Foreign labour policy & income disparity in Singapore

By Edmund

There has been a disconnect between the profits of businesses and the wages of ordinary Singaporeans in recent years. While corporate profits have increased, the wages of Singaporean workers, except for those at the higher end, have barely budged in real terms.

In addition, income disparity in Singapore has increased. The lowest 20% of income earners or 300,000 Singaporean workers are earning $1,200 per month or less. They have not benefited from the growth in the economy, and their incomes have not increased as much proportionally as the other income groups. In fact, it was shown that Singapore has a first world economy but a third world wage structure. Compared to developed countries and other NIEs (newly industrialising economies), Singapore has a relatively low wage share and high profit share.[1]

Why have the wages of our bottom 20% remained stagnant despite the economic growth? Why has the income gap between the top and bottom of our society widened?

Part of the answer lies in the liberal foreign worker policy.

Foreign Labour Policy

The government claimed that the access to foreign workers have enabled our economy to remain competitive. It is because “many companies use foreign workers to meet skill shortages or to lower costs to compete for business”.[2]

Despite the scrutiny on the unemployment rate, there is actually a surplus of job opportunities in Singapore. Based on the number provided by the Minister of Manpower in March 2006, there are 670,000 foreign workers in Singapore, which accounts for 29% of the Singapore workforce. The number does not include permanent residents.

We have about 65,000 Employment Pass holders and 25,000 S Pass holders. Foreigners need to hold employment passes for jobs that pay more than $2,500 in monthly wages and S passes for jobs that pay more than $1,800 per month.

There are about 580,000 Work Permit holders in Singapore. Of these, 160,000 are foreign domestic maids. Work permits are issued for employers to employ foreign persons for monthly wages of not more than $1800 per month. This means that we have close to half a million foreigners competing with Singaporeans for jobs that pay less than $1800 per month.

Foreign workers compete with our lower-skilled workers for job opportunities and, in the process, depress their wages. The explanation is elementary economics – it is a case of increased supply lowering the wage rate in the labour market. Those suffered most are our lower-skilled and older workers.

In supporting the foreign labour policy, a standard argument used by the PAP leaders is that foreign workers are taking jobs that locals are unwilling to do. This is not true.

The supply of labour is dependent on its price. The Singapore workers have to consider the jobs and wages on offer against the costs of working, which include transport and meals or even childcare. Their overheads are higher than that of foreigners. The wages for lower-skilled jobs have fallen so much that many, particularly women, have been discouraged and dropped out of the labour market.

Our political leaders must know this: after all, it is the same argument they use to justify the pegging of their pay to top private sector executives. It is thus disheartening that the unemployed are often labelled as choosy by our leaders.

Equally invalid is the argument that inflationary pressures would build up without the foreign workers and thus restricting the growth of the Singapore economy.

With fewer foreign workers, our economy would simply grow more slowly. But the question for Singaporeans is not whether the influx of foreign workers increases the size of the economy, but whether it raises their own income.

The PAP government seems to think only about growing the economic pie, i.e. GDP, but what truly benefits Singaporeans is that their income increases. What is the point of having 5-7 percent GDP annual growth simply by importing more foreign workers, when it depresses the wages of Singaporeans especially those at the lower end?

It is the sophistication, not the size, of the economy that matters in the globalised economy. Singapore could never grow into the size of China or India or, for that matter, even Malaysia. What we need is for our people to find niches that they could serve the global economy.

While foreign professionals and skilled foreign workers could relieve skills shortages in the industry sectors that the government is targeting, one cannot help but notice that the vast majority of foreign workers are here for jobs that pays less than $1,800.

As for the potential impact on our cost competitiveness, the question we need to ask ourselves is how sensitive is the cost of doing business in Singapore to the wages of the lower-skilled workers. Except for labour-intensive manufacturing activities, many which have already abandoned Singapore, the cost of operating a business in Singapore is more dependent on the salaries of the executives and professionals. The other costs are of course land and rental, infrastructure and taxes.

The use of unskilled foreign workers also hinders the adoption of technology to improve productivity. Businesses in Singapore must help workers upgrade their skills, rather than resort to cheap alternatives by hiring foreign workers.

Several academics have warned that excessive supply of cheap labour would dampen the wage rate among lower income people and harm the productivity growth of the economy.[3] It is thus questionable why the PAP government is still subsidising economic activities that rely on cheap foreign labour that Singapore do not have an economic advantage in and do not benefit the Singaporeans?

While the reliance on foreign workers to compete on cost could boost the economy in the short term, it is definitely not a long term solution for Singapore. Businesses need to learn to move up the value chain. We should not subsidise manual labour intensive activities that are no longer viable in Singapore. By continuing to depend on cheap foreign labour, we are just delaying the inevitable shake-up.

This brings to another question. In explaining retrenchments and job turnover, the PAP leaders claimed that Singapore’s economy had been undergoing economic upgrading and restructuring since 1998. I suppose it means a higher proportion of better-paying jobs from a more sophisticated economy. Why is it that the Singapore economy is still relying on an army of close to half a million cheap foreign labour?

Woes of the Singaporean workers

As discussed earlier, the problem Singapore faces today is not the lack of jobs but rather quality employment for our people. Unlike other developed countries, Singapore workers in lower-skilled jobs face competition from cheap foreign labour. As a result, their wages are being depressed and this resulted in a huge income disparity between the knowledge and the manual workers.

