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Foreign Labour and Economic Growth

Policy Options for Singapore

Weng-Tat Hui*

Department of Economics &

Public Policy Programme, National University of Singapore

10 Kent Ridge Crescent, Singapore 119260

Aamir Rafique Hashmi

Department of Economics, National University of Singapore

10 Kent Ridge Crescent, Singapore 119260

and

Department of Economics, University of Toronto

150 St George St, Toronto, ON M5S 3G7, Canada

• Research support from NUS Academic Research Fund (Grant No R-122-000-030-112) is gratefully

acknowledged. • Corresponding author at Tel: (65) 68744726, Fax: (65) 67752646, Email: wthui@nus.edu.sg.

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FOREIGN LABOUR AND ECONOMIC GROWTH : POLICY OPTIONS FOR SINGAPORE

ABSTRACT

Prior to the Asian economic crisis in 1997, Singapore’s official projected medium-term

GDP growth target was set at 7 per cent per annum. Since then, the targeted growth rate

has been reduced to 5 per cent. This paper examines the implications of the 5 per cent

growth target on the labour requirements of the Singapore economy. It is shown that the

projected resident labour force will not be able to keep pace with the increased labour

demand and the share of foreigners in the labour force will increase significantly even

under the most favourable scenario. Some implications of the increased dependence on

foreign labour in Singapore are discussed. With permanent immigration fixed at the

current level, various policy options and their effects on the demand for foreign labour are

considered. These include improving labour productivity, raising total fertility rate,

increasing labour force participation of older workers and lowering the targeted rate of

economic growth.

JEL Classification: J1

Key Words: Singapore Labour Market, Foreign Labour and Growth

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FOREIGN LABOUR AND ECONOMIC GROWTH : POLICY OPTIONS FOR SINGAPORE

1. Introduction

Singapore had been dependent on the inflow of immigrants to support the growth of the

economy from the early years of its development. Since its founding in 1819 until the mid

1950s, the former British colony’s free immigration policy had attracted large numbers of

migrant workers, boosting population growth and increasing the pace of economic

development. Starting from a small population base, the immigration-augmented growth

in the colonial years did not generate much controversy or concern among the residents of

the island economy. Between 1901 and 1957 for example, net immigration to the colony

totaled about 722,000 (Chiew [1995]) enabling the population to reach 1.63 million in

1960. With self government and independence in the 1960s, immigration continued to be

a major contributor to population and economic growth in Singapore, albeit at a slower

pace as the colonial free immigration policy was replaced by a selective immigration

policy favouring the permanent migration of skilled and educated manpower and the

temporary stay of lower skilled foreign labour. Immigration controls on foreign labour

take the form of work passes with differing residency conditions, restrictions on the

sectors allowed to employ foreign labour, levies on the employment of lower skilled

foreign guest labour and ceilings on the proportion of such workers in a firm.1.

1 Foreign manpower is admitted under two broad categories - work permit holders and employment pass holders. Work permit holders are lower-skilled workers who earn less than S$2,500 a month. They are normally granted renewable short-term permits of two-years to work in Singapore and their employers pay the foreign worker levy. Employment passes are granted to skilled workers who possess tertiary or professional qualifications and paid a monthly salary in excess of S$2500. Employment pass holders are eligible to apply for permanent residence in the country for themselves and their families. The national policy towards skilled foreign manpower has always been one that promotes free entry for those who with requisite skills and educational qualifications.

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Since 1967, the rate of increase in Singapore’s indigenous labour force has followed a

downward trend. This reduction in labour force growth is consistent with the experience of

most developed and developing economies confronted with the problem of declining

fertility rates and an ageing population. The total fertility rate for females aged 15-44

years in Singapore has trended downwards from 5.76 in 1960 to 1.37 in 2002. Prior to

1975, the growth in labour force was due solely to the growth of the indigenous

workforce. With declining fertility rates as a result of successful population planning

measures implemented from late 1960s through the 70s, the contribution of the indigenous

population to labour force growth has fallen significantly (Table 1).

Table 1: Labour Force Growth Rates

Contribution From Period Growth Rate

% Indigenous Labour

Foreign Labour

1970-74 5.7 5.7 0.0 1975-79 4.1 3.0 1.1 1980-84 3.5 1.6 1.9

1980-1990 3.5 - - 1990-2000 3.4 1.4a 2.0

Notes: a. Estimated by author based on published resident employment and unemployment figures Source: Figures up to 1984 are from the MTI (1986), The Singapore Economy: New Directions. Report of the Economic Committee, Ministry of Trade and Industry, February, p. 106. From 1990, the rates are computed from the various issues of the Singapore Yearbook of Labour Statistics and Yearbook of Manpower Statistics

The reduction in domestic labour supply growth has been offset to some extent by a

corresponding increase in female labour force participation. While the participation rates

of men had remained relatively steady, the increase in female labour force participation

from 29.5 % in 1970 to 50.2 % in 2000 has resulted in about 175,000 additional female

resident labour force participants to the economy in the past three decades. However even

with this, the high economic growth achieved in past three decades would not have been

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possible without the augmentation of foreign labour whose population has increased

steadily from 131,800 in 1980 to 755,000 in 2000 (Census [2001]), constituting 5.5 per

cent and 18.8 per cent respectively, of total population in each period. In terms of the

economically active population, the share of foreign labour is even higher. In 2000, the

foreign workforce totaled 612,200 or 29.2 per cent of the total employed labour force

(Census [2003]). The prospect for indigenous population growth for the future is unlikely

to deviate from the falling trend. Despite the incentives which have been introduced to

encourage families to have more children since 1987, the birth rate has continued to

decline.

