Wages and labor market policies have been cornerstones of Singapore’s development strategy. Over the past three decades, four distinct periods can be identified. In the first (mid-1960s to the late 1970s), policy aimed at restraining wages in order to promote rapid industrialization and solve the problem of large-scale unemployment. In the second period (1979-84), with the economy operating at high levels of employment, the emphasis shifted to fostering the implementation of higher technology and value-added activities by encouraging large labor cost increases and the upgrading of skills. The economic downturn of the mid-1980s provoked another change in policy, to promoting reduced labor costs. In the final period, beginning in 1987, policy has taken a more market-oriented approach to wage determination while continuing to emphasize increased labor force participation and skill development.
The Four Periods of Labor Market Policy
Phase I: Rapid Industrialization, 1965-78
The first phase of Singapore’s rapid postindependence development was shaped importantly by labor market conditions. Three features were prominent. First, unemployment was chronically high (10 percent in 1965) and growth of the labor force increased after 1965 as female labor force participation began rising (Table A4). Second, the labor force was largely unskilled because the drive to improve education had not had sufficient time to bear fruit. Third, there was a history of industrial unrest dating back to the 1950s associated with the internal political struggles leading up to independence.
The abundant supply of unskilled labor set the stage for labor-intensive development once the outward-oriented strategy took root and foreign investment increased. Employment grew rapidly, and unemployment dropped below 5 percent by the early 1970s (Table 5-1). Labor shortages first became apparent at that time and, although temporarily relieved by the slowdown in growth in 1974-75, persisted throughout the 1970s. The tight labor market raised concerns about potential wage inflation, which were reinforced by the upsurge in global inflation in the early 1970s and the impact of the first oil shock. The policy response was to structure labor market institutions aimed at minimizing industrial disputes and encouraging wage settlements consistent with national economic objectives (see “Labor Market Institutions” below).
Output, Prices, and Labor Market Developments
(Average annual growth rate in percent)
All employed persons.
For 1973-8: average weekly earnings in manufacturing. For 1979-91: average monthly earnings of all workers in the economy.
For 1973-78: value added per worker in manufacturing. For 1979-91: productivity figures refer to all workers in the economy and cannot be derived from value added and employment figures.
Output, Prices, and Labor Market Developments
(Average annual growth rate in percent)
| 1973-75 | 1976-78 | 1979-84 | 1985-87 | 1988-93 | |
|---|---|---|---|---|---|
| Real GDP | 7.3 | 7.9 | 8.7 | 3.1 | 8.5 |
| Employment1 | 4.0 | 4.8 | 3.4 | … | 3.9 |
| Unemployment rate | 4.3 | 4.0 | 3.1 | 5.1 | 2.5 |
| Earnings2 | 13.5 | 5.8 | 11.5 | 3.9 | 8.5 |
| Consumer prices | 14.5 | 2.0 | 4.7 | -0.1 | 2.6 |
| Real earnings | -1.0 | 3.8 | 6.8 | 4.0 | 5.9 |
| Productivity3 | 5.2 | 3.5 | 4.6 | 4.7 | 3.9 |
All employed persons.
For 1973-8: average weekly earnings in manufacturing. For 1979-91: average monthly earnings of all workers in the economy.
For 1973-78: value added per worker in manufacturing. For 1979-91: productivity figures refer to all workers in the economy and cannot be derived from value added and employment figures.
Output, Prices, and Labor Market Developments
(Average annual growth rate in percent)
| 1973-75 | 1976-78 | 1979-84 | 1985-87 | 1988-93 | |
|---|---|---|---|---|---|
| Real GDP | 7.3 | 7.9 | 8.7 | 3.1 | 8.5 |
| Employment1 | 4.0 | 4.8 | 3.4 | … | 3.9 |
| Unemployment rate | 4.3 | 4.0 | 3.1 | 5.1 | 2.5 |
| Earnings2 | 13.5 | 5.8 | 11.5 | 3.9 | 8.5 |
| Consumer prices | 14.5 | 2.0 | 4.7 | -0.1 | 2.6 |
| Real earnings | -1.0 | 3.8 | 6.8 | 4.0 | 5.9 |
| Productivity3 | 5.2 | 3.5 | 4.6 | 4.7 | 3.9 |
All employed persons.
