When wages race ahead of productivity: Should we worry?

Sustaining pay rises for all
Last year was a bumper year for workers, with real median wage for Singaporeans rising 7 per cent. This strong wage growth was attained despite stagnating productivity. Can higher wages be too much of a good thing? Toh Yong Chuan and Joanna Seow study the issues.
By Toh Yong Chuan, Manpower Correspondent, The Sunday Times, 24 Apr 2016

Singaporean workers had much to cheer about last year.

Citizen unemployment was low and the labour market remained tight with more jobs chasing available workers, even though redundancies grew as well.

The nominal median wages of Singaporean workers grew 6.5 per cent last year.

After adjusting for the negative inflation of 0.5 per cent, the real growth of wages was 7 per cent.

But even as wages raced ahead, productivity growth remained tepid. It shrank by 0.1 per cent last year.

This has led some analysts to question if these wage increases are sustainable over the longer term.

Can too much wage growth be a bad thing in the long run?

PRODUCTIVITY VS WAGES: A SIMPLE EQUATION

The problem of wage growth outstripping productivity growth in Singapore is not a new one.

In fact, a chart drawn up by The Sunday Times on productivity and wage changes in the last decade found that wages grew faster than productivity in eight of the past nine years.

The only year when wages lagged behind productivity growth was in 2010 when productivity grew 11.6 per cent and median gross income grew 2.5 per cent as Singapore rebounded from the global financial crisis. (See chart.)

When asked if it is worried about wages rising faster than productivity, the Manpower Ministry (MOM) would only say: "Wage growth may fluctuate from year to year, and it is useful to look at a longer period."

It did not shed more light on the reasons behind the 7 per cent wage hike of Singaporeans or the long-term trend of wage growth.

But wage growth without a corresponding rise in productivity is a recipe for disaster, said economists.

In the recent debate in Parliament on MOM's annual budget, Manpower Minister Lim Swee Say put out some simple maths to illustrate the dire situation of low productivity.

Economic growth is a combination of both manpower growth and productivity growth.

The problem with Singapore, however, is that recent growth has largely been powered by manpower growth.

Over the past five years, the Singapore economy's growth of about 4 per cent a year was powered solely by manpower growth, while productivity was more or less stagnant, Mr Lim told Parliament.

Add in a shrinking local labour force and a slowing foreign workforce growth, and the result is simple: Growth will fall.

"Without a breakthrough in productivity growth... low growth will become the new norm," he warned.

And if productivity does not improve, the country's economic competitiveness over the long run will take a hit, economists pointed out.

Said Singapore Management University (SMU) Professor of Economics Hoon Hian Teck: "Wage growth that outstrips labour productivity growth translates into declining profit margins, business closures, and layoff of workers.

"Unless accompanied by a depreciation of the Singapore dollar, the increase in unit labour costs also implies a loss of international competitiveness."

Singapore Business Federation (SBF) chief executive Ho Meng Kit agreed.

"If wage growth continues to outpace productivity growth, we will price ourselves out of a globally competitive market. Our businesses will be uncompetitive," he said.

In a paper published in February, Ministry of Trade and Industry (MTI) economist Foo Xian Yun found that from 2005 to last year, labour productivity grew annually by 0.5 per cent.

But the real wages of the resident labour force grew by 1 per cent annually.

If employers' Central Provident Fund contributions were added, the annual wage growth was even higher at 2 per cent.

"It will be difficult to sustain increases in wages over the longer term without a corresponding increase in productivity, given the potential impact on our economy's competitiveness," she warned.

SEARCHING FOR SOLUTIONS

But while it is easy to understand the maths behind the productivity challenge, fixing it is a lot harder.

For one thing, it is a difficult task just trying to get an accurate measure of productivity.

Economists point out that the way labour productivity is measured - gross domestic product divided by the total number of workers - is too crude.

This is because of the large pool of lower-skilled, low-wage foreign workers present in the Singapore economy, said labour economist Hui Weng Tat from the Lee Kuan Yew School of Public Policy.

Many of these low-skilled workers end up doing low-value jobs and are also not eligible for subsidies to upgrade their skills.

As a result, overall productivity is pulled down, especially if companies continue to rely on large numbers of foreign workers.

"Productivity performance is the outcome of joint team effort of both local and foreign workers," said Associate Professor Hui.

The other fear is that should wages continue to push above market rates for an extended period of time, when a recession hits, workers could take a hard hit, with large numbers of layoffs.

On the flip side, the rapid wage growth could also be the result of distortionary factors in the economy.

