The Singapore government has progressively tightened the inflow of cheap foreign labour and has opted to instead, embark on a productivity drive.

Discuss the conflicts in the government objectives that may arise from the use of this policy to achieve productivity-driven growth. [25]

Introduction

Reasons behind the tightening of immigration

·      Influx of foreign workers due to high demand by SMEs for labour-intensive work as they are generally considered by to be cheap to employ

·      Ability to hire cheap labour at low wages to take up labour-intensive jobs gives firms very little incentive to increase productivity

HOW AND WHY THE SUPPLY OF FOREIGN LABOUR HAS BEEN TIGHTENED

Measures in place:

1.  Foreign Worker Levy (FWL)

·       The FWL is payable to the government on top of what employers are paying the foreign workers. This artificially increases the cost of hiring a foreign worker.

·       Progressively revised upwards over the last few years

2.  Dependency Ratio Ceiling (DRC)

Figure 22a: Increase in productive capacity

An employer can only hire up to a certain number of foreign workers corresponding to the total number of workers in his company (i.e. there must be a mixture of both local and foreign workers). This DRC has been progressively revised downwards such that employers are allowed to hire lesser foreign workers. (A blanket 5% reduction in DRC was applied during the last Budget.)

These measures aim to reduce firms’ reliance on foreign workers.

Figure 22b: Increase in cost of production

As firms face higher costs in hiring foreign workers, they will be forced to reconsider their options and consider increasing productivity by investing in the training of workers or via investment in technology to make up for the higher costs. When firms take such actions, productivity will be increased and this will increase the productive capacity of the economy via a rightward shift of the AS as illustrated in Figure 22a.

·      Increase in long term potential growth

POSSIBLE CONFLICTS

01 Inflation

·      In the short term, with the reduction in DRC and increase in FWL, firms will find it both harder and costlier to hire foreign workers. In the immediate term, it may be hard for firms to immediately increase their productivity as such measures will take time to see results.

·      Therefore, they may still have to continue hiring the same amount of foreign workers despite the higher cost to maintain the same level of output in the short run.

·      As such, cost of production will go up. The increase in cost of production is purely due to an increase in the cost of hiring labour. When firms face an increase in costs, they may pass on the higher costs in terms of higher prices back to the consumers. This is illustrated on Figure 22b in terms of a leftward (upward) shift of the AS.

Ø  GPL will increase

Figure 22c: Fall in AD

02 Lower economic growth

Firms may cut back on investments due to higher costs involved in doing business.

·      Fall in I àfall in AD àfall in NY via k àfall in economic growth

·      The higher cost of production may also increase the price of final output, this may cause Px to increase. Export competitiveness may fall and cause a fall in demand for Exports. Fall in (X – M) àfall in AD àfall in NY via k àfall in economic growth

03 Higher unemployment

·      The fall in output level as mentioned earlier will lead to firms cutting back on factors of production such as labour, since the amount of labour required to produce a lower level of output is lower, resulting in higher unemployment.

Conclusion

There will be some “pains” associated with the shift from relying on low cost cheap foreign labour to productivity in driving growth. This means that costs will have to go up during the transition period. Businesses that are unable to cope with such increase in costs may have to shut-down, which can cause an increase in unemployment. In the long term, should the productivity drive be successful, it will drive higher economic growth.