Prior to the Asian economic crisis in 1997, Singapore’s official projected medium-term

growth rate was set at seven per cent. Since then, the targeted growth rate has been placed

at five per cent in the medium-term. Given the diminishing rate of growth of the

indigenous labour force, there are legitimate concerns whether this might seriously limit

the future economic growth of the economy. And if the targeted growth rate is to be

achieved, it is instructive to investigate the extent of dependence on foreign labour in the

future. With these labour force trends and constraints in mind, this paper seeks to estimate

economy-wide labour requirements based on the medium term targeted five per cent

growth rate, and compare these against domestic labour force projections. The extent to

which the resident labour force can satisfy labour requirements and the resulting demand

for foreign labour is estimated. We assess the potential of various policies to reduce

Singapore’s reliance on foreign labour. This is the first study, to our knowledge, that

provides a quantitative assessment of the projected demand for foreign labour and the

potential of various policies in moderating this demand. The rest of the paper is organized

as follows. In Section 2 a model of demand for labour is estimated and used to project

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labour demand in next thirty years. Section 3 projects the supply of resident labour using a

component model under different demographic assumptions. These projections are used to

estimate the demand for foreign labour in Section 4. In Section 5 we discuss the effects of

immigration in Singapore and the reasons for moderating the future inflow of foreign

labour. Section 6 examines various policy options and their impact on foreign labour

demand. Concluding remarks follow in Section 7.

2. PROJECTED DEMAND FOR LABOUR

2.1 Data

Annual time series data of employment, real GDP and real monthly earnings from 1973 to

2003 from the Time-series Retrieval and Dissemination (TREND) database of the

Singapore Department of Statistics are used in our estimation. Data from other official

documents are also used to fill certain gaps. In particular, the employment series, which is

derived from the annual Labour Force survey conducted by the Ministry of Manpower,

does not capture foreign workers who are staying at worksites and those who commute

daily from abroad to work in Singapore. We have therefore adjusted the series by taking

into account the actual employment changes reported in the Economic Survey of

Singapore and recently released snapshots of the actual number foreigners working in

Singapore2.

2 Statistics on the actual number of foreign workers in Singapore had always been classified as State secrets. In an unprecedented move in response to a public controversy over the impact of foreign labour on job prospects, the government in August 1993 released data on year to year changes in the stock of foreign workforce for the period 1993 to 2002.

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Basic statistical tests to ascertain the time series properties of these series have shown that

all these log-series are integrated of order one and that a co-integrating relationship exists

among these series3.

Using the level of employment as the demand for labour, we estimated a simple reduced

form model of demand for labour4 with employment determined by output and wage costs.

Various regression variables and their lagged values are included in the preliminary

estimations using the ordinary least squares method and the following model is finally

chosen on the basis of economic theory and standard diagnostic tests5:

( ) ( ) ( ) ( ) ( )09.012.009.006.017.0ln65.0ln29.0ln35.0ln71.033.0ln 11 −− +−−+= ttttt EMPGDPWGDPEMP

where

EMP = Employment

GDP = Real Gross Domestic Product

W = Real Earnings

and numbers in parenthesis show the standard errors.

Using the above estimated model the level of employment is projected by assuming a

constant growth in GDP of 5 per cent per annum and in real monthly earnings of 3 per

cent per annum. This may be justified on the basis that the difference in the historical

3 Using Johansen’s method (Johansen [1991, 1995]) to test the null hypothesis of no co-integrating equation against the alternative of one co-integrating equation, we are able to reject this hypothesis at 1 per cent level of significance under both trace and maximum Eigen-value tests. In addition, test of the null of one co-integrating equation against the alternative of two shows that there is not enough evidence to reject this hypothesis at 1 or 5 per cent levels of significance. 4 We do not attempt to present an elaborate model of labor demand here. Interested readers are referred to the following comprehensive works by Beenstock [1988] and Hamermesh [1993]. 5 These include, inter alia, various tests on residuals, value of the likelihood and values of Akaike Information Criterion and Schwartz Bayesian Criterion.

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annualized rate of growth of real GDP and real monthly earnings has been around 2 per

cent (Table 2).

Table 2: Annualized Growth Rates of Real GDP and Real Monthly Earnings Period Real GDP Real Monthly

Earnings Differential

1974-2000 7.6 5.7 1.9 1990-2000 7.7 5.4 2.3 Source: Ministry of Trade and Industry TREND database.

The actual employment and the projected employment by the model from 1974 to 2034

are reported at five-year intervals in Table 3. The model predicts an annualized growth

rate of 2.9 per cent in employment and an implied annual productivity growth of about 2

per cent.

Table 3: Actual and Projected Employment (in 000’s) Year Actual Projected 1974 824.3 843.0 1979 1021.0 1019.3 1984 1269.8 1295.2 1989 1383.2 1374.9 1994 1713.9 1762.9 1999 2062.3 2073.9 2004 - 2170.8 2009 - 2454.9 2014 - 2833.3 2019 - 3433.5 2024 - 3810.8 2029 - 4422.6 2034 - 5132.8

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3. PROJECTED SUPPLY OF RESIDENT LABOUR

The projected supply of resident labour for the same period is estimated using the

approach outlined below.

