Singapore’s high dependence on foreign labor begs an alternative model of growth

By Deborah Lee

In a televised speech on the eve of Singapore’s National Day in 2013, Prime Minister Lee Hsien Loong said “We face difficult choices: We need foreign workers to serve our economy and Singaporeans’ needs, and immigrants to make up for our shortfall of babies.”

Singapore’s GDP growth has depended more on input than productivity increases, as reflected in the high dependence on foreign low-wage labor. This phenomenon is evident in blue-collar jobs in Singapore, especially in three main industries: domestic services, F&B and construction. These sectors rely almost exclusively on imported low-wage labor.

It's about wages

Mr Lee's statement begs some important questions: do we really need foreign workers to serve our economy and our needs? Why can’t Singaporeans serve our own economy in these sectors and meet our own needs?

The short answer is that the wages of blue-collar jobs in Singapore are unsustainably low, such that Singaporeans working in these job sectors would not be able to support a decent standard of living in Singapore. In an economy where the labor supply is closed, wages would rise to a point where supply would meet the demand for workers. Singaporeans would be willing to work in these jobs because of the higher pay. Businesses would hire fewer workers but focus on staff retraining and capital investment to sustain high productivity.

However, this natural progression has been stymied by Singapore’s labor policies that allow businesses to import low-wage and low-skilled labor from neighboring developing countries. The abundant supply of low-wage labor suppresses wages in these industries and has had the inadvertent effect of discouraging GDP growth from productivity increases: businesses rely on greater inputs from low-wage labor to increase output instead of increasing productivity.

Meanwhile Singaporeans have been pushed out of blue-collar jobs by temporary lower-cost foreign workers who will put up a much lower standard of living in the short-term so as to eventually purchase a better way of life in their home-countries where the costs of living are much lower.

While businesses in these sectors profit from the ample supply of low-wage imported labor, the costs of the economic inefficiencies of high-input, labor intensive growth are passed on to Singaporeans: adding more people to land-scarce Singapore inevitably raises the cost of residential housing, commercial rents and creates congestion in transportation and over-crowding in public spaces.

Singapore’s rapidly rising housing costs effectively prices property out of the reach of many middle-class and younger workers, while transferring wealth to a small percentage of older and wealthier Singaporeans. The rise in housing prices compounds the problem of population replacement: young couples are reluctant to reproduce due to the high-cost of living. While Singapore has become a playground for the wealthy, many ordinary Singaporeans with modest incomes increasingly feel crowded out by foreigners and alienated in their own country.

The problem does not lie with foreign workers or with Singaporeans, but rather with labor policies in Singapore that predisposes Singapore towards a model of low-wage, high-input growth instead of a high-wage, high-productivity growth model. While it is easier to implement, this model of growth is unsustainable in the long run because of the strain it puts on Singapore’s limited land resources and the ever-widening cultural and socio-economic divisions it creates.

Many affluent economies such as that of Norway, Switzerland, Japan and the United States, have achieved GDP growth through higher productivity instead of higher inputs. This dispels the notion that low-wage labor is necessary to sustain growth.

Limiting the supply of low-wage foreign labor in these countries have encouraged businesses to invest in upgrading the skills of workers and in substituting capital for labor. For example in the US, the construction industry is a high-wage, high-skill and capital-intensive industry that employs mostly unionized native workers.

Similarly, in the F&B industry, many restaurant workers are seasoned professionals pursuing a full-time, long-term career. Customary tipping and a minimum wage incentivize restaurant servers to provide a high level of service that encompass conversation skills, customer relations and knowledge of the menu. In the domestic service industry, domestic workers are often professional self-employed workers serving multiple clients for domestic services at hourly rates many times the minimum wage.