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Inequality Worsened by Influx of Foreign Workers/Talents

Singapore embarked on one round of economic restructuring almost every decade after from the 1960s.  After each round, some Singaporeans inevitably fell behind due to skill obsolescence. Those who could be retrained were redeployed to high value-add emerging sectors but many usually ended up in domestic services sector earning lower pay. After the turn of the century, their plight was exacerbated by the influx of foreign workers and mid-level talents poaching jobs and depressing wage growth in the lower and middle rungs. 

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1 January 2011

As mentioned, Singapore's economy had to undergo incessant restructuring over the past decades in order to keep ahead of competition from other emerging economies. This need to move up the value-add ladder posed a great demand on its lean labour force to upgrade its skills and knowledge continuously.

 

Inadvertently, the economic restructuring produced winners and losers. In time, more and more older workers faced dislocation due to skill obsolescence. The mismatch in supply and demand of skill sets as the economy moves up the value ladder resulted not only in more structural unemployment but also increasing dependence on foreign talent with the skill sets for emerging high-growth economic sectors.

Influx of Foreign Workers and Talents


To be sure, human resource has all along been a binding constraint that limits economic growth since as early as the 1970s. By 1970, for example, there were a total of 72,590 foreign workers making up about 11% of the work force. Since then, the number of foreign workers had grown rapidly in tandem with high economic growth. 

Notably, during the ’70s and ’80s, Singapore’s industries were more capital intensive and the labour shortage was more in terms of quantity than quality. Domestic workers were also in their prime. Foreign workers were brought in then to supplement, not to supplant them. In the end, the influx of foreign workers helped to spur economic activities that resulted in rising wages across the board. Growth was inclusive as evidenced by the falling Gini coefficient then.

However, this began to change by the 1990s as more older Singaporeans were displaced with the Singapore's economy moving progressively from capital intensive to technology intensive. After the turn of the century when Singapore again upgraded its economic structure to focus on knowledge-based and innovation-driven industries, the floodgate for unskilled foreign workers destined for non-tradable services sector — such as public transport, cleaning, retailing and construction — should have been narrowed or closed, so that the jobs in that sector could go to the older Singaporean workers who were by now becoming increasingly unemployable because the hollowing out of lower value-add manufacturing operations had resulted in the obsolescence of their skill sets.

To make matter worse, while foreign workers occupied mainly the bottom rungs of the job ladder in the past, they were now also competing with displaced PMETs for jobs in the middle rungs.[8] With the rising of business costs, Singapore was becoming progressively uncompetitive. As MNCs relocated to lower-cost destinations, displaced engineers and IT professionals in the "global periphery" track sought employments with SMEs in the "domestic core" track but were unhappy with the significantly lower pay that the SMEs could afford. Disappointed, many switched to driving taxis while continuing to look for green pastures. More recently, with the emergence of private car hailing services, many of these young, skilled displaced PMETs became registered drivers of Uber, Grab and GoJek. Today, out of 41000 private registered drivers in Singapore, more than 40% or about 18,000 aged less than 40.  

 

Meanwhile, SMEs became increasingly dependent on lower-cost foreign skilled workers for mid-level jobs to maintain its competitiveness. But the mid-level foreign talents did not just flow to SMEs. MNCs and larger private companies and institutions were also taking in these cheaper mid-level foreign talents with skills that the more expensive Singaporeans also possess to help lower costs and raise profitability. Efforts to drive growth in new economic sectors (electronics, biomedical, chemicals, and engineering) and to position Singapore as a global financial centre also led to the shortage of professionals at the upper middle and top rungs with both the relevant skills and international exposure that Singaporeans lack. 

In short, after the turn of the century, Singapore's labour market had been made more complicated by the shrinking of the lower value-add manufacturing sector due to economic restructuring; the departures of the MNCs due to Singapore's declining cost competitiveness; the efforts to position Singapore as a hub for new business services and as a financial centre to enable it to exploit emerging opportunities (e.g. in wealth management) presented by the Global Financial Crisis and the Eurozone Crisis.

