Jan 02, 2014
ASK: NUS ECONOMISTS
By Davin Chor, For The Straits Times
To what extent have low blue-collar wages and rising inequality in Singapore been the result of foreign worker inflows?
THE link between foreign workers and local wages has been a hot-button topic. It is also clearly an issue in which many Singaporeans feel they have a stake. Rightly or wrongly, the slow growth in blue-collar wages and the accompanying rise in inequality over the past decade have been pinned on the influx of foreign workers.
This "conventional wisdom" was recently challenged in an article written by Professor Hoon Hian Teck - entitled Relook Link Between Low Wages And Foreign Workers - published in The Straits Times on Nov 27 last year.
His argument can be summarised as follows: The stagnation of wages at the low end of the income distribution began between 2000 and 2004. This was the result of the Singapore economy being hit by the bursting of the dot.com bubble and the Sars crisis.
However, the growth in the non-resident workforce only accelerated after 2005. Given this timing, it is argued, the influx of foreign workers could not have been the root cause of our blue-collar wage woes.
So did the presence of foreign workers not matter at all? Or is there still some truth to the conventional wisdom? The reality, I believe, lies somewhere in between.
I agree with Prof Hoon's view that there are deeper forces at play that are not fully appreciated in the ongoing debate on wages in Singapore. These issues have to do with the underlying economic restructuring that Singapore has to undergo to stay relevant in the global economy. As Prof Hoon points out, this is a process that has favoured growth in our services sector at the expense of manufacturing.
The stark reality is that these structural changes have also favoured skilled workers over their less skilled counterparts. Being "skilled" now means possessing computer literacy, or being able to use IT tools (such as e-mail and Microsoft Word) that drive any modern workplace. A worker with such capabilities would inevitably be more nimble in making a job transition between sectors than, for example, someone whose primary skill set was working on a specific production line machine.
Consequently, less skilled workers are now in a more vulnerable position. Even if we had hypothetically held constant the number of foreign workers in Singapore, our less skilled resident workers would still have had to play catch-up.
That said, one should not understate the effects of foreign workers on our local labour market. As the Singapore economy embarked on this restructuring, the upswing in the business cycle around 2005-2006 led to a rise in demand for labour. This demand was met by admitting larger numbers of foreign workers. But there were two key differences this time compared to past recovery episodes.
The first difference was that in the 1990s, our foreign worker policy could be described more as a "guest worker" policy. More workers would be permitted during the growth phase of a business cycle to accommodate the rise in labour demand. But these numbers would also be adjusted downward when recessions came.
For example, during the Asian financial crisis in the late 1990s and the Sars episode in 2003, the size of our non-resident workforce actually shrank. This helped to cushion the negative effects of these slowdowns on our resident workers, for example by sparing some of them from being laid off.
Since 2006, however, our non-resident workforce has grown through all phases of the business cycle, expanding even during the global financial crisis (although the rate of increase did moderate during those years). What this means is that the non-resident workforce is now a much more permanent part of the labour force landscape. It is therefore harder to ignore how non-resident and resident workers affect each other.
The second difference is that since 2006 we have also seen the entry of foreign workers into several non-tradable service sectors, such as cleaning, food and beverages, as well as the wholesale and retail sectors. These were industries that previously were staffed mainly by resident workers. But the pressing need for labour meant that foreign workers were eventually recruited too.
While wages did grow on average in Singapore after 2006, it is less clear that workers in all sectors benefited equally. More studies are needed to look at the detailed industry and occupational wage data to better understand how foreign workers affected the local workforce in these sectors. A natural hypothesis is that resident unskilled wages would have been even more adversely affected had government schemes such as the Workfare Income Supplement not been introduced.
If there is an underlying lesson in this, it is that there is a need to be careful and vigilant in the policies the Government adopts as the economy restructures. Foreign workers are an important complement to our workforce. But it makes sense to monitor their quantity - and quality - more judiciously to avoid unintended socio-economic consequences.
Equally important is the need to pursue policies designed to re-skill the resident workforce, so that low-wage Singaporeans will continue to play an active role in transforming our economy.
The writer is an associate professor in the Department of Economics, National University of Singapore.
[You may also wish to see point #4 of this article, which provides a perspective on low wages and unskilled workers.
