Why more S'pore firms should adopt flexi-wage systems to protect business and jobs
In the face of headwinds, such as a rate hike in the United States to tackle growing inflation and extended Covid-19 lockdowns in China, Singapore businesses have reasons to turn pessimistic. They would do well to be prepared for a worsened international environment by adopting the Flexi-Wage System (FWS).
Despite the global supply chain disruption and geopolitical events, Singapore’s economy has remained resilient as it charts a path to recovery from the Covid-19 pandemic.
Based on the latest data, the economy grew by 4.8 per cent in the second quarter of 2022 and the unemployment rate was at 2.1 per cent in June.
But being a country with high openness to trade and capital flow, Singapore is not shielded from the global economic outlook.
In the face of headwinds, such as a rate hike in the United States to tackle growing inflation and extended Covid-19 lockdowns in China, Singapore businesses have reasons to turn pessimistic.
They would do well to be prepared for a worsened international environment by adopting the Flexi-Wage System (FWS), as it features the Monthly Variable Component (MVC) which is an effective cost-managing tool in bad times, such as a recession.
Even before the pandemic, the National Wage Council (NWC) had been urging firms to adopt the FWS, but adoption remains lower than satisfactory.
This should change. Firms should not need to have an economist’s mindset to anticipate the impact, especially as we are still reeling from a downturn induced by the pandemic. The memory of the past is still fresh.
HOW THE FWS CAN HELP
The FWS operates at two levels.
At the firm level, firms are proactive in managing their labour costs in times of business downturn. They can immediately adjust their labour cost within the same month without reliance on external help.
When firms are capable of effectively reining in their business costs in a short period, they are less reliant on subsidies and rebates, which tend to lag behind business performance and delay cash inflows for months.
Currently, there are two camps among the firms: those who have adopted MVC and those who have not.
The efficiency of MVC cannot be fully realised if there are firms who choose to sit on the fence, waiting to be the last batch of MVC adopters.
When there are two camps during a downturn, those without MVC cannot adjust their costs and those with MVC are hesitant to reduce MVC due to the fear of demotivating their employees and losing their best employees via resignation.
Hence, during a downturn, the unemployment rate will increase because the firms are only left with the option of retrenching their workers to save cost for business survival as they would not want to risk losing the best employees.
When MVC is widely adopted, all firms can be responsive to the call from NWC. NWC, in recognising a nationwide recession, would recommend or enforce the removal of MVC at national level so that all firms could have less strategic worries in cutting down labour costs.
In this case, costs can be adjusted downwards without retrenchment and therefore maintaining the same unemployment rate.
Removal of MVC is an effective cost-reduction measure since the variable components would comprise 30 per cent, 40 per cent, and 50 per cent of the basic wage package for the rank-and-file employees, middle management and senior management respectively.
Currently, the firms that adopt MVC only allocate up to 10 per cent of the wage components in the form of MVC.
The restoration of MVC can be activated at the firm level or at the national level according to NWC guidelines.
The removal of MVC would not cause additional financial hardship to the workforce because it is not included for personal loans application.
The deduction of basic wage is often unfavourable for employees, especially those that allocate a high portion of their income in loan repayment.
Hence, the flexibility of MVC could protect wage and jobs.
Under the FWS, the employers can reduce working hours without cutting the base wage and bank the unused working hours when the economic growth is slow.
When the economy recovers, the working hours banked during the recession can be used to offset the extra working hours.
The FWS, which features MVC, is a wage system that benefits both workers and firms when the business is good.
In the case of a downturn, firms can reduce labour costs and workers remain employed. We hope that the firms which do well this year can put most wage increases in MVC.
MORE INCENTIVES TO ADOPT MVC
When the economy opened up in 2021, only 22 per cent of those retrenched in 2020 were employed again.
In particular, the manufacturing sector and the construction sector only hired three per cent of the number of employees they retrenched in 2020, while it was much higher at 40 per cent in the services sector.
The manufacturing sector and the construction sector also experienced a high productivity growth rate of 21 per cent between 2020 and 2021, more than twice the average productivity growth rate of 9.5 per cent.
When output is higher and yet employment is low, it might imply that the sectors are hesitant about future economic outlook and the firms would like to avoid labour hoarding in anticipation of a downturn.
In Singapore, 75 per cent of the workforce worked in the services sector which has experienced the strongest recovery. It implies that the demand for labour in the service sector is strong amid the recovery.
In general, 22 per cent is not an upbeat re-employment rate.
The best-case scenario is that the firms do not have to retrench employees during a downturn. The next-best alternative is that employment recovers to its origin – hiring back all the workers retrenched in 2020 – within a short period.
The current re-employment rate shows that maintaining a minimal level of headcount is the only strategy for many firms in adjusting their labour cost.
By adopting MVC, firms have the option to adjust their labour cost monthly without retrenching their workforce.
Besides letting firms provide job security to fellow Singaporeans, adopting MVC can also help retain the experienced workforce as business costs are on the rise.
We feel that there is inertia for firms yet to implement MVC.
Figures from the labour movement show that one in two collective bargaining agreements have adopted MVC. Hence, even in the unionised sector in Singapore, the adoption of MVC is not very high.
We would like to recommend that the Ministry of Manpower provides additional incentives for firms that adopt MVC, such as ease of getting foreign staff, to attract more firms to reform their wage system.
ABOUT THE AUTHORS
Chew Soon Beng is Senior Associate at Centre for Liberal Arts and Social Sciences at Nanyang Technological University (NTU) and concurrently, Adjunct Senior Fellow at S. Rajaratnam School of International Studies at NTU. Liew Chii Torng is pursuing a Master of Applied Economics at NTU.