What's keeping blue-collar wages low?

ASK: NUS ECONOMISTS
By Davin Chor, Published The Straits Times, 2 Jan 2014

To what extent have low blue-collar wages and rising inequality in Singapore been the result of foreign worker inflows?

THE link between foreign workers and local wages has been a hot-button topic. It is also clearly an issue in which many Singaporeans feel they have a stake. Rightly or wrongly, the slow growth in blue-collar wages and the accompanying rise in inequality over the past decade have been pinned on the influx of foreign workers.

This "conventional wisdom" was recently challenged in an article written by Professor Hoon Hian Teck - entitled Relook Link Between Low Wages And Foreign Workers - published in The Straits Times on Nov 27 last year.

His argument can be summarised as follows: The stagnation of wages at the low end of the income distribution began between 2000 and 2004. This was the result of the Singapore economy being hit by the bursting of the dot.com bubble and the SARS crisis.

However, the growth in the non-resident workforce only accelerated after 2005. Given this timing, it is argued, the influx of foreign workers could not have been the root cause of our blue-collar wage woes.

So did the presence of foreign workers not matter at all? Or is there still some truth to the conventional wisdom? The reality, I believe, lies somewhere in between.

I agree with Prof Hoon's view that there are deeper forces at play that are not fully appreciated in the ongoing debate on wages in Singapore. These issues have to do with the underlying economic restructuring that Singapore has to undergo to stay relevant in the global economy. As Prof Hoon points out, this is a process that has favoured growth in our services sector at the expense of manufacturing.

The stark reality is that these structural changes have also favoured skilled workers over their less skilled counterparts. Being "skilled" now means possessing computer literacy, or being able to use IT tools (such as e-mail and Microsoft Word) that drive any modern workplace. A worker with such capabilities would inevitably be more nimble in making a job transition between sectors than, for example, someone whose primary skill set was working on a specific production line machine.

Consequently, less skilled workers are now in a more vulnerable position. Even if we had hypothetically held constant the number of foreign workers in Singapore, our less skilled resident workers would still have had to play catch-up.

That said, one should not understate the effects of foreign workers on our local labour market. As the Singapore economy embarked on this restructuring, the upswing in the business cycle around 2005-2006 led to a rise in demand for labour. This demand was met by admitting larger numbers of foreign workers. But there were two key differences this time compared to past recovery episodes.

The first difference was that in the 1990s, our foreign worker policy could be described more as a "guest worker" policy. More workers would be permitted during the growth phase of a business cycle to accommodate the rise in labour demand. But these numbers would also be adjusted downward when recessions came.

For example, during the Asian financial crisis in the late 1990s and the SARS episode in 2003, the size of our non-resident workforce actually shrank. This helped to cushion the negative effects of these slowdowns on our resident workers, for example by sparing some of them from being laid off.

Since 2006, however, our non-resident workforce has grown through all phases of the business cycle, expanding even during the global financial crisis (although the rate of increase did moderate during those years). What this means is that the non-resident workforce is now a much more permanent part of the labour force landscape. It is therefore harder to ignore how non-resident and resident workers affect each other.

The second difference is that since 2006 we have also seen the entry of foreign workers into several non-tradable service sectors, such as cleaning, food and beverages, as well as the wholesale and retail sectors. These were industries that previously were staffed mainly by resident workers. But the pressing need for labour meant that foreign workers were eventually recruited too.

While wages did grow on average in Singapore after 2006, it is less clear that workers in all sectors benefited equally. More studies are needed to look at the detailed industry and occupational wage data to better understand how foreign workers affected the local workforce in these sectors. A natural hypothesis is that resident unskilled wages would have been even more adversely affected had government schemes such as the Workfare Income Supplement not been introduced.

If there is an underlying lesson in this, it is that there is a need to be careful and vigilant in the policies the Government adopts as the economy restructures. Foreign workers are an important complement to our workforce. But it makes sense to monitor their quantity - and quality - more judiciously to avoid unintended socio-economic consequences.

Equally important is the need to pursue policies designed to re-skill the resident workforce, so that low-wage Singaporeans will continue to play an active role in transforming our economy.

The writer is an associate professor in the Department of Economics, National University of Singapore.

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