 

Even when the economy was expanding prior to the Global Financial Crisis in 2008, Singapore was faced with a bewildering predicament of having both an excess and a shortage of workers at the same time. 

 

Overall, the number of foreigners working in Singapore was expanding rapidly especially after the turn of the century as the economy rebounded from the external shocks associated with 9/11 attack and bird flu. In 2005, for example, about 49,800 (44%) of the 113,300 jobs created went to foreign workers even though foreign workers made up only 28.9% of the labour force. Foreign labour growth of 8% was double that of local labour growth.[6] In 2007 and 2008, as many as 300,000 foreigners took up jobs in Singapore.[7] By 2009, they accounted for a third of the three-million-strong labour force, up from only a quarter in 2004.

Gradually but surely, adverse impacts of Singapore’s overdependence on foreign workers began to show. Voices of discontent grew, first and foremost with the issues of job poachingThe availability of these foreign workers willing to work for a significantly lower pay also depressed wage growth of Singapore workers at not only the lower but also middle rungs. Cleaners, for example, were paid as low as about $600 a month. 

Besides being accused of poaching job and depressing wages, foreign workers have also been partly blamed for the trend of declining productivity in recent years. While the overall economy has grown with the enlarged workforce, the productivity of each worker has fallen. The fall is thought to be caused by the easy availability of low-cost foreign workers which incentivizes employers to employ more workers instead of investing in capital equipment to raise productivity.

 

Lastly, the influx of foreigners is said to be also exerting demand pressures on Singapore infrastructures, pushing up housing prices, taking up places in school at Singaporeans’ expense and contributing to the frequent breakdowns of the mass rapid transit system.

Changes in Singapore's Population and Demographic Composition

As a result of the influx of foreign workers, Singapore's total population expanded 23.6% from 4.03 million in 2000 to 4.98 million in 2009. During that period, the foreign population increased by 70.9% while the number of citizens increased by only 7%. In terms of composition, citizens constituted only 64% of the total population, a decline of 10% over the same period.[5] 

Change in Demographic Composition (2000

As of June 2017, Singapore had a population of 5.61 million comprising 3.44 million citizens and 527,000 permanent residents. In 2016 alone, a total of 22,076 citizenships and 31,849 permanent residencies were granted. Total population growth had slowed to 1% per year over the preceding five years compared to 3% per year for the five years before that. With an increase of 50,000 to 60,000 each year, the population could hit 6.4 million by 2030At these rates of immigration, Singapore is said to be “close to achieving the same effect as if we had full-replacement Total Fertility Rate". Till 2020, workforce growth would slow to about significantly lower but more sustainable pace of 1% to 2% annually. [In other words, current annual GDP growth of 1% - 2% is achieved by population growth rather than from increase in productivity.]

In a population White Paper released in January 2013, the government had stated that the Republic’s total population could range between 5.8 million and 6 million by 2020, and 6.5 million to 6.9 million by 2030. The target of 6.5 million was deemed as the optimal population size that could provide the economy with a critical mass without overstretching the limited natural and social resources. The official rhetoric was that with an ageing population and with total fertility rate (TFR) plunging from 1.60 in 2000 to 1.28 in 2008, far below the 2.1 needed for a population to replace itself, Singapore needed foreign newcomers to make up the bulk of the increase in population and work force. In 2017, the TFR fell further to 1.16.

