Foreign worker levy hike: short pain, long gain

Foreign worker levy hike: short pain, long gain

By MALMINDERJIT SINGH

The increase serves as a good starting point for policy that can later be fine tuned
AS Members of Parliament (MPs) spent last week discussing Budget 2010 in Parliament, one topic stood out: the increase in foreign worker levies. While there was merit in most of the arguments posed, one key issue was raised that took the discussion into uncharted territory, and that is the impact of the foreign levy hike on the wages of Singaporeans.
The policy aim of the levy increase is to create a more level playing field between foreign workers and Singaporeans so that competition for jobs will be based more on skills and qualifications, rather than on wage costs.
In the process, some small and medium enterprises (SMEs) may be faced with increased costs in the near future if they choose to retain their foreign workers. But employers who switch to hiring more Singaporeans may also face higher costs while waiting for productivity gains to kick in. However, in the longer term, both companies and the economy will adjust to the slower intake of foreign workers and will come out ahead.
There are some who argue that the presence of large numbers of foreign workers has had a negative impact on the wages of Singaporeans, particularly those from the lower income bracket, as an increase in supply of unskilled labour keeps wages low for this segment of workers.
Associate Professor Hui Weng Tat from the Lee Kuan Yew School of Public Policy points out that depressed wages in Singapore is a real problem, highlighted by the fact that we have schemes such as the Workfare Income Supplement (WIS).
“The levy increase controls the inflow of foreign workers into Singapore as it narrows the wage gap and raises the attractiveness of Singaporeans,” says Prof Hui.
Since the depression of wages is a more chronic problem for lower income Singaporeans compared to the rest of the population, this trend, if not addressed, could potentially worsen income inequality here.
Budget 2010 should be commended for recognising these problems and implementing the levy hike as a progressive measure to address them – while at the same time pushing for improved productivity to help lower costs for employers.
Speaking to BT, MP for Ang Mo Kio GRC, Inderjit Singh, offered an alternative: “The levy increase will address the problem of depressed wages, but if we are to lower the cost burden on SMEs, then we can administer a minimum wage,” he suggests. He adds that the minimum wage can be subsidised by the government, via the mechanism of the WIS.
“The real solution is to improve productivity so that each worker can command a higher wage,” he says. “But until we get there, a minimum wage may be needed. This will help arrest the issues of low wages and wage inequality with little or no burden on companies for now.”
Adding to calls for a more comprehensive approach towards addressing this problem, Associate Professor Shandre Thangavelu from the National University of Singapore explains that since Singapore is a small and open economy, it will be useful to have a derivative of a minimum wage, with a flexible component to address unemployment fluctuations during economic downturns.
However, he adds that to solve the problem of depressed wages and wage inequality, a minimum wage alone would be inadequate. There should also be improvements in innovation and technology to substitute unskilled workers with more semi-skilled and skilled workers, he says.
The foreign worker levy increase serves as a good starting point for policy that can later be fine tuned. For companies, the hike may appear unnecessary and untimely. But from a public policy perspective, it can be seen as a measure that creates some short-term pain to achieve longer term gain.
If it is able to achieve its ultimate purpose – higher incomes for Singaporeans – companies will stand to benefit from a larger consumption pie. They will also gain from the productivity measures when they kick in due to a more optimal use of the factors of production.
As Prof Thangavelu sums up, “There is no doubt a trade-off here between long-term and mid-term growth. There will be an adjustment cost, and therefore the budget has given incentives to cope with this cost. However, it is better to make these changes now that we have just come out of a recession, rather than later.”
In other words, although the levy increase can cause some pain in the short run for some companies, it is a positive step towards long-term competitiveness for the economy as a whole.
In the longer term, both companies and the economy will adjust to the slower intake of foreign workers and will come out ahead.