When Saving Jobs Can No Longer Ensure Welfare

Feb 23, 2016 at 2:36 pm | Hits: 2885

By Nicholas Koh

Governments traditionally adopt two types of labour policies to alleviate recession pains. The first focuses on maintaining a minimum standard of living through entitlement programmes, and the second focuses on maintaining employment through lowered wages.

However, with more traditional occupations being disrupted by rapid technological change, the choices governments face in the future will no longer be clearly delineated into one of the two policy options. Instead, it will be imperative to take the middle road, by providing more social assistance programmes while continuing to focus on job retention.

The US and German Experiences

In the United States, maintaining a minimum standard of living through entitlement programmes is its chief economic priority during downturns. At the trough of the Great Recession in early 2009, this priority was demonstrated when the US Congress extended unemployment insurance from 26 weeks to an average of 99 weeks. Although unemployment rate remained high — peaking at 10% in October 2009 — greater unemployment benefits helped Americans through.

Screenshot at Feb 23 11-44-16

(Figure 1)

Contrast this with Germany. In the same year America extended its unemployment benefits, Germany passed a highly successful recession labour policy known as Kurzarbeit — translated as “short-time working” — where firms were incentivised to reduce labour usage by reducing working hours, instead of reducing jobs. Up to 67% of employee wages were paid by the German government in order to keep labour costs down. Germany’s GDP contracted by 4% in 2009 but its unemployment rate remained stable at an average of 7.64% throughout the year (Figure 2).

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(Figure 2)

Singapore: Closer to Germany than the US

Singapore, like Germany, has tended towards the second approach. At the height of the 1985 recession, two decades before Kurzarbeit, the Singapore government accepted the National Wage Council’s recommendation of a wage restraint. The wage restraint lowered overhead costs, prevented layoffs and maintained stable unemployment throughout the slowdown.

In the 2009 Budget, the government announced the Jobs Credit Scheme — a temporary one-year scheme aimed at encouraging businesses to preserve jobs at a time of great economic uncertainty. Businesses received cash grants based on the Central Provident Fund contributions they made for their existing employees. That year, Singapore’s resident unemployment rate increased only marginally to 4.3% (from 3.2% in 2008), and quickly fell back to 3.1% in 2010 (Figure 3).

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(Figure 3)

The examples of Germany and Singapore suggest that the second approach of maintaining employment to ensure welfare is better than outright welfare provision. Jobs provided a steady income for citizens to afford basic needs and on-the-job training raised productivity. In contrast, maintaining a minimum standard of benefits in tough times, as in the case of America, contributed to a growing budget deficit and did little to stanch unemployment.

The approach of maintaining employment, however, rests on the assumption that ensuring employment will in turn ensure welfare. But this assumption may no longer hold true in a period of accelerating technological advancement. Protecting jobs is increasingly becoming more difficult, and even when saved, jobs do not always guarantee a minimum standard of living.

Saving Jobs is Increasingly More Difficult

The World Economic Forum published a report in January on the future of jobs and skills claiming that “current trends could lead to a … total loss of 7.1 million jobs — two thirds of which are concentrated in routine white collar office functions, such as Office and Administrative roles.”

All over the world, such routine mid-skilled jobs that can be substituted by technology have increasingly become automated and some have already been swept away into obsolescence. The extinction of the switchboard operator that we see in period films is an example of what is to come.

Lowering wages or reducing working hours in a recession will not save these kinds of jobs in a technologically disrupted labour market. Robots are, in the long run, still cheaper than human labour, with smaller margins of error and requiring no rest or sleep.

Not All Jobs Guarantee a Minimum Standard of Living

Even if some of these routine mid-skilled workers were able to retain their jobs, their wages may not be sufficient to guarantee them a minimum standard of living. With less labour demanded than before, real wage growth is likely to fall.

From June 2014 to June 2015, median monthly income for a full-time employed Singaporean resident rose by 4.75%. However, most of the gains were enjoyed by the highly-skilled, namely, working proprietors and professionals whose productivity was augmented by technology. Those in routine mid-skilled vocations, on the other hand, saw little improvement in their income (Figure 4).

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(Figure 4)

Therefore, Singapore’s traditional approach of maintaining employment is not sufficient. Saving jobs by controlling wages may only serve to worsen the welfare of the mid-skilled, by further suppressing their already low wages.

For that reason, a middle path, a combination of both policy approaches — providing basic welfare and social assistance while ensuring access to and creation of jobs — is necessary.

The Middle Path

The Singapore government has put in place several schemes that focus on creating good jobs, and ensuring good workers. The SkillsFuture programme, launched in 2015, offers an initial amount of $500 to all Singaporeans to pick up new skills that can give them an edge in the changing workplace. The aim is to push more workers up the ladder to technologically complementary jobs and industries.

But the ladder is steep and upgrading takes time. And even with time, not every Singaporean will graduate to higher-skilled work. The challenge therefore is to help more mid and low-skilled workers to remain competitive, but at the same time earn wages that can afford them and their families a minimum standard of living.

One way the government can do so is to expand the Progressive Wage Model (PWM) beyond the cleaning, landscape and security industries. The PWM has proved to be efficacious in raising the incomes of the lowest skilled. Its initiation in April 2014 is potentially the reason why the lowest skilled segment of the workforce profited from 10.10% in median monthly income growth last year (Figure 5). The same could be done for the medium skilled.

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(Figure 5)

The economic volatility of the past few months suggests that the bear case is now the base case, and the facts indicate that saving jobs can no longer ensure welfare. It is perhaps time we rethink the distributional properties of our economy.

Nicholas Koh is majoring in economics and political science at the National University of Singapore. He previously interned at the Economics and Business research cluster at IPS.

Top photo from thinkstock.

Category: Economics & Business

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