13 Jan 2013

Singapore has been embroiled in debates over income inequality issues in the past few years, not unlike other countries in the aftermath of the Great Financial Crisis.

Singapore has been embroiled in debates over income inequality issues in the past few years, not unlike other countries in the aftermath of the Great Financial Crisis. In the decade to 2012, the income gap – as measured by the Gini coefficient – has widened from 0.454, unadjusted for government taxes and redistributive transfer, to 0.478, with a higher figure demonstrating worsening income gaps.

Even redistributive taxes and transfers failed to close the gap, with a coefficient of 0.433 in 2002 widening to 0.459 in 2012. Furthermore, the gap between the bottom and top 10 percentiles has exhibited greater divergence and demonstrates the need for policies to address deepening inequality.

The Department of Statistics released the Key Household Income Trends 2012 report in February, indicating that the reported Gini coefficient, a measurement of income distribution in which a smaller number means more equal distribution, was 0.478 before government taxes and redistributive transfers and 0.459 after. In 2011, both values were lower at 0.473 and 0.448 respectively. Median monthly household income from wages increased in both nominal and real terms for 2012, and presents a significant increase in incomes across all deciles relative to the previous years. Between 2007 and 2012, the annualised real income change of the bottom 11th to 40th percentile has been increasing, with a decreasing trend of the 41st to 90th percentile. If this continues, the income gap between the two quartiles may eventually converge. In other words, income inequality may narrow.

Yet, it seems unclear what factors and how each contributed to this marginal improvement. If policymakers and analysts were to better understand the underlying causes for the rise in income inequalities, a greater breakdown of the reported statistics would be very beneficial in the recommendation of corrective measures, especially for the lower income groups. Two pieces of statistics can further illustrate this.

In 2012, the bottom and top 10 percent of households saw a nominal income increase of 4.3 percent and 9.6 percent respectively but Singapore’s reported annual inflation stood at 4.6 percent, erasing the gains for the worse-off in society. While all income deciles would be affected, the impact of inflation is more marked on the lowest decile than the highest, as they spend a disproportionately bigger share of income on goods and services which make up the consumer price index. Adjusting for inflation and the proportion (weights) of expenditure, real income actually fell by 1.2 percent for the bottom 10 percent income stratum, but still increased by 5.1 percent for the top 10 percent income stratum.

Another statistic to consider is imputed rent, an item in the CPI basket. Imputed rent is the rental income forgone by the owner in occupying his/her own accommodation. This effect is very evident to those who do not own, and rent public housing, namely those in the lowest income bracket. If imputed rent is removed from the CPI, a similar calculation will indicate that real income of the lowest 10 percent income stratum actually increases by 0.8 percent while real income of the top 10 percent increases by 5.6 percent. Seen another way, any increase in the CPI, or any one component in it, affects the lowest income decile more adversely than others.

The Household Income Trends report acknowledges that households could potentially have non-work sourced income such as capital income that was not included, for instance, rental income, while the reported Gini was computed using only labour income (which is only 42 percent of total GDP in 2011). Capital income comes from investment dividends and rental income earned by households with more than one unit of housing or have spare capacity in their current ones. Incomes from either source can be substantial and are likely to only be accrued to those who have a greater ability to save.

The reported Gini is also derived using data from households with at least one working individual. In Singapore, 9.2 percent households are not in the labour market and are excluded from the calculation. They cover the spectrum from households dependent on working adult children, transfers from the government or their pension payouts to those who enjoy accrued savings from capital, rental or other non-labour incomes.

The unexplained omission of both non-labour income and households with no labour force participation and non-labour income presents a less than representative picture. Intuition suggests that the Gini coefficient may, in fact, be larger than what was reported.

Policy Tweaks Needed

An increasing income gap as reported in the Household Income Trends 2012 report can become a source of anxiety if steps are not taken to reduce it. While Singapore’s use of regressive transfers and progressive tax structures has helped mitigate it somewhat, it did not manage to prevent the Gini coefficient from increasing.

For the lowest decile especially, existing policies such as income assistance in high inflation periods and the expanded use of goods and services tax vouchers are helpful in raising real incomes. Lower public housing rental, greater rebates and subsidies on utilities, healthcare and ways to further this group’s ability towards homeownership also go some way towards mitigating current income inequality levels. While the use of government taxes and transfers reduce the income gap to some degree, this merely addresses immediate needs, and does not help raise the long-term earnings potential of the various groups.

There is a general positive correlation between higher incomes with technical change and productivity improvements. This is reflected in the managerial and technical skill sets of individuals, notably those who manage domestic enterprises. However, lower income groups are often unable to capitalise on such improvements. Attaining new skills often favours higher income workers as this is the group who can better afford to take time out for retraining. In contrast, older workers and those whose skills have become obsolete will be the most adversely affected.

Singapore’s policy-makers may do well to formulate policies to focus on making training and education opportunities available and accessible, restructuring local small-and-medium enterprises, widening the safety-net for enhanced risk-pooling through insurance and budgetary financing against external shocks. These policies in tandem may help social mobility. A compelling case can also be made for retirement financing as acknowledged in the 2013 Singapore Budget. These are all steps that would go far towards reducing income inequality in Singapore.

Tan Khay Boon is a Senior Lecturer with SIM Global Education. He previously taught at Nanyang Technological University and SIM University, and is a regular commentator in the media on a variety of economic issues. He can be reached at