For 1973-8: average weekly earnings in manufacturing. For 1979-91: average monthly earnings of all workers in the economy.
For 1973-78: value added per worker in manufacturing. For 1979-91: productivity figures refer to all workers in the economy and cannot be derived from value added and employment figures.
Until the late 1970s, the NWC emphasized wage restraint in order to prevent the tight labor market from generating inflationary pressures. In 1973 and 1974, the NWC recommended wage increases below the rate of consumer price inflation, which prevented a full pass-through of the first oil shock into wages. Wage restraint facilitated the economy’s quick absorption of the oil shock and minimized the economic slowdown. Real wages fell as prices surged in 1973 and 1974, and, although real wages rebounded in 1975, they were approximately unchanged for the three years as a whole, in contrast to the strong growth in productivity (Table 5-1 and Chart 5-1). Money wage increases remained moderate as the policy of restraint continued up to 1978, facilitating low inflation.
Wages and Productivity
Sources: Singapore, Department of Statistics; Singapore National Accounts, 1967, Economic and Social Statistics, 1960-1982, and Yearbook of Statistics, 1991; Public Access Time Series database; and IMF staff estimates.1 Includes employer CPF contribution and SDF levy.In addition to these policies, immigration controls were eased in the early 1970s to facilitate the entry of foreign workers and thereby alleviate labor supply constraints.1 Although little information is publicly available about the numbers of foreign workers, it is known that they increased sharply in the 1970s.
The sustainability of the labor-intensive development strategy came increasingly into question toward the end of the 1970s. Wage restraint through the NWC mechanism could not have continued indefinitely in the face of market pressures. Eventually, wages would have surged ahead of productivity growth in a catch-up process. Artificially low wages were also encouraging the retention of low-skill, low-technology industries that were not making the best use of Singapore’s limited labor resources and maximizing its growth potential. Moreover, there were limits to the use of foreign workers, stemming from concerns about the social impact and the fact that they were predominantly unskilled. Such concerns led to the adoption of the so-called wage correction policy in 1979.
Phase 2: Economic Restructuring and the Wage Correction Policy, 1979-84
Labor market policies played a key role in the move to higher value-added activities. In a departure from the earlier period, wage policy was reoriented to encourage rapid increases in labor costs to reflect labor scarcity, and specific measures were taken to upgrade labor skills and productivity. By pushing up labor costs, this approach ran the risk of a deterioration in competitiveness and loss of traditional export market share, but it was based on the expectation that increases in labor costs would help generate increased productivity by encouraging employers to restructure. In large measure this expectation was met, but labor costs rose so rapidly and for so long that the loss of competitiveness eventually became problematic.
There were three complementary labor market policy initiatives. First, the NWC recommended wage increases in excess of past productivity growth, and the CPF employer contribution rate was raised in order to push up labor costs. The increase in the relative price of labor encouraged substitution of capital for labor and the phasing out of low-wage, labor-intensive activities. Second, steps were taken to improve labor skills. In addition to various adult education and worker training programs, the Skills Development Fund (SDF) was formed in 1979. Financed by a levy on employers, the SDF was designed to upgrade employees’ skills and expertise and to retrain retrenched employees by providing financial assistance for approved courses and on-the-job training. Third, the Government announced that unskilled foreign labor from nontraditional (that is, non-Malaysian) sources would be phased out by 1984. The intent was to limit the inflow of foreign workers into lower-paid, unskilled occupational categories.
