Foreign worker levy 'not serving its intended purpose'

Experts say other measures already help to tighten inflows; fees just add to firms' costs
By Chia Yan Min, The Straits Times, 2 Jul 2015

Companies have a reprieve from foreign worker levy hikes this year but some business leaders and economists say this is not enough.

They say the levies, which would have gone up yesterday if not for a deferment unveiled in Budget 2015, no longer serve their original objectives but instead are only adding to companies' costs.

The tightening of foreign manpower inflows has been gaining pace since economic restructuring efforts began here in 2010.

Foreign worker levies have been gradually raised in recent years as part of a suite of policies aimed at weaning companies off cheap foreign labour. Dependency ratio ceilings (DRC) - a quota setting the maximum number of foreign workers a firm can hire for every full-time local worker it employs - have also been gradually reduced across sectors.

Some economists and business leaders say other prongs of the Government's foreign worker policy are already working to limit the size of the pool of such workers.

Given that tighter dependency ratios already put a cap on the number of foreign workers firms can hire, levies "don't contribute much in terms of regulating foreign worker inflows; instead they only increase costs and erode margins", said DBS economist Irvin Seah.

This is having a detrimental effect on firms "already struggling with persistent increases in business costs, and reduced demand".

Singapore Business Federation chief operating officer Victor Tay said the levies were intended to make foreign workers more costly to hire and encourage companies to hire locals. However, certain classes of work passes and permits - particularly for skilled workers - already have minimum salary requirements for renewal.

"In the industry perception, the levy has artificially inflated business costs... Foreign worker levies erode companies' margins and in an environment of rising business costs, may sink them into a loss-making situation," he said.

Mr Seah said it is a "misperception" that the levies will level the playing field by equalising wage levels, "because many foreign workers take up jobs that Singaporeans shun, to begin with". These include jobs in construction, shipyards, and the food and beverage sector.

"In the longer term, policymakers should consider reducing or doing away with the levies," he said.

Ms Karen Tan, director of frozen foods manufacturer CS Tay, said the company "does not mind paying more" for local employees.

"But for my trade, it's tough to find locals. We have shift duties and sometimes work on weekends... I might be paying more, but no one is interested," she said. About 20 of the firm's 60 employees are foreign workers, and the firm pays $9,500 to $10,000 in levies every month.

Despite the deferment, Finance Minister Tharman Shanmugaratnam stressed in February that while the Government was tweaking the pace of foreign worker measures, it was "not changing direction".

Nanyang Technological University Assistant Professor Walter Theseira said it is "quite natural" for interest groups such as employers to push for policy changes which improve the bottom line.

"But we cannot maintain a low-skill, labour-intensive economy in Singapore in the long run," said Prof Theseira. "Reducing levies would certainly benefit employers, but it is less clear whether that decision would benefit all Singaporeans to the same extent."

If foreign workers are too cheap, some employers might find it less costly to hire locals to do nothing - or almost nothing - to increase their DRC and be allowed to hire more foreign workers. "Abolishing foreign worker levies would simply give employers even more of an incentive to engage in such practices, which are just unproductive."

Instead, the system should be calibrated according to best practices in the industry, said Prof Theseira.

More productive firms can still be profitable with tighter DRCs and higher levies, he noted. "The DRCs and foreign worker levies can be a moving target - as they are now - but the targets should be calibrated according to the most successful firms, the ones whose productivity and practices we want the rest of the industry to adopt," he said.

Association of Small and Medium Enterprises president Kurt Wee said businesses would welcome a re-look of the levy if it means lower costs, "but, at this stage, the more immediate problem is catalysing SMEs into new stages of growth".

New hiring among SMEs has slowed markedly in recent months, in a worrying sign. "This could be due to various reasons - restructuring, or businesses moderating the scale of their activity, given manpower constraints."

Costs are just one part of the equation - growing revenue by expanding or developing new products is also vital for the long-term survival of Singapore's SMEs, said Mr Wee.