Income Inequality in Singapore

Pundarik Mukhopadhaya

• Publisher: Taylor & Francis
• Year: 2014
• eBook ISBN: 9781317755142
• Edition: 1
• Topic: Economics
• Subtopic: Business General
• Index: Economics

The World Bank, 1993 conferred on Singapore the status of 'tiger economy' because of its two miraculous characteristics: high growth and reduced income inequality. Expansion of educational provision is one of the major policies the Government of Singapore followed since 1975 particularly to enrich the human capital endowment of the country which has been crucial to the success of Singapore. This book made a coherent study of these extremely important issues to examine the trend and pattern of income inequality in Singapore

The book delves further into the trend and pattern of income inequality in Singapore and their implications for the future. It attempts to analyse the links between social welfare and inequality in the light of rapid economic growth phase and adduced important policy implications. The concepts and methodologies used in this book as well as the novelty of analyses and policy implications make this a coherent and in-depth study of extremely important issues with most up-to-date observations.

In the last three decades no such book on Singapore has been written and this book fills the gap in existing literature. It is a must-read for anyone who is interested to learn more about the tiger economy of Singapore.

1 Introduction

In all countries social policy-makers generally have goals and values that inform the making of social judgments and guide the formulation of social decisions. Typically, these are likely to include attaining an efficient use of scarce resources and the promotion of equitable and just distribution of those resources. Philosophically, notions of equitable distribution dissolve into an endless sequence of semantic issues. Examples of some of the issues that relate to economic inequality could be: Tom and Dick might both earn the same amount of money, but Dick may be physically handicapped while Tom isn’t; Eleanor is richer than Emma, but Eleanor lives in a country that denies her freedoms such as the right to vote or travel freely; Chow earned more than Kim until they were both forty, thereafter Chow earns more. These examples make it obvious that the concept of economic inequality is complex and ultimately linked to other concepts such as freedom, age, personal capability etc. The concept of disparities in personal income is narrow compared to the broader issues of liberty, capabilities etc., but it is easier to quantify and measure. Furthermore, income is typically studied on the basis that it is a reasonable indicator of individual well-being.

Economists, philosophers and policy analysts have been concerned with income inequality issues for over a century. In the mid-1980s there was a paradigm shift in realization by social scientists that the problem of income inequality was universal rather than specific to developing countries. Income may be earned from various sources. Due to a lack of available information for Singapore, in this book we will measure income inequality in terms of earnings only and we will use the terms income and earnings synonymously.

From the early twentieth century, social scientists have been looking for a reliable and satisfactory theory to explain the income/earnings inequality. The human capital model (Becker, 1964; Mincer, 1970; and followers) provides one explanation of income differences in the labour market. In this model each individual is viewed as making an investment decision on how much schooling and training to acquire, with the assumption that both schooling and training increase the productivity of the worker and thus their future wages. Proponents of this theory have identified the relevant costs of the human investment process; they have analysed school and post-school investment, spelled out optimizing decision rules for such investments and derived implications for income differentials among skill categories, across occupations and by age categories. Thus, income differential depends on what degree of schooling and training reached, is sufficient to compensate for the costs of education and training (human resource development), accounting for working life, uncertainty of earnings, unemployment and other non-financial benefits.

Empirical research has established that average income increases with the level of schooling attained, confirming the predictions of human capital models. It has been found that with age, average income first increases and, after a certain point, starts decreasing. This would suggest that there exists some income inequality arising from the age factor. With age, individuals acquire new skills and upgrade old skills through on-the-job training. At the same time, old skills depreciate over time through obsolescence and, after a certain age, the average income starts decreasing. Another interesting observation is that the average income increases faster with age for the more educated workers. To explain the reason for this finding, Mincer (1970) argued that for the more educated workers, income increases at a higher rate because of the positive association between schooling and post-schooling (on-the-job training) investment. There is ample opportunity for on-the-job training for jobs taken by more highly educated workers; however, less-educated workers have little opportunity for the on-the-job training.

An analysis of the human capital model to explain earnings inequality provides some guidance to social policy. In developing countries (sub-Saharan Africa and Latin America in particular), underinvestment in education could explain the high earnings inequality. A study by Psacharopoulos (1985) on the comparison of rates of returns to society from education indicates that in all regions of the world social returns are higher from primary education than from secondary education; and when secondary and tertiary (higher) education are compared, the returns are even greater for secondary than for higher education. The study also reveals that returns to society from education are substantially higher for low-income regions of the world, than middle- and high-income countries. Results for advanced economies indicate that education is still a good investment for increasing productivity and decreasing income inequality. As a result, many government programmes aim to increase schooling and training for low-earning populations. In a number of countries, basic education has been made compulsory, and in some others it is a constitutional right. Efforts have also been made to reduce dropout rates among various age levels. Student loan programmes have been designed to encourage college-age students from low-earning families to attend higher education institutions by way of scholarships, and bursaries are provided for school-age children from poor families.

According to the ability theory (e.g., Taussing, 1915; Roy, 1950; Mandelbrot, 1962), differences in workers’ productivity, and hence their earnings, are due to differences in their abilities. It was widely believed that abilities were distributed normally, like other physical characteristics. The seemingly natural conclusion to be drawn from this is that income too is distributed normally. In 1897 Pareto’s empirical examination revealed that income was not distributed normally, instead it had a flat long tail to the right, implying substantial unequal distribution in the labour market. Researchers are sceptical of the direct role ability has in earnings; some have expressed concerns about the indirect effect of education and training, some point out that measuring ability only captures certain components, while others contend that ability depends largely on a person’s immediate environment.

