DEEPENING income divides are among the biggest challenges facing not just Singapore but other countries, and they have adopted different ways to combat this problem. Each method has its pros and cons, but as yet there is no magic bullet.
Broadly, there are two key ways to temper the divide: by shoring up the incomes of the poor and by redistributing some of the income of the rich.
MINIMUM wage legislation is one of the most common ways in which developed countries try to shore up the wages of the poor. The United States, Britain, Canada, Australia, Japan and South Korea all have minimum wage laws in place.
Architects of such laws believe that societies should be willing to pay higher wages to some people, even though free markets will not give it to them.
In traditional neo-liberal economics, people are paid according to productivity and wages rise as productivity rises. But advocates of minimum wage laws say it is tough to raise the productivity for some jobs, such as barbers, bus drivers or domestic workers.
Those against such laws argue that minimum wages can lead to higher unemployment, and as a result, countries with minimum wage laws also often have generous unemployment benefits and cash transfers for some who are so low-skilled that companies simply will not hire them.
Indeed, in high labour-cost countries such as the US, Britain or Spain, minimum wages could cause higher unemployment. But in places like Hong Kong or Singapore, which have pursued high growth by riding on low-cost immigrant labour, such laws could actually benefit low-wage locals, some of whom have seen their wages fall in the wake of stiff competition from cheaper immigrants. Hong Kong and Malaysia have both recently adopted minimum wage laws.
Singapore has not bitten the minimum-wage bullet so far, fearing, among other things, that such a policy would lead to higher unemployment among low-wage workers.
- Strong unions, collective bargaining
MOST of the Nordic countries, which have some of the lowest income gaps in the world, do not have official minimum wage laws. But in Norway, wages normally fall within a national scale negotiated by labour unions, employers and local governments. In Sweden, unofficial wages in various sectors are set annually by collective bargaining contracts negotiated by the various unions.
The Nordic countries also have high taxation rates and high public spending on education, health care and welfare, in a bid to temper inequality. This high-tax, high-entitlement welfare model has worked well so far, but economists are seriously concerned about its financial viability as people age and fewer younger workers are available to support larger pools of older folk.
SHORING up the wages of low-skilled workers through increases in training and productivity is another way forward, as is Workfare.
Singapore has already embarked on such schemes. With Workfare, the state bumps up the pay of low-wage workers through cash transfers. However, the bulk of the transfers are given in Central Provident Fund payments to boost a worker's retirement income, rather than in cash.
FINALLY, taxing the rich is another way in which governments temper inequality.
Studies overseas have also found a strong correlation between the reductions in top tax rates in countries such as the US and Britain and the increases in pre-tax incomes of the richest 1 per cent from the mid-1970s to 2008.
In these countries, top tax rates were slashed about 40 percentage points within a decade after the Thatcher and Reagan 'revolutions'. During this time, the income share of the top 1 per cent roughly doubled.
In sharp contrast, during the same period, France and Germany did not reduce their top income tax rates by much and the share of income of their richest 1 per cent remained largely unchanged.
Riven by inequality, the US is in the middle of a debate right now on whether to impose a so-called millionaires' tax.
Singapore currently has among the lowest income tax rates for the rich in the world, but not much of the discussion on how to narrow income gaps has centred on tax increases for the rich.