I AM baffled by what Finance Minister Tharman Shanmugaratnam said in his address last Wednesday to some 500 unionists about being wary of wage-induced inflation ('Tharman: Pay rises no cure for inflation').
He seemed to suggest that wage increment could contribute to inflation.
First, Singapore is a net importer of goods and the rise in prices is caused by the spike in world oil prices. The price increase, as one may term inflation, does not necessarily mean there is an increase in real demand for goods. Singapore imports the goods and any increase in manufacturing cost in other countries is passed on to us, even if there is no rise in demand here.
A rise in wages of a few percentage points is not likely to add significantly to the cost of production here as that cost is more likely driven up by the spike in fuel prices, which Mr Tharman cited at 64 per cent. Given the statistics, it is a little far-fetched to think a small increment in wages would stoke a second round of inflation.
Raising productivity seems like a panacea to the perennial problem of not losing that competitive edge. Productivity cannot keep increasing without added costs. There is an optimal output level and beyond that, diminishing returns set in.
Perhaps what should be emphasised here is having workers understand why pay rises may not be a long-term solution as employers have to manage smaller profit margins due to inflated raw-material prices. It is a delicate situation, so workers have to moderate their expectations to ensure the survival of Singapore companies in a fiercely competitive world.
