Labor Market Application: Why is the Wage Gap Widening in Singapore? (Part 2)

Topics: Microeconomics | Labor Markets | Income Inequality | Singapore Economy

Level: JC A-Level H2 Economics / IB Economics

Note: This is Part 2 of our Labor Market series. Part 1 (explaining the existence of the wage gap) is available exclusively to students in our JC Economics Tuition and IB Economics Tuition programs.

In this advanced application, we move beyond the basics. We use the Demand & Supply Framework to analyze why the income gap between University Graduates (Skilled) and Non-University Graduates (Unskilled/Less Skilled) has increased over time in Singapore.

Watch the advanced analysis in the video with the accompanying notes below:

The Scenario: A Tale of Two Markets

To explain the widening gap, we must compare two labor markets simultaneously over time:

1. The Unskilled / Non-Grad Market (e.g., Handyman, Service Staff)

2. The Skilled / University Grad Market (e.g., Biomedical Scientists, Wealth Managers)

Observation

Originally, a gap already existed (Wskilled > Wunskilled).

Over time, wages for University Grads have skyrocketed, while wages for Non-Grads have remained stagnant or fallen. The gap has widened.

Factor 1: The Supply-Side Shock (Globalization)

Key Concept: Labor Mobility & Price Elasticity of Supply (PES)

1. Unskilled Labor (Non-Grads):

• Influx of Foreign Labor: With globalization, Singapore is open to labor flows. We have seen a significant supply of lower-skilled workers from the region (e.g., foreign workers in construction, F&B, or handymen services).

• Shift: The Supply curve increases massively.

• Result: This exerts a huge downward pressure on wages.

2. Skilled Labor (University Grads):

• Harder to Replicate: Skilled professionals (like scientists) are scarce globally. There is intense competition to attract them, so the supply increase is smaller.

• Inelastic Supply (PES < 1): It takes years to train a doctor or coder (long gestation period).

• Shift: The Supply curve increases only slightly.

• Result: Because Supply is Price Inelastic, even a small increase in demand forces wages up significantly.

Factor 2: The Demand-Side Shock (Comparative Advantage)

Key Concept: Derived Demand & Export Orientation

1. Skilled Labor (University Grads):

• Export-Oriented Growth: Singapore’s comparative advantage lies in high-tech, high-value-added sectors (Biomedical, Fintech, Tech).

• Derived Demand: As our exports boom globally, the demand for the professionals who create these exports explodes.

• Shift: Demand increases massively.

• Result: Huge shortage at original wages => Wages skyrocket.

2. Unskilled Labor (Non-Grads):

• Domestic Demand: Demand for lower-skilled services (e.g., retail, cleaning) is mostly local. It grows with the economy, but not at the explosive rate of the global export market.

• Shift: Demand increases marginally.

• Result: The small increase in demand is overwhelmed by the massive increase in supply (from Factor 1). Wages fall or stagnate.

Conclusion: Putting it Together

• Skilled Market: Massive increase in Demand + Inelastic Supply = Sharp Wage Rise.

• Unskilled Market: Massive increase in Supply + Moderate increase in Demand = Wage Stagnation/Fall.

Therefore, the income inequality gap widens.

Want the Full “Model Essay” Answer?

The analysis in this video is taken directly from my book: Model Essays on the Singapore Economy.

In the exams, you need to write this entire argument with Evaluation points. My students learn exactly how to structure these essays to hit the L3 (Level 3) mark every time.

Don’t let the Wage Gap widen between you and an ‘A’ grade.