Rising Inequality due to Economic Restructuring and Influx of Foreigners

The trend of rising income inequality due to economic restructuring and influx of foreign workers became increasingly noticeable after the Asian Financial Crisis. Even though there was an increase in mean income and that social welfare has increased in terms of better education, healthcare and overall standard of living, Gini coefficient rose from 0.44 in 1990, 1995 and 1997 to 0.45 in 1998 and 0.47 in 1999. [9]  Another study by Chia and Chen (2003) arrived also at similar conclusion. They found that, contrary to Kuznets’ prediction[10], ratios of the top to bottom quintiles of households by income from work fell from 14.4 in 1980 to 11.4 in 1990 but rose again to an even higher level of 20.9 in 2000, showing that income inequality improved initially (i.e. Gini coefficient fell) in the 1980s but deteriorated significantly (i.e. Gini coefficient rose) in the 1990s.[11] By 2000, the workers were in fact worse off in terms of wage growth.

 

[About Kuznets’ Hypothesis] Kuznets’ hypothesis posits that as development proceeds and mean income grows, inequality in income distribution first increases and then decreases, producing an inverse-U shape Gini coefficient curve.

After the turn of the century, even though the economy as a whole registered impressive growth, in particular after 2004, the unequal distribution of income persisted. While headline GDP grew 6.4% in 2005 and 10.6% in 2006, domestic demand expanded only by 3.3% and 4.9% for the two periods respectively.[12] Again, the disproportionate growth in the two tracks showed up in the growth of household income. While the higher income groups saw their income grow 2.8% annually between 2000 – 2005, the lower income groups suffered income contraction. The 11th to 20th income decile group saw an annual 4.3% fall in average household income, while the 21st to 30th income decile group saw a 0.5% decline.[13] Consequently, between 2000 and 2007, the Singapore’s Gini coefficient climbed from 0.444 to a high of 0.489. It moderated to 0.481 in 2008 and 0.478 in 2009 only because of the financial crisis.[14]

Gini coefficient 2000 - 2009 copy.jpg

The fact that more low-skilled foreign workers continued to stream in to help keep costs low worked to the disadvantage of the low-income workers. It benefited especially the higher-income workers, as they enjoyed not only rising wages higher GDP growth but also lower cost of living made possible by the low-cost foreign workers.

 

An appreciating Singapore dollar helped to constrain imported inflation but it was the use of low-cost foreign labour that helped to maintain price stability in the domestic sector. Inflation averaged about 1% between 2000 and 2007 but that impressive low inflation was arguably achieved in part at the expense of the low-income Singaporean wage earners.

 

In short, globalization and technological changes certainly contributed to structural unemployment but it was the foreign labour policy that exacerbated the plights of the dislocated low-income wage earners. Had the strength of low-cost foreign workers been reduced in tandem with the pace of economic restructuring, the wages of low-income Singaporean workers in the domestic sector would have undoubtedly risen along with the tide. More importantly, the competition for job is not only limited to the top and bottom rungs but also those in the middle thus hitting our middle-income households.

 

Going forward, to fundamentally tackle the challenge of widening wage disparity, it is important that policymakers relook at the roles foreign workers and talent plays in Singapore’s next phase of economic development.

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REFERENCES

[1] See Figure 1 for the various phases of Singapore’s economic development and the government’s efforts in upgrading the economy.

[2] See Chua H.B. (2006).                                                    

[3] Straits Times. “What ails Singapore’s building industry?” March 13, 2010

[4] Straits Times. “Go for Goldilocks Growth.” January 23, 2010

[5] Straits Times. “The Singapore Story in Figures.” December 31, 2009.

[6] See Chua H.B. (2006).

[7] Straits Times. “Don't let foreign workers become a soft option.” January 9, 2010.

[8] The Economist. “Singapore and immigration: A PR problem.” November 14, 2009.

[9] See Singapore Department of Statistics (2000) and Mukhopadhaya (2001).

[10] See Kuznets (1955).

[11] See Chia and Chen (2003) for a summary of various studies conducted by different economists on how income distribution in Singapore changes at different phases of economic development.

[12] See Chua H.B. (2006).

[13] See Singapore Department of Statistics. (2006)

[14] Straits Times. “A Global, Vibrant Singapore.” December 31, 2009.