Tuesday, September 13, 2016

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

...Almost 42,000 businesses ceased in the first half of this year versus nearly 49,000 in the whole of 2015, government data shows.

Total nominal wages rose 4.6 percent per year on average over the past decade, compared with a 0.5 percent average annual growth rate of value-added per worker in that period.

And recent data showed the unit labor cost index hitting a record high of 116.7 in the second quarter.

Trinh Nguyen, Natixis' senior emerging Asia economist says this increases recession risks.

"It squeezes firms' profit margins and erodes exporters' ability to compete," Nguyen said. "While they cannot earn more money externally ... they cannot reduce cost structures."...

…and this…

Singapore Wages Outpacing GDP May Restrain MAS Policy: Chart

Nominal wages in Singapore have been rising faster than real gross domestic product since the first quarter of 2015. An aging population and tight labor supply due to stricter immigration policy are behind the divergence, Euben Paracuelles, a Singapore-based economist at Nomura, said yesterday, adding that job market conditions are deviating from the central bank’s assessment in April. Nomura expects the central bank to maintain its currency policy in October. The Monetary Authority of Singapore unexpectedly eased in April, citing a projected slowdown in wage growth due to softer employment conditions.

Problem no 1: Wages (and the wage to GDP ratio) are tracked in nominal terms, but the Bloomberg chart and the preceding Reuters discussion talks about GDP in real terms. Erm, guys, you can’t do that, it’s a false comparison.

Problem no 2: A high wage to GDP ratio does not imply high wages, or vice versa. In fact, the Reuters article mentions that Singapore’s wage ratio is in fact on the low side relative to the global average, but then proceeds to dismiss this inconvenient truth. The human interest example used in the Reuters article in fact mentions a store opening in Tokyo, where wage levels are at least twice as high as in Singapore – obviously, high wages wasn’t a constraint for that decision, nor the fact that Japan’s growth record is much poorer than Singapore’s (to put it kindly).

Problem no 3: An increasing wage to GDP ratio could be due to wages rising too fast; it could equally be due to GDP (aka profits) growth not rising fast enough. Wages are “stickier” (less elastic) than profits. Instead of this rigmarole of “wages are too high”, Singapore could be facing a recession – profits are down – because profits are literally down.

Given that Singapore’s wage to GDP ratio is actually on the low side i.e. capital’s share of GDP is relatively high, makes the argument that high wages “squeezes profit margins and erodes exporters’ ability to compete” somewhat disingenuous.

I think that Singapore and Singaporean businesses have to get used to the idea that, at their level of development, profit margins will and should erode to developed country levels.

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