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Will reducing foreign worker numbers really hurt Singapore?

Recent calls to reduce Singapore’s reliance on cheap foreign labour have drawn a sharp response from several industry associations, which argued among things that such a move would harm Singapore’s economy and lead to higher production costs. Are these concerns valid?

Construction workers wearing masks in precaution of the coronavirus outbreak carry pipes as they pass a building in the Central Business District in Singapore on Feb 18, 2020.

Construction workers wearing masks in precaution of the coronavirus outbreak carry pipes as they pass a building in the Central Business District in Singapore on Feb 18, 2020.

Recently, there have been increased calls by some observers to reduce Singapore’s reliance on cheap foreign labour. 

This has elicited a swift and concerted response from several industry associations, which argued, among other things, that such a move would harm Singapore’s economy.

The associations asserted that migrant workers are necessary because Singapore’s local manpower resources are limited and Singaporeans are not willing to take on certain jobs.

By restricting foreign labour, they said, labour becomes more expensive and production costs would inevitably rise. Consequently, Singapore will become less competitive.

To what extent are these concerns valid?

A QUESTION OF DOLLARS AND CENTS

Will production costs necessarily increase if foreign manpower is reduced? The answer to this depends on whether we are considering the short or long run.

Suppose you are asked to dig a hole in the ground. How can you achieve this? One way would be to recruit lots of workers and have each worker dig the hole with their hands. Alternatively, with the same time spent, you can have a smaller number of workers, but with each having a shovel. Of course, you could go further: Just have one worker dig the hole with the aid of a power trencher.

Which method would you choose? For a profit maximising company, the answer boils down to cost. 

A company would seek to use the method that requires the least cost. So if workers are extremely inexpensive relative to capital, it would make sense for a firm to go for option one – the most labour-intensive method. 

As labour becomes more expensive, this produces incentives for a firm to change the way it produces, and it progressively gravitates towards option two or three – where it becomes less and less labour-intensive. 

Moving from option one to option three, labour productivity successively increases as a result of the tools provided to workers. 

While only three options are presented in this example for simplicity of exposition, in practice, firms can choose from a whole spectrum of labour-capital combinations. 

In the short run, when firms cannot readily adjust their methods of production, it may be true that restrictions on foreign employment could indeed drive up production costs since each worker becomes more expensive to hire.

However, when a rise in the cost of some input such as labour persists, businesses naturally try to economise by altering their modes of production to use less of the dearer input.

In the long run, restrictions on foreign labour are therefore likely to be met with behavioural adjustments by firms, prodding them to use less labour-intensive methods of production. 

What this means is that, contrary to the arguments put forth by the associations, production costs need not necessarily rise in the long run.

In fact, they could potentially fall if firms are nudged to adopt smarter, more efficient, ways of production.

Take for example the construction industry. Advancements in construction technology have technically made it possible for robots to perform many of the repetitive and routine job functions currently done by workers, such as bricklaying and rebar tying.

These robots offer many advantages: They can put up structures quickly, work tirelessly without the need for breaks, and reduce workplace injury.

Yet, they have not been widely adopted by companies. Why? Part of the reason is because firms here have a ready supply of inexpensive foreign workers at their disposal.

Why should a firm adopt labour-saving technologies when it can always rely on inexpensive foreign labour?

Another reason is that transitioning from a labour to a capital-intensive mode of production is no simple feat.

It requires companies to acquire the necessary robots and machinery, and workers to learn how to operate them. All this necessarily takes time and implies significant upfront costs for companies.

Consequently, even if a company had the foresight to transition towards these labour-saving modes of production, the daunting upfront costs may act as a deterrent, especially for companies that are credit-constrained.         

A 2019 study by the University of International Business and Economics in Beijing, published in Financial Management, found that the migration of low‐skilled, rural workers to urban centres in China had a negative effect on firms’ innovation and incentive to use high-skilled technologies.

By placing limits on foreign employment, while at the same time providing grants to companies to enable them to overcome the large upfront costs in transitioning towards less labour-intensive modes of production, we can nudge them to change the way they produce.

This could drive production costs down in the long run.

ENTICING SINGAPOREANS TO TAKE ON CERTAIN JOBS

For a long time, Singapore has justified its need for foreign manpower by arguing that foreign workers help to fill the jobs that locals are unwilling to do.

But perhaps this is a chicken-and-egg problem. Could it be that Singaporeans are unwilling to do these jobs simply because the wages paid are too low, due partly to firms’ ease of access to inexpensive foreign substitutes?

Would Singaporeans still shun the construction industry if companies in the industry were to go high-tech and if workers in the industry were paid similar to teachers, engineers, or accountants?

Indeed, going the high-tech route would enable labour productivity in the sector to increase and for wages in the sector to rise commensurately as well.

My sense is that you can attract locals to a job, as long as the price is right.

TIME FOR REINVENTION 

To be sure, the Government has sought to reduce Singapore’s reliance on foreign labour since at least 2012.  

Then Finance Minister Tharman Shanmugaratnam noted in his Budget speech that year that Singapore’s increasing dependence on foreign workers is unsustainable, adding that the “easy availability of foreign labour will reduce the incentives for our companies to upgrade, design better jobs and raise productivity”.

Since then, we have seen a progressive tightening of the foreign worker dependency ratio ceilings (DRC) and increases in foreign worker levy rates across many sectors.

The DRC refers to the maximum permitted ratio of foreign workers to the total workforce that a company in the stipulated sector is allowed to hire.

But some sectors such as construction continue to be very reliant on foreign workers. Though the DRC relating specifically to S-Pass holders or mid-skilled foreigners in construction has been cut somewhat since 2012, the overall DRC for construction remains strikingly high at 87.5 per cent and has been unchanged since 2012.

This gives construction firms a lot of flexibility in utilising low-skilled foreign labour. Not surprisingly, we have 300,000 foreign workers in the sector today.

There is nothing inherently wrong with relying on a large pool of foreign workers if space and infrastructural constraints are not an issue in Singapore. But they are.

As Deputy Prime Minister Heng Swee Keat said in his Fortitude Budget round-up speech on June 5: “The Covid-19 situation is a mighty storm that has damaged sails, and forced ships around the world to go into harbour. While waiting for the storm to subside, we must make the best use of this downtime to build new strengths and capabilities. 

“Let us take this rare chance to repair, upgrade our ship and install new instruments, re-orientate our mental compass, and strengthen our sailors, so that when the fair wind comes, we will sail out faster and further than ever before.”

The time appears to be right for our businesses to reinvent the way they produce.

 

ABOUT THE AUTHOR:

Kelvin Seah Kah Cheng is a senior lecturer in the Department of Economics, National University of Singapore, and a research affiliate at the Institute of Labor Economics.

Related topics

Migrant Workers foreign labour economy manpower

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