3.1 Methodology

Despite extensive research, estimated models of labour supply remain poor in their

forecasting performance6. The reason is that most of these models are based on labour

supply as a function of labour income and variables such as taste, family composition and

other socioeconomic characteristics. However, from a forecasting point of view it is

almost impossible to provide accurate expected values of these variables. As a result, such

models, while very useful in explaining the structure of the labour supply, are of little use

for forecasting.

For forecasting purposes, a better approach is to extrapolate the past trends in population

and labour force participation rates into the future, making certain assumptions about birth

rates, life expectancy at birth and immigration. This approach has been used to project

Australia’s labour force (ABS [1999]). In Singapore, the key variables which influence

labour supply are population growth and immigration (Pang [1985]). Our projection of the

labour force involves three stages. In the first stage, population projections are obtained

(by age and sex) after making certain assumptions about birth rates, death rates and net

immigration. In the second stage, labour force participation rates (LFPRs) are extrapolated

subject to certain ceilings and floors. Finally, the population and LFPR figures are

6 Once again our objective is not to present a formal model of labour supply. Interested reader is referred to Killingsworth [1983] which provides an extensive survey of the research on modeling the supply of labour.

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combined to obtain the projected labour force. A total of eleven different sets of

assumptions are used for the projections. Details of the methodology can be found in

Hashmi and Hui [2002].

Out of the eleven scenarios, the following three7 have been selected for our analysis:

a. Scenario A: Total Fertility Rate (TFR) falls gradually from the 1999 rate of 1.48 to

1.25 in 2049 and net permanent immigration increases from about 30,000 per year

to 50,000 per year in 2049.

b. Scenario B: TFR falls gradually from 1.48 to 1.25 in 2049 and net permanent

immigration remains constant at 30,000 per year.

c. Scenario C: TFR remains at its current level of 1.48 and there is no net permanent

immigration.

Scenario A reflects a pro-immigration stance with a gradual increase of the current intake

and assimilation of foreign skilled immigrants over the next five decades. Scenario B

describes a status quo policy while scenario C corresponds to a tough immigration stance

with complete curtailment of inflow of permanent immigrants complemented by pro-

natalist policies to maintain the fertility rate at the current level.

3.2 Plausibility of Assumptions under three Scenarios

The TFR in Singapore has gradually been declining since 1960 (see Table 4). In the ten

years from 1989, the TFR has declined from 1.75 to 1.48 despite the package of

incentives to encourage families to have more children under the New Population Policy

7 These scenarios correspond, respectively, to projections 13, 16 and 21 in Hashmi and Hui (2002),

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introduced in 19878. It is also observed that the lowest TFR in the world is around 1.1

(World Bank [1999]). With these two facts, it is not unreasonable to make the assumption

that TFR in Singapore will gradually decline to 1.25 by 2050. However, if current policies

and incentives are successful in encouraging more births, the TFR may, at best, stabilize at

the current level.

Table 4: Total Fertility Rate (per women aged 15-44 years)

Year Total Fertility Rate

1960 5.76 1970 3.07 1980 1.82 1989 1.75 1999 1.48

Source: Yearbook of Statistics 2000, Singapore Department of Statistics, p 23

Table 5: Permanent Immigration 1990-99

Year No. of Permanent Immigrants

1990 20,300 1991 21,330 1992 20,020 1993 20,240 1994 21,740 1995 23,980 1996 25,510 1997 27,570 1998 28,990 1999 26,770

Source: Computed by authors.

8 The package of incentives aimed at increasing fertility include enhanced income tax and child relief for first four children, tax rebates of up to S$20,000 for each third and fourth child, special rebates for women who give birth to their second child before a certain age, child care subsidies for first three children of working mothers, priority of registration in primary schools and selection of Housing Development Board flats for three-child families.

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Actual immigration figures are not publicly available in Singapore. Data on resident

population, births and deaths for the last ten years have therefore been used to estimate the

extent of permanent immigration. These estimates are shown in Table 59. The three

scenarios reflect three possible options on immigration: to let the immigration increase as

in scenario A; to maintain immigration around its current level as in scenario B and

finally, the hypothetical extreme case of a complete curtailment of immigration in scenario

C. Singapore has always maintained a liberal policy towards permanent migration of

skilled manpower. Recognition of the crucial role of human capital to generate growth

and to create wealth in the knowledge economy has led to several national initiatives10 to

make Singapore an attractive destination and to extend the reach for foreign talents.

Recent initiatives such as the promotion and development of Singapore as a regional

education hub and the review of citizenship privileges are part of the continual efforts

directed at inducing more foreigners to take root in Singapore. Given this, it is therefore

not unreasonable to expect the level of net permanent immigration to be sustained or

increased in the future.

3.3 Projection Results

Table 6 presents the projections for Singapore’s local labour force in next three decades.

Under the pro-immigration scenario A, the resident labour force will grow from 1.75

million to 2.60 million in the next thirty years at an annualized average growth rate of 1.32

per cent. With the status quo scenario B, the resident labour force will grow at a lower

annual growth rate of 1.08 percent to 2.42 million over the same period. Under the anti- 9 These estimates are in line with what Deputy Prime Minister of Singapore Lee Hsien Loong said in an interview with Foreign Policy Magazine (24 April 2002). He said that annual immigrants to Singapore were between 20,000 and 30,000. 10 These initiatives are spelt out in the Manpower21 report (MOM 1999), the official blueprint for developing globally competitive manpower resources for Singapore.