The problem is that low skilled workers will always be at a disadvantage. If you have no skills or the skills you need to carry out the work can easily be taught in an hour or a day, then why should anyone pay you more than what any other "no-skill" worker is willing to work for? No-skill workers are plentiful. And when there are a lot of them, why should they be paid a premium. Workers are "selling" their labour, and employers are "buying" their labour, but if the labour is unskilled, the employers want to get a good deal and get labour as cheaply as it can.
But is that exploitation?
Let's take cleaners at a hawker centre. The "market rate" for cleaners is about $800 - $1000. However, paying this rate will mean few takers, because most of the unskilled workers are older persons with lower stamina and energy. They are less likely to be able to take up "3D jobs" - difficult, dangerous, and dirty/demeaning jobs. Cleaning is a difficult job in terms of the need for energy and stamina. You may also consider it dirty, and even demeaning. The work environment is also likely to be uncomfortable.
So the "younger" ones with the energy and stamina and the need to support the family will take up these jobs, even at the market rates. The older ones, with weak legs, and lower energy would never take up these jobs at whatever salary.
But what if you automate and mechanise?
Good question. Very few innovations have been introduce to the cleaning industry. The last one was probably the trolley for cleaners to clear the tables. But the solution is to approach the issue holistically. Trolleys are great ideas until you try to navigate the narrow spaces between chairs and tables. Automation and labour saving processes cannot be an afterthought. It has to be integrated into the system and infrastructure from the start.
BUT, here is the interesting contradiction: with scarce supply, prices should go up. There is a scarcity of low wage workers, particularly for cleaners. Employers have persistent vacancies. What have they NOT raise wages to attract more people into the sector? Is the supply of cleaners so inelastic? Is there some "ceiling" on what employers are willing to pay? Employers have said that they cannot raise salaries because then they can't make competitive bids, and they can't get contracts, and they go out of business.
Rather, it is best to not be the first mover. Let their competitors bid high, lose contracts, go out of business, and reduce competition, free up their cleaning staff to be hired by other cleaning companies, who can then bid competitively and continue to survive in the business.
Prisoner's Dilemma for the cleaning companies.
Well, now the govt has set de factor minimum wage for cleaners. Let's see how that works. It would seem promising. On paper.]
That's precisely what happened with most of the financial experts trying to guess the fate of the euro. Some remained optimistic about the future of Europe's common currency, but the majority predicted that the euro would not survive the global financial crisis, that it would break up with an almighty bang.
Not only did this not happen, but the euro was also one of the best-performing currencies last year. And, far from shrinking in size as some predicted, the number of countries using the currency increased: Latvia, a small republic on northern Europe's Baltic shores, ditched its national bank- notes in favour of the euro at the start of this year.
How could armies of erudite academics, financial specialists and media commentators get it so spectacularly wrong? Largely because they failed to realise that the euro's biggest flaw - the fact that it is a currency driven by politics rather than economic realities - is ironically also the euro's most durable asset. The euro remains under threat but it is Europe's political map, rather than complicated indexes of sovereign debt and money supply, which will decide the currency's fate.
Those who invented the currency two decades ago were careful to speak the language of economic necessity. The euro, they claimed, would spur cross-border investments, encourage competition and make it easier to travel and work across frontiers. But the reality was that the euro was a largely political enterprise designed to prevent a reunified Germany from translating its economic might into continental domination by depriving all nation states of one of their most important instruments of statehood: their currency. As a result, the purely economic criteria for managing the euro were largely ignored.
The outcome is, by now, well known. European countries whose finances were in shambles for decades borrowed cheaply in euros until their debts became unsustainable and drove some of them to the brink of bankruptcy.
Failures of project
YET less familiar although equally important are the other failures of the euro project. It did not spur cross-European investment: European corporations switched their production lines to Asia instead. It did not prompt a boom in financial services: London, the British capital resolutely outside the euro zone, increased its domination in these fields. And because individual countries continued to apply their own separate taxes and trade regulations, the euro did not reduce retail prices either. Seldom has any project failed in so many of its stated objectives and in such a comprehensive manner.
Given all these considerations, the smartest course when the financial crisis struck would have been for nearly bankrupt countries such as Greece or Portugal to leave the euro zone. And, if they refused, the equally logical response would have been for a country like Germany - which ultimately bankrolls every European project - to kick them out.
