Understanding the need to curb foreign labour

Calibrating a foreign manpower policy for growth
By Randolph Tan, Published TODAY, 20 Feb 2015

The job market is now approximately 40 per cent tighter than it was five years ago, just before the Government started to curb the flow of foreign manpower into Singapore.

This tightening of the job market is due in large part to the Government’s recalibration of Singapore’s foreign worker policy. Although severe, these measures have nonetheless been instrumental in slowing the growth in foreign manpower which is well worth the pain as it has led to more manageable increases in population figures and also, more sustainable business practices.

To appreciate the magnitude of the foreign worker policy challenges, it is useful to look to the past when there were fewer restrictions on foreign manpower, beginning around 2005. In almost the entire 10 years since then, employment growth of foreigners (non-residents) has far exceeded that of residents, with the exception of the recession in 2009.

This trend could finally be reversed, as data for the first six months of 2014 point to annual growth rates of 3.8 per cent and 2.2 per cent in resident and non-resident employment respectively.

Could this have been achieved with less severe restraints in foreign manpower numbers?

Let’s look at the 5.9 per cent growth for non-resident employment in 2012, two years after tighter restrictions were introduced by the government. At that rate, the foreign workforce would have expanded by 50 per cent by 2020. While such extrapolation is admittedly simplistic, it is not implausible given the persistence of strong hiring appetites.

As it turned out, a combination of measures has been required to rein in those appetites.

These included increasing levy hikes, and reducing dependency ratio ceilings (DRC) across all sectors as well as reduced man-year entitlement (MYE) quotas in the construction and process sectors.

The Government sought to tighten the foreign manpower policy in reaction to the unsustainable high degree of reliance on foreign labour, as well as to remove one of the main impediments to better productivity performance.

Initiated in Budget 2010, the tightening began with hikes on levies for work permits and S-Passes spread out over two-and-a-half years. Further measures were announced in subsequent Budgets.

The cumulative effect of these changes since 2010 is a movement away from fixed levies in each of the major sectors to a system of differentiated levies within each sector, depending on different DRC tiers as well as skill levels. In addition, S-Pass conditions have also been tightened significantly since 2009.

But there have been critics of the recalibration, pointing to a less competitive economy and manpower crunch as the result of the tightening.

From the outset, some businesses have warned that they might be forced to move out if the tightening restricted their capacity to operate. Economists have also suggested that by raising manpower costs without producing immediate improvements in productivity, the tightening measures could lead to a jump in labour costs, and an erosion of competitiveness. In its most recent survey, the Institute of Singapore Chartered Accountants found that manpower and rental costs were the main worries for businesses, repeating a pattern it had seen since the tightening began. These fears are clearly not unfounded. On the other hand, despite the tightening, the reality remains that the foreign workforce in Singapore has continued to grow. It is only the growth rate that has slowed.

LOOKING AHEAD

Achievements in aggregate employment growth notwithstanding, there still remain significant challenges, not least of all with the lack of improvement in productivity performance. While the lack of productivity gains is a cause for concern, I do not think it invalidates either the productivity targets or the policy calibration measures. There has been an understandable tendency to conflate foreign manpower curbs with the productivity drive. If this encourages the view that the manpower curbs – like productivity gains – are not a priority as long as growth remains healthy and unemployment is low, then the conflation would be a mistake.

While both productivity gain and foreign manpower curbs are necessary and neither is optional, perhaps it is a bit unfortunate they are taking place simultaneously. This is because in any other country where the limitations of space and infrastructure are not pressing, it would have been preferable to work each separately. This could be done, for instance, by targeting changes more selectively instead of confronting both issues on such a broad front.

As it stands, employment growth continues to be powered by the increasing size of the non-resident workforce. It is also after several rounds of hikes in foreign worker levies that the growth has slowed to more sustainable levels. Meanwhile, a quick tour of the ground can throw up many observable instances of a lack of urgency in replacing labour-intensive practices with leaner, more sustainable alternatives.

As recounted above, the re-calibration of manpower policies has taken on a more sector-specific approach over time, in order to achieve an overall target of capping foreign manpower at a third of the total. This brings us to a comparison with the productivity target. As we have seen reiterated in more than one Budget statement, the sectors suffering from poor productivity performance have also tended to be the most heavily reliant on foreign manpower and the most hesitant to change.

There is no doubt that foreign manpower has served Singapore well. It has, among other benefits, provided the buffer of manpower that has enabled a relatively small economy to exceed its limitations. Nonetheless, businesses would not be served well if this dependence turned into a crutch. If allowed to continue unchecked, it could lull firms into a false sense of complacency about the availability of resources, as well as delay the search for more efficient workplace processes.

The macro targets, for both productivity and manpower growth, enable us to distinguish sectors, and even individual firms, according to where they stand in relative performance. This provides us with a starting point to determine - in a labour squeeze - which sectors whose growth the economy can no longer afford to drive purely through manpower increases. That will be important for the longer term, if only to prepare us for the possibility that the days of access to low-cost foreign manpower could be numbered.

Randolph Tan is director of the Centre for Applied Research at SIM University