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immigration scenario C, the labour force will increase for the first ten years and then

decline thereafter. The net result is that the resident labour force size will almost be the

same in 2025 as in 2004. The results also show that under all three scenarios, the average

annualized labour force growth rate will initially decline over the next 25 years. This is

primarily due to the aging population and the below replacement level of TFR11.

Increasing immigration can partially offset this fall but the effect will only be felt after

2025. When we compare these labour force growth rates with a 2.9 per cent average

annual growth rate in labour demand, it is apparent that there will be an increasing gap

between labour demand and the resident labour supply.

Table 6: Projected Local Labour Force: 2004-2034

Year Scenario A Scenario B Scenario C

2004 1753301 1753301 1663685 (1.61) (1.61) (0.55)

2009 1930205 1930205 1727599 (1.94) (1.94) (0.76)

2014 2108065 2092315 1768511 (1.78) (1.63) (0.47)

2019 2241194 2205979 1757431 (1.23) (1.06) (-0.13)

2024 2352399 2280461 1698374 (0.97) (0.67) (-0.68)

2029 2455947 2342671 1619109 (0.87) (0.54) (-0.95)

2034 2597105 2422653 1553007 (1.12) (0.67) (-0.83)

Note: Numbers in parentheses are average annualized growth rates over last five years.

11 A TFR level of 2.1 is needed to ensure that population will remain constant in the absence of any immigration.

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4. PROJECTED DEMAND FOR FOREIGN LABOUR

The demand for foreign labour (DFL) is computed as the difference between total

employment (EMP) and the employed local labour force (LLFEMP).

EMPFL LLFEMPD −= (1)

The projected local labour force under the three scenarios in Table 6 refers to the available

labour and ignores any unemployment. To correct for this, a resident unemployment rate

of 3 per cent for the entire projection period has been assumed. This gives

LLFEMPDFL 97.0−= (4)

Table 7 shows this projected foreign labour demand under three scenarios and the share of

foreign labour in total employment. The demand for foreign labour is expected to grow

under all three scenarios. Under scenario A, it will increase fivefold from an estimated

495,000 in 2004 to 2.61 million in 2034. The percentage of foreign workers in the total

workforce increases from 23 per cent in 2004, to 51 per cent in 2034.

Table 7: Projected Demand for Foreign Labour1 (‘000)

Year Scenario A Scenario B Scenario C

2004 495.13 495.13 580.71

(22.8) (22.8) (26.8) 2009 582.57 582.57 779.10

(23.7) (23.7) (31.7) 2014 788.45 803.73 1117.82

(27.8) (28.4) (39.5) 2019 1110.34 1144.50 1579.59

(33.8) (34.8) (48.1) 2024 1528.94 1598.72 2163.34

(40.1) (42.0) (56.8) 2029 2040.30 2150.17 2852.03

(46.1) (48.6) (64.5) 2034 2613.63 2782.85 3626.40

(50.9) (54.2) (70.7)

Note: 1. Assuming 5 per cent growth in GDP and 3 per cent growth in Real Earnings. Figures in parenthesis show the percentage of foreign workers in total employed labour.

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Under scenario B, the demand for foreign labour increases to 2.78 million in 2034

accounting for 54.2 percent of the total workforce. Scenario C, where permanent

immigration is curtailed, highlights the extent of Singapore’s reliance on foreign labour to

sustain its economic growth. With no net permanent immigration, the demand for foreign

labour will increase rapidly to 3.63 million in 2034 accounting for 70.7 per cent share of

total employment.

5. EFFECTS OF IMMIGRATION IN SINGAPORE

5.1 Economic Effects of Immigration

Economic theory posits that international migration will confer benefits to the host country

in the form of an immigration surplus representing an increase in national income accruing

to the natives (Borjas [1995]). However, there are also fiscal and income redistribution

effects of immigration in the host country to contend with. Wildasin [1994] shows that

free immigration which increases the costs of income redistribution may lead to Pareto-

inferior outcomes. Michael [2003] shows that, in the presence of international capital

mobility, immigration can have a positive effect on national welfare by reducing the loss

to workers while increasing the welfare of capitalist. Empirical research by Simon [1996]

argues that immigrants in the US tend to pay quantities of taxes that exceed the costs of

the public services they receive and hence immigration confers positive fiscal benefits to

the host country. Storesletten [2000] finds that net public gain of a marginal immigrant

varies with age and skill where high-skilled immigrants generate the highest net public

gain, followed by medium- and low-skilled immigrants. Net public gain is potentially

highest for middle-aged immigrants and declines for older and younger age groups while

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the contribution of low-skilled immigrants is almost always negative. Hence an

immigration policy that is characterized by an increased inflow of middle aged, high- and

medium-skilled immigrants is favoured. Research on the effects of immigration on labour

markets for natives has generated differing results. In the US, Borjas [2003] and Borjas et

al. [1997] find that immigration reduces the wage and labour supply of competing native

workers and accounts for 30-55 per cent of the relative wage decline experienced by high

school dropouts and other low wage workers while Fairlie and Meyer [2003] find that self-

employed immigrants displace self-employed natives. Card [1997] and Grant [1998] on

the other hand did not find empirical support for the negative impact on wages in the US

and Canada. In Australia, cross sectional studies by Chapman and Cobb-Clark [1999],

and Addison and Worswick [2002} also show that the evidence does not indicate a

negative association between immigration and adverse labour market outcomes for native

Australians.

Ideally, it would be very interesting to explore the above issues for Singapore. However,

the unavailability of immigration data does not allow us to proceed along this route.