For example, the construction sector in Singapore is totally addicted to unskilled Bangladeshi foreign workers and labour productivity is closer to a third world country than a developed economy. Not all Singaporeans have the skills set or the desire to be a knowledge worker. While men in Australia and European countries can work as builders and earn decent wages to support their family, can our men do likewise?

Furthermore, as the lower-skilled workers that rely on manual work get older they are not as productive as the younger ones and their earning power declines. Thus we have a group of helpless Singaporeans who just could not earn and save enough for their retirement.

The two pictures above contrast the adoption of labour-savingtechnology in the construction industries of Hong Kong and Singapore. The picture on the left was taken in November 2004 on my visit to Hong Kong. An automatic traffic light system with object sensors was used to direct the traffic. The picture on the right was taken in Singapore in August 2006. Two workers were deployed just to manually guide the opposing traffic using the stop/go poles.

What is needed?

The sustainable solution for our poorly paid workers is higher wages and a more comprehensive social safety net, not impromptu handouts (that coincides with the election years). The 300,000 in the bottom 20 per cent of the wage earners should not be made to depend on the government for financial supplement. Singaporean workers have the rights to decent living wages to support their family.

The opening of world trade is eliminating opportunities for production of labour-intensive tradable goods and services in high-income countries like Singapore. As more economies open up and compete with others, firms face pressure to keep costs down. To survive, they move to lower-cost countries, outsource jobs there, turn to technology or use a combination of these strategies. All of these trends depress wages of workers whose jobs can migrate easily to cheaper places or be replaced by technology. Thus the employment of the local lower-skilled workers must increasingly be in the non-tradable activities, e.g. services and construction. If cheap foreign workers drive down wages for such jobs too, a hapless underclass will inevitably emerge.

We need tighter restrictions on the import of cheap foreign labour into domestic economic sectors (i.e. industries not in direct external competition), e.g. services. This would help to raise the living standards of our citizens in the lower rungs of the economic ladder, and at the same time minimise the effect on our cost competitiveness, if any.

On the social safety net, Singapore‘s current social security arrangement is characterised by near exclusive reliance on CPF, which only works when employability is not an issue. However, as we have witnessed in recent years, the Singapore economy has one of the most volatile growth rates in the world due to its specialisation. In addition, we have one of the fastest changing economies. Not only are industries left to global market forces, we have a situation of accelerated restructuring led by the government. The government chooses clusters and then directs and incentivises resources to move into these industries. In the process, it displaces workers from the other industries.

The future for Singaporeans

In Alan S. Blinder’s article “Offshoring: The Next Industrial Revolution?” in the March/April 2006 issue of the Foreign Affairs, it was postulated that the sorts of jobs at risk of being migrated out of the higher income countries are not longer between manufacturing and non-manufacturing jobs. Neither is it between highly educated (or highly skilled) people and less-educated (or less-skilled) people – doctors versus call-center operators, for example.

The critical divide in the future is between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not. This unconventional divide does not correspond well to traditional distinctions between jobs that require high levels of education and jobs that do not. A few disparate examples will illustrate just how complex and untraditional the new divide is.

It is unlikely that the services of taxi drivers – a low-skill job – will ever be offshored. On the other hand, accounting services and investment analysis (high-skill jobs) are already being delivered electronically from India.

Most doctors need not fear that their jobs will be moved offshore, but radiologists are already seeing it happening. And it has happened in our government hospitals (National Healthcare Group). In short, the dividing line between the jobs that are threatened by offshoring and those that do not in the future does not correspond to traditional distinctions between high-end and low-end work.

Labour policy solutions

What should be the long term policy solutions for Singapore?

Firstly, the only way that we are going to give a better life for the lower 20 per cent of Singaporeans over the longer term is to recognise that certain jobs should be kept for lower-skilled Singaporeans. Low wage jobs exist in Singapore only because of the availability of cheap foreign labour. If employers are made to pay higher wages, they will be encouraged to invest in technology and in their workers to maximise their productivity. It will cost more, but we have people providing services at a more professional level.

Secondly, Singapore needs to implement a safety net that supports workers who fall off the labor-market trapeze – improving programs ranging from unemployment insurance to job retraining, health insurance, pensions, and right down to public assistance. While there will not be massive unemployment; there will be a massive transition. An effective safety net would ease the pain and, by so doing, speed up the adjustment.

Thirdly, our education system needs to emphasis more on soft skills, e.g. personality traits and interpersonal skills. Singapore has to transform its education systems so as to prepare workers for the jobs that will exist in the higher-income countries. Basically, that requires preparing workers for personal services jobs rather than impersonal services and manufacturing. Creativity and imagination skills will be highly valued, and people skills will be more valuable than computer skills.

Further reading/references:

• [1] “First World Per Capita Income but Third World Income Structure? Wage Share and Productivity Improvement in Singapore,” Statistics Singapore Newsletter (link)

• [2] The Reply by Minister for Manpower’s (Dr Ng Eng Hen) to Mr Steve Chia on Foreign Workers in Workforce in Parliamentary Debates, Singapore, Official Report, 10th Parliament, Part 3 of Second Session, Volume 81 (link)

• [3] The Business Times, 27 July 2005, S’pore has to tread carefully on foreign labour policy: Prof

• [4] Foreign Affairs, March/April 2006, Offshoring: The Next Industrial Revolution?

For just US$7.50 a month, sign up as a subscriber on Patreon (and enjoy ads-free experience on our site) to support our mission to transform TOC into an alternative mainstream press in Singapore.