Discuss whether raising labour productivity alone is sufficient for Singapore to achieve its macroeconomic objectives.
Firms can no longer depend on cheap, low-skilled foreign labour to meet their economic objectives. As a result, Singapore has tightened its foreign manpower quota to push businesses towards greater investment in technology and to promote a fairer and more efficient use of resources.
b. Discuss whether raising labour productivity alone is sufficient for Singapore to achieve its macroeconomic objectives. [15]
Introduction
In recent years, Singapore has adopted a series of manpower tightening measures to reduce reliance on cheap, low-skilled foreign labour. This move is aimed at pushing firms to invest more in productivity-enhancing measures, including technological adoption and workforce upskilling. Programmes such as Continuing Education and Training (CET), and SkillsFuture reflect the government’s broader strategy to raise labour productivity as a cornerstone of sustainable growth. However, while raising labour productivity can support many of Singapore’s macroeconomic objectives, it is not a silver bullet. In this essay, we evaluate the extent to which increasing labour productivity alone is sufficient for Singapore to achieve its key economic goals.
Raising Labour Productivity Can Help Achieve Multiple Macroeconomic Objectives
Improving labour productivity—defined as output per worker per unit time—allows firms to produce more with the same or fewer resources. This translates into higher potential output for the economy, as reflected by a rightward shift of the Long-Run Aggregate Supply (LRAS) curve. When productivity rises, unit labour costs fall, leading to a reduction in the cost of production. This can moderate inflationary pressures in the economy, particularly cost-push inflation, thus contributing to the macroeconomic goal of low and stable inflation.
Additionally, by raising productive capacity, the economy can grow without generating excessive inflationary pressure. This is especially important for Singapore, a country that is often operating near full employment—with an unemployment rate consistently hovering around 2%. Productivity-led growth helps Singapore achieve sustained economic growth, allowing the economy to expand from YF₀ to Y₁ on the Aggregate Demand–Aggregate Supply (AD–AS) diagram without overheating.
Furthermore, higher labour productivity improves the cost competitiveness of Singapore’s goods and services. This increases the attractiveness of Singapore as a destination for foreign direct investment (FDI). An inflow of FDI not only enhances the capital account (a component of the Balance of Payments), but also adds to Aggregate Demand (via an increase in investment expenditure, I). As AD increases, national income and employment rise, helping to lower cyclical unemployment and supporting short-run economic growth.
However, it is important to note that raising labour productivity alone may not be sufficient to achieve all macroeconomic objectives, especially in the short run. The process of raising productivity is often slow and uneven. While Singapore set an ambitious target of 2–3% annual productivity growth between 2010 and 2019, the actual figures in years such as 2012, 2014, and early 2015 showed productivity dips instead. This suggests that efforts to raise productivity face significant obstacles—including business inertia, skills mismatch, and limited short-run adaptability of both employers and workers.
Retraining and upskilling also face friction. Workers may resist re-skilling due to age, lack of confidence, or personal constraints. Firms, especially SMEs, may also lack the resources or incentive to send staff for training, especially when previous access to cheap foreign labour made this unnecessary. Moreover, even when training is undertaken, the new skills may take time to translate into higher output. Hence, relying solely on labour productivity improvements could lead to delays in achieving economic growth, and does little to address external shocks such as imported inflation in the short term.
The Need for Complementary Policies
To achieve Singapore’s broader macroeconomic objectives, labour productivity must be part of a multi-pronged strategy. For instance, inflation in Singapore is often driven by imported goods—given the country’s lack of natural resources. Here, the Monetary Authority of Singapore (MAS) complements supply-side policies with its exchange-rate based monetary policy, typically adopting a modest and gradual appreciation of the Singapore dollar to dampen imported inflation.
Similarly, fiscal policy plays a crucial role. Competitive corporate tax rates and sustained infrastructural investment enhance business sentiment, attracting more FDI and spurring growth. Social policies also matter. Singapore uses progressive taxation and targeted transfers such as the GST Voucher scheme and Workfare Income Supplement to manage income inequality and ensure inclusive growth. These policies are crucial, especially as technological change and restructuring may widen wage gaps between high- and low-skilled workers.
In addition, capital deepening, through greater use of technology and automation, is necessary alongside labour productivity improvements. This is supported under the Productivity Solutions Grant and the broader Industry Transformation Maps (ITMs). PIC, for example, did not just fund training—it also subsidised automation and IT equipment, recognising that long-term competitiveness stems from both better labour and better capital.
Conclusion
Singapore’s push to reduce its dependence on low-skilled foreign labour is both necessary and forward-looking. Raising labour productivity is a key lever in this transition, and it certainly contributes meaningfully to achieving several macroeconomic objectives, from sustainable growth and low inflation to higher employment and external competitiveness. However, labour productivity alone is not enough. Its effectiveness is constrained by structural rigidities, time lags, and external vulnerabilities that lie beyond the influence of productivity policy.
In the end, Singapore’s success lies in its holistic approach—combining labour productivity with exchange rate management, fiscal incentives, social support, and technological transformation. Only through such a multi-dimensional policy framework can the country successfully meet its macroeconomic goals in a sustainable and inclusive manner.
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