Businesses cannot rely on low-cost, low-skilled foreign manpower to achieve its economic aims. Thus, Singapore has reduced its foreign manpower quota to encourage companies to invest in technology and to bring about a more equitable and efficient allocation of resources.

LABOUR COST: LABOUR PRODUCTIVITY AND GDP GROWTH

 Percentage change

Unit labour cost index Labour GDP

of overall economy productivity growth

2011 1.7 2.3 6.0

2012  3.1 -0.5 3.0

2013 2.4 0.3 4.0

2014 3.5 -0.8 3.0

Assess the view that improving labour productivity solely will achieve the macroeconomic aims of Singapore. [25]

Introduction

Labour productivity refers to the amount of output per worker per unit time.

Labour productivity measures the amount of goods and services produced by 1 hour of labour OR the amount of real GDP produced by an hour of labour. Macroeconomic aims of Singapore are low inflation, low unemployment, sustained and inclusive growth as well as a healthy BOP.

Explain how improving labour productivity can help achieve some of these aims

(RWA) Policies in recent years are geared towards improving workers productivity in the form of PIC (where companies can receive 60% cash grant for investing in workers’ training), CET where adult learners are given significant subsidies to attend training courses at various universities, polytechnics and ITEs to improve their skills and recently SkillsFuture where every Singaporean is given $500 credit to pursue improvements in skills.

Figure 24: Increase in LRAS

Improving labour productivity will allow each worker to produce more. This increases the amount that the economy can collectively produce. When that happens, the productive capacity increases. As reflected in Figure 24, that results in a rightward shift of the LRAS.

·      The GPL falls, resulting in lower cost-push inflation, and the full employment level increases as well, achieving higher potential growth.

·      This is especially true for Singapore, since we are already operating near full employment level where unemployment rate today hovers at around 2%.

·      At the same time, when our labour force becomes more productive, it translates to lower production costs for firms. This could help attract FDI. An inflow of FDI will result in an improvement in the capital account, and improved BOP position; there will also be an increase in aggregate demand as reflected in the increase in AD. The increased demand for goods and services will prompt firms to hire more factor inputs such as labour, reducing unemployment and improving economic growth.

Explain how improving labour productivity alone will not help achieve these aims

It should be noted that there are limitations of trying to improve labour productivity

·      It is not easy to increase labour productivity as workers may take time to be retrained. Businesses may also not be motivated to send workers for retraining if they can just simply make use of cheap low-skilled workers in greater numbers instead.

·       (RWA) Singapore set a target of 2-3% of productivity growth for each year between 2010-2019. In 2012, 2014 and the 1st half of 2015 – we saw a dip in labour productivity instead. (0.5% for first half of this year). The evidence thus shows that at least in the short term, policies to boost labour productivity may yield little results.

Other policies are also used and may be more relevant to deal with some of these aims

1.  Modest and gradual appreciation of the exchange rate to help address imported inflation

2. Fiscal policy, through competitive corporate tax rates and infrastructural spending, helps to improve the sentiments of investors to attract FDI

3. Progressive tax system and government transfers like the GST Vouchers / Workfare Income Supplement help to address the income inequity issue.

4. Addressing the issue of growth (where we are already operating at near full employment level), we are also capitalising on the use of technology and machinery to increase potential growth, in addition to improving labour productivity. This is done through supply side policies (PIC also allows firms to purchase IT and automation equipment).

Conclusion

Firms used to rely on importing cheap foreign labour as a means to continue to grow as the economy approached full employment level. Weaning off our reliance on foreign workers requires us to improve labour productivity as a means to continue growing. Improving labour productivity is however a herculean task, as both workers and employers can be relatively resistant to change and even if they were willing to go for retraining, the process can take time.