Instead, we will provide a qualitative discussion on some of the impacts of immigration in

Singapore which could justify the need for caution on future immigration.

5.2 Immigration Issues in Singapore

From the economic planner’s viewpoint, the availability of a ready supply of foreign

manpower is considered an important attraction of foreign investment which has provided

the impetus to growth and job creation since the 1970s. The argument for the continued

presence of a significant foreign labour force is also predicated on their important role in

maintaining our competitive edge through supplementing domestic labour supply and

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skills and moderating wage increases during economic expansion. The stock of foreign

labour also acts as an employment stabilising buffer during downturns when their outflow

would shield locals from job displacement. There are also jobs shunned by locals which

foreign workers help to fill.

When the economy recorded strong growth and jobs were plentiful in the 1980s and

1990s, public concerns about the increased presence of foreigners were initially directed

mainly at the social issues of foreign housing enclaves, overcrowding and excessive

consumption of public amenities and impact of foreign workers, particularly domestic

maids, on the values acquired by younger generations of Singaporeans (Teng [1997]).

With the growing presence of foreign labour, other issues came into focus. These include

the negative impact on productivity growth from maintaining a rotating group of lower

skilled foreign guest workers; increased income inequality arising from wage depression at

the lower end of the wage distribution; increased incidence of illegal immigration12 and

costs of enforcement measures; risks of escalating property prices in the land-scarce city

state; the political hurdles of cultivating national identity in the face of an influx of

foreigners and an increased emigration tendency among citizens (Hui [2002]).

The persistence of structural unemployment of older and lower educated workers is also a

major concern. With economic restructuring following the Asian economic crisis, the

slowing down of job creation and the ensuing significant rise in resident unemployment

from an average of 2.0 per cent, prior to 1998, to about 5.3 per cent in 2003, there is a

growing anxiety among this group of workers over their employment security and

heightened fear that foreigners are displacing them in jobs. This has led to calls for more 12 The number of immigration offenders has increased steadily in the 1990s to reach about 17,000 in 1999 (Hui 2001). Although it is just 4% of total migrant labour force and lowest among East Asian countries (Martin 2003), this may be seen as the result of effective but costly control and enforcement measures.

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restrictions on the inflow and employment of foreign workers. A poll conducted in 2003,

for example, revealed that 56 per cent of the respondents were concerned that foreign

talent in Singapore would take away their jobs13. In another survey, 3 out of 4 were of the

opinion that reducing the number of foreign workers would increase job prospects for the

unemployed14. The resentment of Singaporeans towards immigration is not unusual.

Similar polls in the European Union, for example, revealed 54 per cent of French people,

57 per cent of Germans, 51 per cent of Britons and 64 per cent of Italians believe the

number of immigrants in their respective countries to be excessive (de Melo et al. 2001).

In one 1996 US survey, 75 per cent of respondents felt that immigration levels were

excessive and should be reduced by two-thirds15 while 44 per cent of Australians in a 1988

survey {Addison and Worswick [2002, p. 68]) believe immigration deprives Australians

of jobs. Such perceptions are held despite the relatively lower share of migrants in total

population of these countries which is 10.6 per cent for France, 9.0 per cent for Germany,

6.8 per cent for the UK, 2.8 per cent for Italy , 12.4 per cent for the US in 2000 and 23.6

per cent for Australia in 1990 (UN [2002]). Singapore, by comparison, has the world’s

fifth highest share of foreign-born persons in its total population at 33.6 per cent in 2000.

The number of Singaporeans emigrating to live abroad is also on the rise. In 2001, there

were some 66,000 Singaporeans living and working in Australia, US, Canada and New

Zealand (Hugo [2003]). In 2002, an additional 4370 Singaporeans were granted

permanent residency in these countries representing an increase of up to 48 percent to

some countries16. As the majority of these emigrants are in the higher income and skills

category, this outflow, if sustained in the longer run, will lead to a depletion of the nation’s

13 “Fear of Losing Jobs” The New Paper, 26 September 2003. 14 “Poll: Govt on right track in helping jobless but…” The Straits Times, 23 August 2003. 15 “A Survey Of American Attitudes About Population Size: Towards A Smaller U.S. Population”, http://www.npg.org/roper/exec_summary.htm 16 “Have Job Will Migrate” The Straits Times , 4 April 2004.

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skilled manpower. While temporary overseas employment stints by citizens contribute to

the accumulation of invaluable human capital and overseas contacts to further the nation's

globalization efforts (Hui [1998]), the possibility of a permanent drain of the local talent

pool is a real concern. With increased influx of foreigners, the real or perceived labour

market disadvantage of local employees relative to the enlarged foreign talent pool could

possibly induce more citizens to seek permanent employment overseas.

It may therefore be argued that for social, economic and political reasons, there are

justifiable concerns about the desirability of having a large foreign workforce in

Singapore. In the following section, we will explore how the projected excessive

dependence on foreign labour could be reduced under various policy initiatives.

6. POLICY OPTIONS FOR REDUCING DEPENDENCE ON FOREIGN LABOUR

6.1 Improving Labour Productivity

The implied annualized productivity growth for the different scenarios is about 2 per cent.

A pertinent question concerns whether productivity growth could be increased to reduce

the dependence on foreign labour. To answer this, it is instructive to study the

productivity performance of the Singapore economy over the past two decades.

