Why the PAP fails miserably at behavioral economics

P-K4 Project Editorial

Ong Ye Kung was the outgoing Executive Secretary of the National Transport Workers’ Union prior to the SMRT bus strike.

The National Trade Union Congress (NTUC) is now synonymous with the “cheaper, better and faster” slogan. It was claimed that the message was driving at promoting greater productivity, a mutual agreement by the tripartite partners of government, workers and employers to be cheaper, better and faster. According to Lim Swee Say, the end result of the “cheaper, better and faster” drive is ” stronger economic growth, more profitable companies, and higher wages”.

However, unfortunately for the People’s Action Party (PAP) and fortunately for its detractors, the situation on the ground is completely the opposite. It now sounds like a broken record blaring out for the upteempth time, but because of the influx of foreign workers, wages are depressed, which damningly looks like “cheaper” workers as per NTUC slogan, even if that was unintended as claimed. We aren’t so much for covering the same ground that numerous other commentators have done so previously, but what we want to do is to point out the PAP’s apparent lack of grasp of the discipline of behavioral economics, especially with regards to its policies that ultimately affected wages. Despite many commentators pointing out the detrimental effect of low wage foreign workers on wages, it took a poor showing during the General Elections 2011 to wake the PAP up. How much the PAP has woken up its idea is again a debate reserved for another day.

What is behavioral economics? It is in essence a marriage between economics and psychology. It is concerned with how social, cognitive and emotional factors affect the decisions and actions of individuals that ultimately result in certain economic outcomes, and in the context of this article, we are quite interested in productivity. Sometimes, behavior of individuals do not follow the outcomes of economic models, and that is where behavioral economics comes in to fill the gap, as it attempts to explain how actions of individuals are influenced by psychological factors which brings about certain economic outcomes as the end result.

Mathematically speaking, depression of wages maximises profits for business owners. The basic assumption is that workers can maintain the same level of productivity and have a similar level of output as compared to the past when wages were at higher levels. Firms can also hire more workers with depressed wages, increasing their output and profits. However, of course, things are not as simple as it sounds. One must filter out the rhetorics of having cheaper and equally qualified workers, and examine the impact of depressed wages on the individual’s psychology, which influences his subsequent actions.

We should not underestimate the impact of reduced wages on the morale of workers. As a consequence of this, workers tend to reciprocate by doing as little as possible. If workers of a firm sense a disparity in wages in comparison to a peer who is equally qualified and performs the same job function, then the one who gets a lower wage could have a lower morale, assuming all other factors such as company benefits, leaves and bonus packages are similar. This could impact the latter’s productivity.

In a research paper titled “Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment“, the investigators, Sebastian Kube, Michel André Maréchal and Clemens Puppe, conducted a field experiment at a university library. The libary hired workers for a limited time period who were told that that they will be paid a projected 15 Euros per hour. For the control experiment, workers are paid the promised amount. For another group, the workers are told before starting work that their pay will be reduced to 10 Euros per hour. For the group that suffered the cut, there was a 20% decrease in productivity.

Reduction in productivity is one consequence, the others could possibly be high turnover rates, which isn’t good for the firm in the long-term, as it will have to bear the costs of re-training new workers, and suffer the inconvenience and losses due to discontinuity of work, i.e. when a previous worker involved in a project resigns, there is always an information gap between the the latter and an incoming worker, which may possibly determine the success or failure of the project.

We now read of a recent bus strike involving more than 170 bus drivers over dissatisfaction regarding pay and living conditions; they felt aggrieved over differences in pay in comparison with their Malaysian colleagues. The research by Kube and colleagues demonstrated reduction in productivity as a consequence, but in truth, difference in remuneration and company benefits or lack thereof could result in far more negative repercussions, it is possible that psychologically, such negative conditions could have forced the workers over the tipping point, which resulted in them striking. Hence, there are a number of eventualities, either retaliation through doing as little as possible, to organising strikes.

In fact, behavioral economics gives us a way to appreciate the conflict between the proletariat (workers) and the bourgeoisie (the business owners) in Marxism. The conflict is brought about as the proletariat want their wages to be as high as possible and the bourgeosie want that to be as low as possible. It is possible that working conditions could have agitated the proletariat psychologically to the extent which is way past the tipping point that they stage a revolution against the bourgeoisie.

The reason why the PAP fails miserably at behavioral economics stems from the moment it considers Singaporeans as economic digits. Behavioral economics brings in the human element, specifically the role of human psyche, within the economic framework. Is it any wonder why Singapore has struggled with the chronic problem of low productivity?

Yet, we read official accounts in the past of how certain celebrated PAP politicians rode the back of the communist tiger to power. Maybe, we should not be so fixated over terms like “communism” or “marxism” for that matter. However, we should know this – the human psyche is more complicated than we can ever imagine, and that can spur individuals to certain actions, even irrational ones or what we consider as insanity at times. Perhaps, the DVD, “Riding the tiger” is just a half-finished work. The moral of the story is that one may ride the tiger, but the major question is will the rider ever become the tiger’s next meal? And no, the tiger has never been killed – never underestimate the power of the human psyche.

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