The hidden cost of economic restructuring revealed

Levy hikes for foreign labour may sound beneficial to local job hunters but do you know the costs passed on to consumers?

Singapore has embarked on a restructuring path initiated by the Economic Strategies Committee (ESC) in 2010. The objective is to enhance productivity improvement and to foster inclusive growth. It involves a progressive tightening in the low-waged foreign labour policies via hikes in levies.

DBS Securities analyst Irvin Seah, however notes that notwithstanding the levy hikes, companies will continue to rely heavily on foreign workers and pass on the higher foreign labour cost from the levy hikes to consumers.

Going forward, Mr. Seah reckons that the cumulative change in levies may only increase their foreign labour cost by as much as 20-25%

Here’s more from Mr. Seah:

Note that labour cost cuts across all segments of the economy. For some industries/ companies, the cumulative change in levies may increase their foreign labour cost by as much as 20-25% [1]. Raising the foreign worker levies is essentially increasing the overall business cost given the heavy reliance on foreign workforce. Excluding foreign domestic workers, the foreigners’ share of employment was 32.8% as of December 2011, up from 31.4% in December 2011.

If these costs are passed on, the net effect is a higher price level and if they continue to rise, a higher inflation rate. Non-tradable inflation (as a proxy for domestic inflationary pressure) has risen sharply since the second half of 2010 . While this is partly due to the other policy changes, especially the hikes in COE premiums, it coincides with the levy hikes as well as a tight domestic labour market. Wage pressure is one of the “invisible” drivers of domestic inflation.

With the cost structure of the economy raised, Singapore’s overall competitiveness becomes diluted unless productivity can be raised. In the short-term, this is difficult: productivity growth in Singapore is highly cyclical and dependent on global business cycle. Moreover, take up rates for some of the productivity enhancement schemes introduced by the government have also been low.

Yet, against the rapid increase in foreign labour costs, some uncompetitive companies that are highly reliant on low-skilled foreign workers may be forced to close down or relocate. There will be “hollowing-out” in some industries. Jobs will be lost and structural unemployment will rise. Quite likely, low wage local workers will be impacted given that these are the industries that they will most likely be employed. Indeed, these are the transition costs of restructuring – the short term pain before the long term gain in productivity can be realized.