Table 8: Singapore Real GDP and Productivity Growth 1980-2000 (per cent)

Year Real GDP Growth Productivity Growth

Productivity share of GDP growth

1980-1985 6.2 4.4 71.0 1985-1990 8.4 5.2 61.9 1990-1995 9.1 4.7 51.6 1995-2000 6.3 2.5 39.7 Source: “Singapore's Productivity Performance” in Economic Survey of Singapore, First Quarter 2001, Ministry of Trade and Industry.

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Table 8 shows that the share of labour productivity growth in total economic growth has

consistently declined over the past two decades. The implied annualized labour

productivity growth of 2 per cent over the next three decades is consistent with the

productivity share of GDP growth remaining at the existing 40 per cent level. However, it

could be argued that with the advent of the knowledge-driven economy, productivity

growth could possibly increase beyond the projected 2 per cent level. Indeed, the

productivity growth experience of the developed economies such as USA, UK and

Switzerland (Table 9) suggests that the productivity performance of the Singapore

economy could be improved to reduce the employment growth needed to sustain the

targeted growth of the economy.

Table 9: Real GDP and Productivity Growth of Selected OECD Countries 1995-2000 (per cent)

Country Real GDP Growth Productivity Growth Productivity growth as share of GDP growth

Australia 4.58 2.44 55.8 Canada 3.49 1.22 35.0 France 2.48 1.16 46.8 Italy 1.85 0.83 44.9 Japan 1.55 1.58 102.2 Netherlands 3.58 0.87 24.3 Switzerland 1.86 1.29 69.4 UK 3.81 1.59 56.5 USA 4.11 2.47 60.1 Source: University of Groningen and The Conference Board, GGDC Total Economy Database, 2002, http://www.eco.rug.nl/ggdc

With a GDP growth target of 5 per cent, an increase in the productivity share of GDP

growth to 60 per cent would imply a one-percentage point improvement in annualized

productivity growth to 3 per cent. The simulation shows that this would consequently

almost halve the demand for foreign labour from 2.78 million to 1.48 million in 2034

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(Option I Table 10). The share of foreign workers in total employment at 38.6 per cent is

much lower than the 54.2 per cent under the original projection.

A rise in the productivity growth rate is by no means the certain direct result of policy

initiatives. It is the unpredictable product of a multitude of factors which include, among

others, the cultivation of a competitive business environment, an efficient infrastructure,

appropriate fiscal incentives to induce work effort, flexible and dynamic industrial

structures to encourage investments in leading high value-added products, a quality trained

workforce and improved workplace practices. The promotion of international outsourcing

of lower-skilled service activities which could enhance productivity (Gorg and Hanley

[2003]) may also be relevant for labour-strapped Singapore.

Table 10: Demand for Foreign Labour under Different Policy Options (‘000)

Reduction in GDP growth rate to 4 % Scenario

B1

Increase productivity

by 1 %

Increase TFR to

2.1

Increase older

worker's LFPR

Combined I-III 3 %

Earnings 2 % Earnings

Option I II III IV V 2004 495.13 495.13 495.13 495.13 495.13 480.65 486.32 (22.8) (22.8) (22.8) (22.8) (22.8) (22.3) (22.5) 2009 582.57 465.14 582.57 532.83 415.40 481.28 567.84 (23.7) (19.9) (23.7) (21.7) (17.8) (20.7) (23.6) 2014 803.73 539.64 803.73 675.03 410.94 537.06 757.25 (28.4) (21.0) (28.4) (23.8) (16.0) (21.2) (27.5) 2019 1144.50 696.58 1142.75 908.45 458.78 664.87 1058.60 (34.8) (24.6) (34.8) (27.7) (16.2) (24.0) (33.4) 2024 1598.72 922.34 1583.67 1338.25 646.82 853.75 1462.53 (42.0) (29.4) (41.6) (35.1) (20.6) (28.2) (40.2) 2029 2150.17 1192.05 2096.89 1876.14 864.74 1079.13 1950.55 (48.6) (34.4) (47.4) (42.4) (25.0) (32.5) (46.6) 2034 2782.85 1479.46 2660.72 2511.41 1085.90 1314.39 2504.18 (54.2) (38.6) (51.8) (48.9) (28.4) (36.2) (52.0)

Notes: 1 Falling TFR , constant migration and assuming 5 and 3 % growth in GDP and earnings, respectively

22

6.2 Increasing Total Fertility Rate

It may be argued that with better incentives and renewed efforts by the authorities, the

total fertility rate could possibly be raised to replacement level of 2.1. To analyse the

impact on foreign labour demand, we simulated a gradual increase of the TFR from its

current level to 2.1 in 2019. The projected impact on foreign labour demand is shown

under option II of Table 10. As expected, any perceptible impact of the increased fertility

rate on labour supply will only be felt after 20 years. Given the 30 years projection

horizon, the decrease in demand for foreign labour is not substantial.

The prospects of increasing the TFR are not promising given the rising trend of dual-

career families, delays in marriages and child rearing (Cheung [1999]). The decline of

TFR to 1.37 in 2002 is an indication that the recent government’s Baby Bonus policy

initiated in 2000 may not have worked17. Even if TFR is increased, it may be offset by a

decline in the labour force participation of women in the childbearing age groups and

engender an increase in dependence on foreign labour, especially for foreign domestic

helpers which in 2003 accounted for about 140,000 of the foreign workforce in Singapore.

