9 - Housing Prices, Graduates, and Income Inequality: The Case of Singapore

Summary

Globalization is often blamed for widening income gaps. However, there could be country specific causes of income inequality that could be addressed by domestic policy interventions. This chapter studies whether escalating housing prices have contributed to the growing income gap in Singapore. Housing price escalations involve a substantial income redistribution away from home buyers for owner occupation to property developers, rental property owners, and financiers. This effect is largely reflected in nonlabour earnings. Even with household labour income data, we find that rising private property prices have a small but statistically significant effect on income inequality, measured by the percentile ratio P90/P10. Unexpectedly, the most robust variable that explains this income ratio is the share of resident graduates in total employment. This variable shows an inverted U effect on income inequality. A similar inverted U effect is found with a productivity ratio variable used to measure the effect of globalization.

INTRODUCTION

Rising income inequality has been a global phenomenon, and Singapore is not an exception. Singapore's income Gini coefficient among employed resident households, for example, increased from 0.457 in 2003 to 0.482 in 2007. This dropped slightly after the global financial crisis, trended upward again until 2012, and then dropped to 0.464 in 2014. After accounting for government transfers and taxes, however, the Gini coefficient increased only marginally from 0.419 in 2004 to 0.432 in 2012, before dropping to 0.412 in 2014 (DOS 2015). The after-tax Gini coefficient in many Organisation for Economic Co-operation and Development (OECD) countries lies below 0.35.

The widening income gap in many developed countries is often attributed to global forces. Nevertheless, some country specific causes are likely to set countries apart in terms inequality levels and trends. Understanding these causes would help in policy formulation.

One factor that has contributed to a wider income gap in Singapore is the dual nature of Singapore's labour market openness. At the top end, competition for international talents drives up the earnings of top earners. At the lower end, the unlimited supply of low-skilled workers from the region keeps low-end wages stagnant. Options available for addressing the income gap caused by this divide are very limited. Excessively restricting foreign labour without offsetting gains in productivity is counterproductive. Productivity improvements, however, have been a long-drawn process.