Government policies in recent years also probably accelerated the pace of wage growth among Singaporeans, said economists.

Prof Hui said government wage subsidies like Workfare Income Supplement (WIS) and the Wage Credit Schemes could have raised wages without corresponding productivity improvements.

The WIS scheme was introduced in 2007 to boost the income of low-wage workers.

The Wage Credit Scheme was introduced in 2013 as a three-year scheme under which the Government co-funds 40 per cent of the wage increases that are given to Singaporean employees over 2013 to last year. It has been extended to next year at a lower co-funding level of 20 per cent.

Said Prof Hui: "Both schemes increased income without providing incentives for the employer to raise productivity through training or job and process redesign."

Correspondingly, the national push to raise productivity, which includes programmes like the Productivity and Innovation Credit scheme launched in 2010, has not made a tangible impact on the productivity numbers.

NOT ALL GLOOMY, YET

But while economists and businesses are clearly worried about Singapore losing its competitiveness should wages continue to push ahead of productivity, some said that it is not all doom and gloom yet.

For many companies, including multinational firms, the decision to set up shop in Singapore rests on a multitude of factors.

Labour is a big part of that equation but firms also have other reasons for wanting to do so.

So far, Singapore has managed to retain its top billing in many international surveys of economic competitiveness.

For instance, it ranked second in the World Economic Forum's Global Economic Competitiveness Report last year.

NUS economist Tilak Abeysinghe noted that commercial rents became lower in the second half of last year.

"There may not be a substantial erosion of international competitiveness as yet," he said.

SMU's Prof Hoon said that there are other factors that continue to make Singapore attractive to foreign investors.

"Our strong legal and corporate infrastructure, our strong economic link with the global economy, and a forward-looking and eager-to-learn workforce all provide us a margin of advantage," he said.

It comes down to whether Singapore workers are able to make themselves invaluable to employers, said SBF's Mr Ho.

"So long as our workers provide a premium to the companies they work for exceeding their cost, they will be competitive.

"However, that premium is no longer a given. It has to be worked for and earned," he warned.

The productivity push has also made progress since it was launched, with the Government taking a more targeted approach in tackling it now.

Earlier this month, Deputy Prime Minister Tharman Shanmugaratnam identified the laggard in the productivity race: the domestic sectors of the economy.

From 2011 to last year, the average annual productivity growth in outward-oriented sectors, such as manufacturing and finance, was 3.2 per cent. But in the domestic sectors such as construction and retail, it was 0.2 per cent.

Mr Victor Mills, chief executive of the Singapore International Chamber of Commerce, is not surprised by how the domestic and export sectors responded to the productivity push.

"The export sectors have no choice (but to innovate) because they're competing globally," he said.

Lastly, Singapore's challenge is not a unique one as others are also grappling with the same problem. This gives the country some buffer to find the right solutions.

According to the MTI paper last year, the wage and productivity growth trends of nine developed economies from 2004 to 2014 showed that in countries like Canada, France and Germany, productivity also lagged behind real wage growth.

But in countries like the US, South Korea and Japan, real wage growth was lower than the productivity gains over the same period.

Said Ms Foo: "Apart from helping export-oriented sectors to restructure into higher value-added products and services, emphasis should also be placed on raising the productivity of domestically oriented sectors in order to sustain wage growth in these sectors."

The $4.5 billion Industry Transformation Package introduced in the recent Budget is proof that the Government has not given up the fight to raise productivity.

Workers and employers now need to roll up their sleeves and get down to the hard work of getting more value from the same amount of resources.

Singapore's economic competitiveness and its workers' wages depend on it.

Grappling with productivity challenge over the decades
By Joanna Seow, The Sunday Times, 24 Apr 2016

Productivity has been one of the most difficult challenges for Singapore's economic planners, a recurring problem that started in the early years of its economic development.

Back in the 1970s, the Government focused on attracting foreign investments to grow the economy.

The move was so successful, with companies coming here creating so many jobs, that the country had to allow a large inflow of foreign workers to meet the demand for labour.

But it was clear that this was not a sustainable mode of growth. Other countries in the region were also adopting the foreign investment model, and Singapore had to start upgrading its workforce and move up to higher-value industries.

By the end of the decade, the Government had begun to turn its focus to raising wages to encourage industry and company restructuring to become more productive.

In 1981, then Prime Minister Lee Kuan Yew said in his eve of National Day Message that workers would only be able to continue to afford the rising prices of goods and services by increasing their earning capacity through increasing productivity, "which means workers with more skills and professionalism, cooperating with each other and with management to reduce the unit cost of each product".

