The future of wages in Singapore

The Government White Paper on Population released last week forecast a slowing workforce growth and a tightening of the supply of foreign workers. Where are Singaporean wage earnings heading in a tighter labour market, given the previous decade's wage trends?
By Hoon Hian Teck, Published The Straits Times, 5 Feb 2013

FOR a clue as to where Singaporean wage earnings are heading, it would be useful to identify some of the major trends affecting Singapore's labour market over the past decade.

Analysing both the consequences of, and the factors affecting these trends can help us discern how Singaporean workers are likely to fare in the next decade.

The past decade

USING the Yearbook of Statistics Singapore 2012, we can identify five facts about Singapore's labour market that appear to be pertinent.

- First, the size of the total labour force increased from 2.3 million in 2001 to 3.2 million in 2011, an increase of nearly 40 per cent over the decade. About half of the increase came from the expansion of the resident labour force, which is made up of Singapore citizens and permanent residents.

- Second, the educational attainment, or what economists call human capital, of the typical member of the resident labour force increased. This is reflected both in an increase in the resident worker's mean years of schooling from 8.5 years in 2001 to 10.2 years in 2011, as well as an increase in the percentage of the resident labour force having secondary or higher educational qualifications, from 53 per cent in 2001 to about 67 per cent in 2011.

While a hefty expansion of the labour force size is not likely to be repeated over the next decade, a further increase in the level of human capital of the typical resident worker seems very likely.

- Third, the relative share of total employment in the manufacturing sector has declined over the past decade with employment gains going predominantly to the service sector. This shift in employment out of manufacturing into services is even more pronounced if we look only at the resident labour force.

Interestingly, while the manufacturing sector's employment share has declined, the sector's share of total real GDP, that is, GDP after adjusting for inflation, shows an increase from 24 per cent in 2001 to 27 per cent in 2011.

Thus, manufacturing output per worker has increased over the past decade. Where have the sector's productivity gains gone?

A closer look at the Yearbook of Statistics shows that the manufacturing sector's share of total wage compensation of employees actually declined from 20 per cent in 2001 to about 16 per cent in 2011. This suggests that most of the productivity gains in manufacturing in the past decade went to profits.

- Fourth, the share of the employed resident labour force made up of the occupation group commonly called professionals, managers, executives and technicians (PMET) increased from 44 per cent in 2001 to 52 per cent in 2011.

Correspondingly, the share of production craftsmen and machine operators declined from 18 per cent to a little above 12 per cent over the past decade. The share of clerical workers also saw a decline.

- Fifth, the share of total wage compensation of employees going to the industries classified as Finance & Insurance and Business Services increased from about 22 per cent in 2001 to about 29 per cent in 2011.

This share declined in 2008 and 2009 in the face of the global financial crisis but recovered in 2010 and 2011.

The future

IN THE light of the five facts about Singapore's labour market highlighted above, what implications are there for Singaporean wage earnings?

While the number of residents working in the manufacturing sector actually declined over the past decade, manufacturing firms overall still created more job vacancies that were filled by foreign workers.

The ready access to the supply of foreign workers kept labour costs low while the increase in value-add per worker boosted the profitability of manufacturing firms. This boost to profits very likely benefited both multinational corporations (MNC) as well as small and medium-sized enterprises (SME).

The Government released its White Paper on Population last week. It forecast a slower workforce growth of about 1 per cent to 2 per cent, down from the average of 3.3 per cent a year, from 1980 to 2010.

With an expected tightening of the supply of foreign workers, there would now appear to be pressure on wages to rise in the manufacturing sector. This prospect is not an unmitigated good for Singaporean workers, however. SMEs that are unable to raise workers' productivity to match the higher labour costs will exit the industry, thus leading to job destruction.

MNCs will also likely look at alternative locations outside Singapore to place some of their production activities, thus moving jobs overseas. For there to be a steady supply of jobs with good pay for Singaporeans, the country would need to continue to attract MNCs by harnessing its relative strength in institutional quality and the availability of a highly skilled workforce.

Success in helping SMEs to raise their productivity levels and sell into overseas markets would also be vital.

Innovative SMEs that succeed in crossing the productivity threshold to pay the fixed cost of exporting will be able to invest resources in job screening to find employees with high ability to justify their high pay.

More goes to PMETs

WE SAW that most of the employment gains in the past decade occurred for PMETs at the expense of production and clerical workers. On the whole, PMETs are in a higher wage income bracket than production and clerical workers so the distributional shift has produced an upward mobility for many in the Singapore workforce.

This occupational shift in favour of PMETs has also been observed in the United States and euro zone countries in the past two decades. As the White Paper noted, by 2030, two-thirds of Singaporeans will be in PMET jobs, up from half today.

An explanation offered by economists is that computerisation has reduced the demand for workers to perform routine tasks while placing a premium on workers who are able to perform non-routine tasks requiring abstract reasoning and human interactions. Routine tasks are also more easily offshored to workers overseas.

Policy aimed at retraining Singaporean workers who are displaced by the Internet revolution will have to take on increased urgency and our education system will need to prepare graduates who are versatile and able to cope with changes.

We observed that the share of total wage compensation going to employees in the industries classified as Finance & Insurance and Business Services enjoyed a secular increase over the past decade although it suffered a decline in 2008 and 2009.

Most likely, the wage gains enjoyed by workers in these industries are partly explained by the vast expansion in gross global financial flows.

With the proliferation of gross international asset and liability positions, especially in the advanced economies, Singapore's financial sector enjoyed a boom.

The pick-up of the wage share in 2010 and 2011 probably resulted from the heightened boom in Singapore's property market, raising the amount of local financial activity.

With reform of the global financial market in the works to stem the adverse effects of interconnectedness among counterparties trading in complex financial products, it seems likely that this will have a dampening effect on wage earnings in Singapore's financial sector.

It would appear that the rise of the wage share of the financial sector will be somewhat moderated.

A boost to the wage earnings of Singapore's financial and business services sector could, however, come from a different source.

As noted earlier, the upward trend in human capital investment is likely to continue. As more Singaporeans possess the higher skills able to take advantage of new technologies to launch new business ideas, more of them may be prepared to take the plunge to become entrepreneurs.

This would lead to an increased demand for financial expertise to assess the prospects of business projects put forward by a bigger supply of entrepreneurs that require funding. The increased demand for financial intermediation could then boost the wage earnings of the financial sector as Singapore turns to SMEs to provide a new source of growth.

The writer is professor of economics at the Singapore Management University.