But nothing of the kind happened. About ¤1 trillion (S$1.7 trillion) was lent by Germany and other rich EU countries to bail out their poorer cousins. And the bankrupt states implemented draconian austerity measures of the kind nations contemplate only in wartime. Greece's gross domestic product, for instance, cumulatively dropped by a quarter during the past four years, equivalent to about 15 average European economic recessions all rolled into one.
One explanation why so many Europeans tolerated this massive exercise in self-flagellation is that the act of joining the euro was similar to that of jumping into the deep end of a pool without knowing how to swim: The only options available are either to somehow paddle along, or to drown. The Greeks could have exited the euro, but only at the cost of pulverising the bank savings of their population. And the Germans could have refused to pay for the Greek bailout, but the result would have been a default among German banks holding bad Greek bonds.
Coin with identical sides
HOWEVER, the chief reason that countries were prepared to bear the pain of austerity was political: the fear that, once out of the euro zone, they would be ejected out of Europe altogether.
That fear may seem odd for the British who never wanted the currency, but not for those who actually faced the danger of losing the euro. If Greece had been evicted from the euro zone, it would have been destined to play second fiddle to Turkey, its perennial rival and far bigger neighbour. An Ireland out of the euro would have meant its return to the British economic sphere of influence which the Irish spent a century trying to escape from. Running away from an unhappy past is also the logic which prompted Latvia to join the euro zone now: It's the only way to avoid the clutches of Russia.
And the countries which bankrolled the bailouts had their own equally powerful political incentives to throw good money after bad. The disintegration of the currency would have confronted France with its biggest foreign policy defeat since World War II: It would have meant that all the French attempts to tie Germany in as many political knots as possible had failed. And for the Germans, the demise of the euro would have spelt the end of the country's post-war policies of anchoring their nation in a peaceful, prosperous Europe.
In short, precisely the political elements which prompted Europe's financial crisis also provided the glue which held the currency together. The euro resembles a coin with two identical sides, a currency doomed to prevail regardless of how one tosses it: Heads I lose, tails you win.
Given all this, does it mean that the possibility of the euro's demise is now completely discounted? The short-term omens are good. Ireland has already exited its bailout programme. Spain no longer needs cash. Speculators worldwide continue to be deterred by the warning from European Central Bank presidentMario Draghi to do "whatever it takes to preserve the euro". And German Chancellor Angela Merkel, only recently re-elected, continues to believe that "if the euro collapses, Europe collapses", so she will pay for any mishap.
Long-term prospects
STILL, the euro's long-term future remains murky, for Europe is sitting on a ticking economic and social time bomb which can explode at any moment. The EU's current approach - cutting deficits to lower debt and enacting "structural reforms" to generate growth - has not done much to either cut debt or change Europe's economic structure.
According to a recently published paper from US economists Kenneth Rogoff and Carmen Reinhart, Europe's "debt overhang" can be resolved only by either "restructuring", a polite term which means that those who lent EU governments the cash will not get back all their money, inflation which reduces the overall value of the debt, or what the authors term "financial repression", namely forcing banks to provide cheap cash to the economy.
Encouraging inflation is out of the question since the Germans won't hear of it. Forcing banks to cough up cash is not realistic either until there is a debt relief for households that owe huge amounts to the same banks. So, the only viable solution is the further restructuring of debts, something which European governments have sworn they will not consider. Either way, the dangerous work of straightening Europe's finances has barely begun; much more pain is in the offing, at least until the end of the decade.
Identity crisis
BUT the far bigger problem is that what began as a financial and banking crisis has now turned into a crisis of European identity, for the euro, which was meant to bring Europe closer together, is tearing the continent apart. Northern Europe is doing well; Germany is bristling with optimism. But southern Europe is a disaster area, where half of those aged under 25 have never earned a salary in their lives and countries turn into ghoulish theme parks. In the Portuguese city of Porto, an architectural jewel and the capital of the region producing the port sweet red wine, the chief attraction now is the "austerity tours" which take visitors around the city's 70,000 derelict houses.
Those who still find Europe an object of desire are either Ukrainians demanding to be let in or African illegal migrants who risk their lives crossing the Mediterranean Sea; in Europe itself, a record 60 per cent of respondents no longer trust the EU to handle any of their aspirations.
The euro won't die because Europe's economics are wrong; it will only when its politics go awry. That has not happened yet but it may happen this year, when elections for the EU Parliament could result in a rise of anti-European parties and a continent-wide backlash against austerity.
Which is one reason why many of those pundits who predicted the currency's demise are still not ready to admit they were wrong.
