Introduction
Income inequality refers to the unequal distribution of income among individuals or households in an economy. It is commonly measured using the Gini coefficient, which ranges from 0 to 1. A Gini coefficient of 0 represents perfect equality, where everyone has the same income, while a coefficient of 1 indicates maximum inequality, where one person holds all the income. In Singapore, rising income inequality has become a concern as the wage gap between high-income and low-income workers continues to widen. Both demand and supply factors in the labour market play a role in this trend.
Demand factor with inelastic supply of high-skilled labour
On the demand side, changes in technology and the evolving structure of the economy have raised demand for workers in high-skilled industries such as artificial intelligence (AI), electric vehicle (EV) manufacturing, and financial services. The demand for labour is a derived demand, meaning that the demand for workers depends on the demand for the goods and services they produce. As demand for AI-related services or EV production rises, the demand for workers in these sectors rises with it.
These high-skilled workers, typically employed in roles requiring advanced qualifications such as degrees or specialised training, already face strong demand. However, the supply of such workers is relatively inelastic in the short term, because training and educating them takes time, typically several years. This inelasticity means that when demand for these workers increases from DD₀ to DD₁, a shortage of qualified workers arises at the initial wage rate P₀, exerting sharp upward pressure on wages. As a result, wages in these high-skilled sectors rise from P₀ to P₁. This benefits high-income workers and widens the income gap between them and low-skilled workers.
Supply factor in low-skilled labour
On the supply side, Singapore's globalised economy and relatively open immigration policies have led to a significant inflow of foreign workers, particularly in low-skilled industries. Despite foreign worker levies and the dependency ratio ceiling, the foreign population in Singapore grew from 1.47 million in 2021 to 1.86 million in 2024. Many of these foreign workers are employed in low-wage sectors such as construction, retail, and food and beverage (F&B). The increase in the supply of low-skilled workers shifts the supply curve from SS₀ to SS₁, creating a surplus of labour in these sectors. This surplus exerts downward pressure on wages, as the abundance of available workers reduces the bargaining power of individual low-skilled workers. Consequently, wages in these sectors fall from P₀ to P₁, further contributing to widening income inequality.
Conclusion
Demand and supply factors interact to widen income inequality in Singapore. On the demand side, high-skilled workers in sectors such as AI and financial services see their wages rise because of increased demand and inelastic supply. On the supply side, the inflow of low-skilled foreign workers suppresses wages in sectors like construction and F&B. The divergence in wage growth between high-income and low-income workers widens income inequality, as measured by the Gini coefficient, contributing to a growing gap in Singapore's income distribution.