6.3 Increasing Older Worker Labour Force Participation

The prospect for increasing labour supply through higher labour force participation of

prime age working persons is limited. In arriving at the labour force projections we have

17 The Baby Bonus or Children Development Co-Savings Scheme implemented with effect from 1 April 2001consists of two-tier payments paid annually for 6 years on the birth of the second and third child. The first tier payments involve a cash gift of S$500 and S$1000 per year for the second and third child respectively. The second tier payments are matching contribution by the government, on a dollar-for-dollar basis of up to $1000 and $2000 for the second and third child respectively, for amounts paid by the parents into the Child Development Account (CDA). The monies in the CDA can be used to pay fees at child care centers, kindergartens and special education schools.

23

extrapolated the age specific trend of labour force participation rates (LFPRs) by gender,

with ceilings (floors) based on the highest (lowest) participation rates of countries such as

Germany, Sweden, Japan and Hong Kong. Table 11 shows the binding restrictions

imposed on the LFPRs for the different age groups.

Table 11: LFPR Ceilings (c) and Floors (f) Age Groups (Years) Male Female

15-19 15.8 (f) 13.6 (f) 20-24 66.7 (f) 84.7 (c) 25-29 None 95.1 (c) 30-34 98.5 (c) 97.0 (c) 35-39 98.7 (c) 97.3 (c) 40-44 None 96.5 (c) 45-49 None 95.8 (c) 50-54 None 90.6 (c) 55-59 None None 60-64 None None 65-69 None None 70-74 0.6 (f) 0.3 (f) 75+ 0.4 (f) 0.2 (f) Source: ILO (1994-96), Year Book of Labour Statistics, International Labour Office, Paris.

Although no ceiling is binding for males aged 40-54 years, the projected LFPR for this

group is already relatively high ranging from 95 per cent to 98 per cent. The prospect of

expanding labour supply through a further increase in LFPR for this group is therefore

limited. However, the same cannot be said for those in the age groups from 55 to 69 years.

The labour force participation of older persons in Singapore is relatively low compared to

countries like Japan and Sweden. For example, in 1999, Singapore’s labour force

participation rate for those aged 55 to 59 years was 72.9 per cent and 27.9 per cent, for

males and females, respectively (Table 12). The corresponding figures for Japan in 1999

were 94.7 per cent and 58.7 per cent.

24

With the expected raising of the Singapore’s statutory retirement age18 from the present 62

to 67 years in the future, the higher educational attainment of the labour force and the

greater emphasis on lifelong learning and training, it is not unreasonable to expect that

labour force participation rates of older persons may increase over time.

Table 12: Age Specific Labour Force Participation Rates

Age Group Singapore (1999) Japan (1999) Male Female Male Female

15-19 17.0 16.9 18.5 16.8 20-24 74.2 81.0 72.8 72.4 25-29 95.3 87.4 95.6 69.7 30-34 98.5 73.7 97.5 56.7 35-39 98.7 65.4 97.7 61.5 40-44 98.1 63.0 97.7 69.5 45-19 96.8 58.0 97.5 71.8 50-54 91.2 44.4 97.1 67.9 55-59 72.9 27.9 94.7 58.7 60-64 46.9 13.9 74.1 39.7 65-69 30.0 7.3 52.6 26.2 70-74 16.8 4.3 34.5 16.8 75+ 7.2 1.5 17.3 6.2

Source: Figures for Singapore are from Singapore Department of Statistics (2000), Year Book of Statistics 2000. Figures for Japan are from Japan Institute of Labour (2001), Japanese Working Life Profile 2001 - Labour Statistics.

To determine the effect on labour supply of an increase in LFPR of older persons, we

assume that their LFPR will increase to reach Japan’s 1999 level in 2019. Figure 1 shows

the effect of this change on the projected LFPR. The effect on demand for foreign labour

is presented under option III of Table 10. The demand for foreign labour is projected to

reach 2.51 million or 48.9 per cent of total employment in 2034. Although this is less than

our benchmark under scenario B, the difference is not substantial.

18 The statutory retirement age has been raised from 55 to 60 in 1993 and to 62 in 1999.

25

Figure 1: Projected Labour Force Participation Rates 2004-34

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

2004 2009 2014 2019 2024 2029 2034

Year

Per c

ent

Male LFPR Adjusted Male LFPR Female LFPR Adjusted Female LFPR

Raising the labour force participation rates of older workers is not just a matter of

encouraging older workers to stay on their jobs through the extension of the statutory

retirement age. It also requires the willingness of companies to continue to keep their

older employees on their payroll. The dominance of the seniority-based compensation

system in Singapore has meant that older workers are more costly than comparable or

more qualified younger workers. Older employees, who once held an advantage in

securing or retaining jobs with their experience or proven performance, are finding their

competitive edge rapidly eroded by technological change and the increased pace of

knowledge obsolescence which no longer justifies the higher cost of retaining them. This

is reflected in the deterioration of the employability of older workers over the past three

decades. Table 13 shows that while the share of older workers in employment has risen

with the ageing population, joblessness among older workers has increased

disproportionately over time. The increase in the share of older workers in unemployment

is especially pronounced following economic downturns such as the post-1997 period.

Recent measures implemented to increase the employability of older workers include the

26

reduction in employer’s Central Provident Fund (CPF) contribution rates for workers aged

55 and above19, the promotion of the competitive performance-based wage system to

replace the seniority-based wage system, general assistance for retraining of older workers

and targeted wage support schemes such as the People for Jobs Traineeship Programme

(PJTP) to assist older workers in making career transitions across industry.

