Refuting Prof Lim's idea on drastically pushing up the wages of low-wage workers by up to 50 per cent in the next three years, Mr Lee said that although he appreciates "his good intentions", he does not agree with this drastic approach.
"The only realistic way to move is a step-by-step with wages and productivity going up in tandem together as fast as we can but as fast as is possible.
"In the early 1980s, we did have one period when we zoomed up and pushed wages up rapidly. But even then, we ran into problems. Wages shot up but productivity didn't improve and we lost competitiveness.
"So in 1985, when the winds changed and when conditions turned difficult, we plunged into a very deep recession. It was scary," said Mr Lee, who was speaking to nearly 1,500 unionists, employers and government leaders gathered at the annual May Day Rally.
Mr Lee acknowledged that small-and-medium enterprises may end up passing the cost to consumers should they increase the wages of low-wage workers, which make up a bulk of their workforce.
He also said low-wage workers will be greatly affected if wages go up sharply and are not matched by improvements in productivity.
"(It is) better to aim for what is sustainable and don't take a big risk with short term jumps in wages. I promise you we will always do our best to uplift low wage workers and we have many programmes doing that."
The plight of low-wage workers have been on the minds of unionists who recently also voiced concerns over issues such as the cost of living and healthcare.
In order to upgrade low-wage workers, Mr Lee promised the labour movement that the government will help workers in this category by implementing the Inclusive Growth Programme.
This programme has now been increased to $100 million and aims to upgrade 100,000 low-wage workers in Singapore.
Speaking at the May Day Rally on Tuesday, Mr Lee said over a lifetime low-income households will get more than $500,000 in government subsidies.
On the topic of foreign workers, Mr Lee noted the different point of views of employers and workers.
Employers are not able to find enough Singaporean workers, especially those who will stay on the job, and therefore turn to foreigners, who add to competition, reduces wages and takes away jobs.
He said both arguments are valid but the inflow of foreigner workers has to slow down significantly in the coming years, as Singapore cannot keep bringing in 80,000 foreign workers a year.
There is no "magic number" when it comes to how many foreign workers are needed in Singapore and it depends on economic opportunities, explained Mr Lee.
"In a good year, you want to allow a few more to come in. In a slow year, we can tighten and let some of them go off but it also depends on our own needs."
Mr Lee emphasised that while Singapore must always be open to the world, Singaporeans will be the government's priority.
"This is the purpose of all our policies, including on foreign workers and talent. We are trying to seek the maximum advantage for Singapore and Singaporeans."
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