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Income inequality narrowing in Singapore: MOF report

Lower- and middle- income groups earn more but productivity growth still a concern

[SINGAPORE] There has been a steady increase in the real incomes of low- and middle-income Singaporeans in the last five years at both the individual and household level, according to the third edition of the Singapore Public Sector Outcomes Review (SPOR) by the Ministry of Finance (MOF).

The report, released yesterday, found that the rising wages for the lower- and middle-income group and falling inflation have led to a narrowing of income inequality, but productivity growth remains a concern.

In 2013, Singaporean workers at the 20th percentile and median income levels earned S$1,800 and S$3,480 per month respectively. This is an increase of 6 per cent and 9 per cent respectively since 2009, after accounting for inflation.

The same trend can be seen at the household level. Singaporean households at the 20th percentile and median levels earned S$1,011 and S$2,114 respectively per household member in 2013. This is an increase of 14 per cent since 2009 for both groups, after accounting for inflation.

The Gini coefficient (a measure of income inequality) fell to 0.412 last year, compared to 0.434 in 2012, after taxes and transfers. (The closer the figure is to one, the greater the inequality.)

Economists BT spoke to said the rise in real income for low- to middle-wage workers can be attributed to two main factors: the first is the government's measures to strengthen social safety nets through transfers and progressive taxes; while the second is a tighter labour pool because of the government's curbs on foreign worker supply.

DBS economist Irvin Seah said: "While steady economic growth naturally leads to healthy income growth, the government's transfer measures that are included in the Budget every fiscal year have been a key factor in raising their income. We are definitely making progress towards inclusive growth."

UOB economist Francis Tan concurred that initiatives such as pay hike recommendations by the National Wages Council to boost the nominal incomes of the lower-wage industries such as cleaning and security have paid off.

"The demand for workers in the lower-wage industries has gone up due to the tightening of foreign labour, so employers must pay more to attract people. Before 2011, income inequality kept rising as employees had an ample supply of foreign labour," explained Mr Tan.

The improved income equality was also driven by falling inflation rates in 2013. Last year, government measures to contain price increases in vehicle certificate of entitlement (COE) and accommodation costs led to lower inflation.

The report found that labour productivity growth has generally been weak in recent years, although several industries like precision engineering and food manufacturing have seen a significant pick-up in productivity, especially among small and medium-sized enterprises (SMEs).

Economist Chua Hak Bin of Bank of America Merrill Lynch said labour productivity growth for the second quarter of 2014 is expected to go down, according to flash estimates.

"Our expectation for labour productivity growth for this full year is 0.5 per cent. It has been growing at 0.2 per cent the past three years, despite the government's target of 2-3 per cent per annum. The restructuring of the Singapore economy to become more productivity-driven has not delivered so far," he said.

Mr Chua added that it is a concern that rising wages for the lower- and middle- income group of Singaporeans have been driven by social support and stricter foreign worker policy, and not productivity gains.

"This is not sustainable if productivity doesn't catch up," he cautioned.

When it comes to gazing into the crystal ball, economists say that it is hard to tell if income inequality will continue to fall.

While Mr Chua of Bank of America Merrill Lynch and Mr Seah of DBS had more muted predictions, Mr Tan of UOB warned that inflation is creeping up this year, which may result in real wage growth which may not be as high.

"Last year, Singapore's core inflation was 1.7 per cent, and we forecast that it will climb to 2.4 per cent this year due to the expectations of higher interest rates in the US next year," he said.

He added that the rise in incomes may also result in businesses passing on additional costs to consumers, making it a vicious circle.

"Income inequality this year may not have a downward trend like in 2013," concluded Mr Tan.

Aside from the rise in wages for lower- and middle-income workers, the report also highlighted some key challenges in the public transport and healthcare capacity that continue to affect Singapore and Singaporeans.

Other areas of concern include the challenges of an ageing population, including the need for increased healthcare capacity and healthcare affordability.

The SPOR is prepared by the Ministry of Finance with inputs from all ministries. Published once every two years, it provides a perspective on how the public sector and Singapore have fared in a broad range of areas of national interest.