The combined effect of all three options on the demand for labour is also shown in Table

10. The simultaneous achievement of all three policy objectives would allow the size of

the foreign labour force to be lowered to reasonable levels.

Table 13: Share of Older Workers 1974-2002 (per cent)

Year Share of

Total Employment

Share of Total Unemployment

Share of Long Term

Unemployment

1974 36.9 12.4 21.7 1979 36.5 12.6 26.5 1984 38.5 17.9 40.6 1989 43.2 19.2 29.4 1994 50.8 22.8 39.7 1999 57.4 40.6 53.6 2002 60.0 45.1 56.8

Source: Ministry of Trade and Industry TREND database and various issues of Labour Force Survey, Ministry of Manpower

6.4 Reducing Targeted Growth Rate

The growth potential for Singapore has been subject to downward revision over the years

in response to changing regional and global developments. Prior to the Asian economic

crisis in 1997, the official pronouncement of the medium term growth potential was 6 to 7

19 The employer’s CPF contribution rates for workers aged 55 and above has been cut since 1988. The employer’s contribution rates, effective since 1 October 2003, are 6 per cent, 3.5 per cent and 3.5 per cent for those aged 55-60 years, 61-65 years and above 65 years, respectively. The employer’s contribution rate for those below 55 years is 13 per cent.

27

per cent20. This was been subsequently revised downwards to 4 to 6 per cent in the post-

crisis period. A recent official forecast predicts growth of between 4 to 5.9 per cent over

the next decade (MTI [2002]). Given the matured economy, the resource constraints and

using the recent growth experience of other developed economies as a guide, it could be

argued that a more sustainable long-term growth for Singapore should be less than 5 per

cent. To study the effect of a lower targeted growth on labour requirements, we derived

the labour demand projections with the growth rate set at 4 per cent. The option IV

column of Table 10 shows the demand for foreign labour when real GDP is simulated to

grow at 4 per cent and real average monthly earnings at 3 per cent. Under these

assumptions there is a substantial reduction in the demand for foreign labour. However,

this result is sensitive to assumed growth rate of real earnings. The option V column of

Table 10 shows the demand for foreign labour under a 4 per cent real GDP growth and 2

per cent real earnings growth. The demand for foreign labour is much higher compared to

the higher real earnings growth under option IV and slightly lower than our benchmark

case. The higher wage costs provide incentives for firms to employ more skillful workers

with higher productivity and therefore lowering the number of workers demanded.

The decision on a suitable economic growth target essentially involves the choice of a

growth path that would maximize the welfare of its population. In Singapore’s case, real

GDP per capita (at 1995 prices), has risen by almost four times in the past 3 decades from

about S$10,900 in 1974 to S$40,000 in 2000. The impact of the lower 4 per cent growth

on real GDP per capita is shown in Table 14 . A lower growth rate would result in a real

GDP per capita which will be $5000 or 5.5 per cent less in 2034. While GDP per capita 20 In August 1996, the Minister for Trade and Industry stated that the 10 year growth forecast was between 6 to 8 per cent and in November the same year, a range of 6 to 7 per cent for growth beyond 2000 was quoted by the Senior Minister. The Monetary Authority of Singapore’s 1996/97 report put the medium term growth at 7 per cent.

28

is a common measure for comparing economic performance, it also has weaknesses as an

indicator of living standards. In this instance, it does not take into account non-pecuniary

factors such as the 1.6 million fewer foreign workers. In an island state with an already

very high population density of 6,000 per sq km, the fourth highest in the world, it might

be argued that the lower growth target path could in fact provide a higher standard of

living in Singapore.

Table 14 : Projected Real GDP per capita (1995 prices) 2004-34

Year 5% GDP

3% Real Wage Growth

4% GDP 3% Real Wage

Growth

4% GDP 2% Real Wage

Growth

2004 42550 42330 42260 2009 50030 48560 47430 2014 57320 55120 52170 2019 64650 61760 56500 2024 72450 68810 60800 2029 81390 76980 65610 2034 92070 86990 71320

Source: Computed by authors

7. CONCLUSION

In this paper, we have analysed the implications of a 5 per cent economic growth target on

labour requirements in Singapore’s economy. Our analysis shows that even on the basis

of optimistic projections of our future resident labour supply, more foreign labour on a

significant scale will be needed to bridge the excess demand for labour. The expected size

of this foreign labour ranges from 2.6 to 3.6 million workers, constituting 51 to 71 per cent

of the projected total workforce. This study has established that in addition to facing a

29

demographic aging problem in next few decades, Singapore will also face the problem of

excessive dependence on foreign workers.

Four possible avenues to reduce the dependence on foreign labour have been explored.

Increasing TFR is the least effective while increasing labour force participation rate of

older persons could reduce the demand for foreign labour by up to 21 per cent. The most

promising option appears to be to increase the productivity level and/or to reduce the

targeted rate of growth for the economy. Raising productivity would be the most

desirable option, however its achievement could be elusive as past experience shows that

there may not be any definite correlation between policy efforts directed at increasing

productivity and the actual productivity outcomes. Lowering the targeted growth rate

involves a deliberate decision to reduce the growth of GDP per capita and is clearly a

viable policy option within the control of policy makers. This, coupled with the

appropriate wage growth policy, will serve to moderate the nation’s dependence on

foreign labour to sustain economic growth in the new millennium. A major challenge for

policy makers in the decades ahead is to tread the fine line between promoting economic

competitiveness through foreign labour augmentation and protecting the economic

wellbeing of its citizens.

30

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