This set the stage for the launch of the nationwide Productivity Movement in September 1981.

It was also about then, in 1982, that Teamy the Productivity Bee mascot was introduced. He stuck around to remind people of the need to maintain their productivity levels all the way until 1999.

The 1990s was a golden decade for Singapore as the country raced ahead, clocking double-digit growth rates regularly before the Asian financial crisis.

At the same time, the foreign worker population continued to rise, from about 300,000 in 1990 to about 700,000 in 2000, according to a 2014 paper by Lee Kuan Yew School of Public Policy research associate Hawyee Auyong.

But some economists started to doubt the sustainability of Singapore's growth model.

Massachusetts Institute of Technology economist Alwyn Young and Stanford University economist Paul Krugman charged that the country was not increasing its Total Factor Productivity. In other words, it was growing through adding resources - capital and labour - rather than using these resources more efficiently or productively.

Then Prime Minister Goh Chok Tong rebutted claims that the country's economy would collapse after "growth on steroids", saying that the first priority was to get development going. "We will invest heavily in education and retraining, in organisation and motivation, to combine inputs with increased efficiency, new ideas and technology," Mr Goh had said at the 1995 Federation of Asean Economic Associations Conference.

The Singapore economy then suffered a series of external growth shocks, starting with the Asian financial crisis in 1997, the dot.com bust in 2001 and the Sars epidemic in 2003. That prompted the Government to open up the gates to foreign workers again, a move that then Finance Minister Tharman Shanmugaratnam said in 2010 had allowed Singapore to "go for growth in the good years".

At the same time, a two-tier economy developed over the decades because of the continued focus on attracting foreign companies, which tend to be more productive as they have to be globally competitive, compared with domestically oriented sectors.

Less productive sectors expanded their share of the workforce from 2008 to 2013, dragging down overall productivity growth by 0.4 percentage point per year, according to an article by Ministry of Trade and Industry economist Goh Tee Wei.

A range of measures has been introduced to try to slow the growth of and upgrade the foreign workforce here, while encouraging companies to make more efficient use of workers, and workers to become more skilful in their jobs.

Today, the Government has made it clear that the policy of allowing large numbers of foreign workers is over, and that companies and workers both need to go back to the basics of raising productivity, just like the economy did decades ago.

Wages in Singapore are competitive, survey shows
Salaries propped up by shortage of specialised talent in key sectors, recruiters say
By Joanna Seow, The Sunday Times, 24 Apr 2016

Wages for workers in Singapore are generally competitive compared with similar global cities, a survey has shown. The workers are generally paid more than workers in similar positions in Shanghai and Jakarta, as well as in Hong Kong for more specialised jobs.

But Singaporean workers are paid less than their counterparts in London and New York, according to a sampling of jobs from recruitment firm Robert Walters' annual salary survey.

For example, financial analysts in Singapore are expected to earn a basic annual salary of US$48,000 (S$65,000) to US$67,000 this year.

This means they earn more than financial analysts in Shanghai, who are expected to earn between US$28,000 and US$43,000, but less than those in London, who could earn US$79,000 to US$115,000.

Salaries for Singaporeans have been held up largely because there has been a shortage of specialised talent in key sectors of Singapore's economy, recruiters told The Sunday Times.

Also, most companies are still willing to pay a premium for local talent as their language proficiency and exposure to diverse cultures are seen as assets for regional roles, said Ms Linda Teo, country manager for ManpowerGroup Singapore.

"For these companies, the increased cost of hiring locals is still less than the relocation investment to cheaper countries," she said.

Rising wages have not dented the country's competitiveness yet.

The nation has consistently ranked at the top of the Business Environment Risk Intelligence's Labour Force Evaluation Measure, which surveys the relative productivity of the workforce, legal framework, worker attitude and technical skills.

It also came in second in labour market efficiency - behind Switzerland - in last year's Global Competitiveness Report compiled by the World Economic Forum.

But Singapore's score did fall from 5.86 five years ago to 5.71 in this section of the report, which measures flexibility and efficient use of talent.

Other factors besides the characteristics of workers also come into play when global companies determine pay packages in different countries. Salaries can be heavily influenced by the cost and quality of living in each country, said Mercer's Asean talent information solutions business leader Kulapalee Tobing.

"Large populations in Jakarta and Shanghai may have high labour supply and hence lower compensation as compared with London, New York or Singapore," she added.