From a policy point of view, if ability determines income disparity, it will be interesting to explore the determinants of ability. From the early 1970s, a number of studies tried to resolve whether ability (intelligence in particular) is inherited or affected by the environment. Empirical research on identical twins tried to separate the influence of genetic factors from environmental factors. The crucial role of environment in the development of intelligence is widely accepted. However, there is little agreement concerning the relative contribution of heredity and environment. Some of those who support the heredity position¹ have suggested that selective breeding of the population be used in an attempt to increase the average intelligence level of a society and thus reduce income inequality. This view arises from the contention that certain ethnic groups are genetically inferior. The majority view among social scientists is that nurture (a child’s environment, upbringing, parents’ education etc.) rather than nature is the prime influence behind various components of ability. Thus, certain research suggests that social policies should be aimed at improving nurture-related outcomes for the betterment of the intelligence level of poor children (Selowsky, 1976).

In the human capital model, it is shown that individuals with more schooling receive higher incomes because education increases their productivity. It is, however, usually noted that subjects taught at more advanced levels of schooling are less relevant to the skills required in the work place. In reality there is imperfect information in the labour market (the human capital model assumes a perfect labour and capital market), and employers have no direct way of assessing prospective employees’ productive abilities. In such cases, schooling is viewed as an information (cut-off) device. Employers pay more to applicants with higher levels of schooling and tend to hire them in favour of less-educated applicants, not solely because education enhances productivity, but because it identifies and anticipates more productive workers. This is the main point raised in various signalling or screening models.² The argument in screening models is directly contrary to the human capital model. Empirical researchers favour human capital models over screening models; however, it is difficult to establish concretely the superiority of one model over another, because of the observational equivalence of human capital theory and screening models (Blaug, 1989). From the viewpoint of social policy-makers, whatever the (right) argument over models, more schooling commands higher wages, and education disparity is one important reason behind income disparity. Thus improvement in educational attainment in society as a whole is one way to reduce disparity of income.

There could be other forms of market imperfections. Bowles (1972) was of the view that the education system was one way of preserving class background. Children from higher social classes are channelled into one part of the education system and segregated from lower social classes. Children of rich people develop contacts and literally walk into higher paying jobs, while children of poor parents may never access such networks and this becomes the major obstacle to getting jobs at the upper levels of the hierarchy. Bowles estimated empirically that 52 per cent variation in schooling achievement was explained by family back-ground variables. Furthermore, family background accounted directly for 13 per cent of variation of income, and indirectly for another 15 per cent through its impact on schooling achievement. When using family background as a control, it was found that achievement in schooling explained only 2 per cent of the variation of income (Bowles and Nelson, 1974). Behrman and Taubman (1990) on a panel survey estimated that there was a 50 per cent correlation between children’s adult income and their parents’ income.

Thus parents can assist children to earn higher wages directly by influencing job-search or indirectly via education. They can motivate their children to succeed at school and inform them about educational opportunities. Even where entry to higher education is limited (for example, in medicine and law), parents can be instrumental in securing their children’s access. These are some examples of the violation of restrictive assumptions of the human capital model. Another important assumption of the human capital model is the existence of a perfect capital market, where everyone is able to borrow money at the same interest rate. This assumption is vital since the cost of investment in schooling at any phase of life in terms of direct costs and opportunity costs can be very high. In reality, the capital market for student loans is not perfect. There are limitations on borrowing as well. Lenders, in most cases, need some security; human capital cannot be held as collateral, and individuals from poor family backgrounds have nothing else to show as security. Children from rich families often have parents to pay for college financing, while others do not have this option. Different students face different market interest rates depending on their circumstances, arising from the imperfect capital market. Therefore, students may make different schooling decisions despite having the same potential rate of return from a college education. Inequality in access to borrowing and consequently access to education may lead to income differentials in excess of those predicted by a simplistic human capital model.

A number of studies have examined reasons for wage differentials in industrialized countries, and many concluded that labour unions have played an important role in wage determination. Freeman (1991) noted that less unionized countries had higher wage inequality in the 1980s, and that between 1978 and 1987 inequality decreased with increasing unionization. Gittleman and Wolff (1993) found evidence to show that the greatest increases in industrial wage inequalities are in areas where there are low levels of unionization. Although unions tend to raise wages of members compared to non-members, evidence shows that overall inequality of income decreases with unionization.

Gender wage difference is another dimension of income disparity. Women typically have fewer years of work experience than men of the same age and educational attainment because of interrupted careers. Also women receive less on-the-job training than men of the same age because employers have less incentive to invest in female workers. However, over the years, all around the world, educational attainment and labour force participation rates for females have increased, leading to a narrowing of the gender wage gap from what it was a few decades ago. Government anti-discrimination programmes have played an important role in improving the economic status of female workers.

The human capital model and its extensions and variants influence social policy to a great extent, and this supports the view that through the expansion of education and training programmes, income inequality can be reduced. These policies affect the supply side of the economy. On the other hand, structural change may shift employment among industries, affecting the de...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• Acknowledgements
• 1 Introduction
• 2 Income inequality: a general discussion
• 3 Income inequality trends in Singapore
• 4 Educational development and income inequality
• 5 Income differences: the gender dimension
• 6 Inequality, older women and necessity for social security
• 7 Trend in equity and efficiency trade-off in Singapore
• 8 Conclusion
• Bibliography
• Index