantial productivity gains might find it difficult to resist additional upward wage pressure, particularly smaller businesses with less power in the labour market. If wages at more productive firms set a reference point for an industry or sector, failure to match those wages might demoralise workers, leading to lower productivity. The actions of disaffected SMRT bus drivers last November have made it all too clear that wage differentials have a strong effect on worker morale.

Furthermore, the presence of these effects will also mean that firms will not be able to undo any wages increases that occurred under the WCS while it is in effect. Given this kind of downward rigidity of wages, wage increases under the scheme will have longer-term cost consequences after its expiry, at least in nominal terms. Therefore, the fact that the WCS is set to expire in three years' time means that wage increases under it will not be as large as those under a scheme without such an explicit end, although there is the possibility that its duration could be extended.

Despite its temporary nature, it is clear that the WCS is expected to have a significant effect on wages at the lower end of the distribution, as evinced by the fact that some commentators have compared it to a minimum wage.

Although the WCS is clearly fundamentally different from the latter, parallels between the two can shed some light on some of the potential effects of the scheme.

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