The national economy, currency strength and industry growth can also determine wages, said Mr Dominic Salomoni, director of commerce at Robert Walters Singapore.

So for now at least, Singapore remains an attractive business hub overall.

Ms Lynne Roeder, managing director of Hays in Singapore, said: "We are still seeing multinationals, particularly within the life sciences and professional services sector, set up regional headquarters here due to the favourable business laws, extensive infrastructure and easy access to emerging markets in the region."

But this advantage will not last forever. Regional countries such as Vietnam and the Philippines are fast catching up, especially with a younger workforce and rising education levels, said Ms Teo.

"This large and better-educated workforce would no doubt be a strong pull factor for many companies, and this could potentially happen within the next decade," she added. "It is therefore critical that the (Singapore) workforce must transform themselves and compete on innovation and expertise."

Singaporean with 'LKY traits' is Bentley China's top man
By Toh Yong Chuan, Manpower Correspondent, The Sunday Times, 24 Apr 2016

BEIJING • After graduating with a business and finance degree from Murdoch University in Australia in 1994, Mr Daniel Khoo spent the better part of the last two decades working for six different employers in five different parts of the world.

"I spent 17 of the last 22 years of my career overseas," the 46-year-old told The Sunday Times from his service apartment at the Ascott Raffles City Beijing last week.

The well-heeled Singaporean has worked for some of the biggest names in the car industry, from Saab to Audi and Bentley.

Today, the former Anglo-Chinese School boy is the managing director of Bentley in China, responsible for importing the luxury car marque into China for sale through a network of more than 35 dealers.

He believes that Singaporeans can more than compete in the global arena, as international employers value integrity and loyalty under pressure.

"We play by the rules and we don't bail out, or quit, when the job pressures pile up," he said. "These are Lee Kuan Yew traits."

Mr Khoo got into the car trade almost by chance. "I was working in the internal audit department at Intra Motors when my boss asked me if I was interested in handling the import of cars, like Rovers and Ladas, for the company," he said.

"I said yes. My degree was in business and finance, but I had to be adaptable."

In fact, Mr Khoo has stayed adaptable throughout his career, willing to move across different countries for the right opportunities.

Over the course of his career, he moved seven times to pursue job opportunities, with his family in tow.

After Intra Motors, he joined Saab as a regional market planning manager based in Singapore and later moved to Melbourne with his wife Joyce, when Saab relocated the regional office there.

In 1999, the couple returned to Singapore when his contract ended.

They had their first child, Grace, and soon after, Mr Khoo joined businessman Karsono Kwee's dealerships as its general sales manager.

Mr Kwee runs the Rolls-Royce, Porsche, Mini, Mazda and Saab dealerships here.

After about a year with the local dealerships, Mr Khoo joined Audi in a Singapore-based regional sales job. But he took off again in 2001, this time to Changchun, China, where Audi had a factory.

The Khoos spent four years in China, where they had their second child, Beth.

At the end of that stint in China, Mr Khoo got his big break - he passed a test which qualified him to be a manager in Audi.

That sent him and his family off to Audi's headquarters at Ingolstadt, Germany, in 2006.

"It was a big break," he said. "The Ingolstadt car factory has more than 40,000 staff and about 1,000 managers. I was the only Singaporean.

"I was hired on a German contract. Besides having to learn the language, I had to prove to my employer that I could handle the German workforce."

After he worked for three years in Germany as a car parts and service manager, the family made the trek back East - to Taiwan, where Mr Khoo ran the Audi import, sales and aftersales operations for six years.

It was only at the end of 2014, after some 13 years working overseas, that the Khoos finally returned to Singapore, with an expatriate package and a housing allowance, to boot.

Mr Khoo took on a new job as Bentley's director of operations for Asia-Pacific, a newly created post.

Both Audi and Bentley are owned by German carmaker Volkswagen.

And earlier this month, Mr Khoo was posted to China by Bentley as its top man there.

His rise up the ranks did not come without sacrifice, as it was difficult to move from country to country and bring his family along, he said.

"My wife is the homemaker and she looks after the two girls."

He also took on the job in China without knowing if his family will join him.

"We are still discussing this. They are very comfortable in Singapore.

"I have not seen my family since (coming here on) April 7," he lamented.

Before taking on the job in China, Mr Khoo vied for a job as the managing director for Audi in Korea, but lost out to a European.

"This is the competition for jobs at the top levels. Nobody owes Singapore or Singaporeans a living, so we just have to be nimble and work on our strengths," he said.