In June 1979, the NWC recommended a general wage increase amounting to approximately 12 percent of average earnings, followed by even larger recommended increases in 1980 (15 percent) and 1981 (12-16 percent). The wage increases recommended in 1979-84 partly took the form of fixed dollar sums, which resulted in larger percentage increases for lower-paid, unskilled workers as an additional incentive to employers to restructure away from unskilled labor. Labor costs were further boosted by increases in the employer CPF contribution rate in steps from 16 ½ percent of employees’ wages in 1978 to 25 percent in 1984, and by the introduction of the SDF levy at a rate of 2 percent in 1979, rising to 4 percent in 1980. As a result of these measures, growth of unit labor costs in manufacturing rose to an annual average rate of 11 ½ percent in 1980-82 before moderating to 5 ½ percent in 1983-84.
The “correction” of wages was intended to be completed by 1981. However, while actual wages rose, on average, in line with recommended increases from 1979 to 1981, they continued to rise rapidly and in excess of NWC guidelines in 1983–84, resulting in real wage increases well ahead of productivity growth (Table 5-1 and Chart 5-1).
Phase 3: The 1985 Recession and Wage Restraint
Singapore experienced its first postindependence recession in 1985. Several factors contributed, including the loss of external competitiveness resulting from the rapid and prolonged escalation of labor costs coinciding with a 25 percent nominal effective appreciation of the Singapore dollar during 1979-85.2
An Advisory Economic Committee established in response to the recession, noting a substantial deterioration in external competitiveness, recommended in February 1986 a wide range of measures to cut costs. Wage-related recommendations (which were acted upon) included a reduction in the employers’ CPF contribution rate from 25 percent to 10 percent of employees’ wages; a cut in the SDF levy from 4 percent to 1 percent; a policy of general wage restraint for at least two years; and reform of the wage-setting system.
The subsequent NWC recommendation in April 1986 endorsed strong wage restraint. To achieve a freeze in the general wage level, it recommended a wage reduction for employees in unprofitable companies, the maintenance of current wages for employees in profitable companies faced with unchanged prospects, and moderate wage increases for employees in profitable companies with good prospects. Further, the Council set the long-run goal of keeping increases in labor costs in line with, or slightly below, those in productivity.
The 1986 Economic Committee also reviewed the policy on foreign labor. While emphasizing the limits to Singapore’s dependence on foreign workers, the Committee saw a need to continue allowing a revolving pool of foreign workers on short-term work permits. Thus, the intention to phase out work permit holders from nontraditional sources, which had been announced in 1979, was not followed through. Although foreign workers were repatriated during the recession, the trend was for their numbers to rise further during the 1980s and early 1990s.3
Phase 4: Recent Developments, 1986-93
The recession highlighted the need for greater flexibility in the wage system. Adjustment through reductions in labor costs had been made easier by a temporary cut in the employers’ CPF contribution rate, which was reversed in steps beginning in 1988. A subcommittee of the NWC was formed in 1986 to consider ways of increasing wage flexibility. As a result, a “flexi-wage” system was introduced under which wages were tiered into a basic component; an annual supplement of one month’s basic wage, which could be adjusted in exceptional circumstances; and a variable performance bonus of up to two months’ basic wage based on company performance, as measured by profits or productivity. Further, after 1987 the NWC’s quantitative wage recommendations were replaced by broad qualitative guidelines. (For example, in 1993 the NWC recommended that the basic wage increase should be moderate and lag behind productivity growth.)
The wage reforms of 1987 and the abandonment of quantitative NWC guidelines have contributed to a more flexible labor market. It is still too early in the life of the flexi-wage system to assess its adequacy fully, but an official committee reviewed the first five years of the system in 1993 and some preliminary observations are possible.4 By 1992, 71 percent of firms had adopted a flexible wage system and the average variable component constituted 15 percent of total wages, compared with the original goal of about 20 percent. The system has not been tested in conditions of recession or inflationary shocks. It is noteworthy, however, that when growth slowed and unemployment rose slightly in 1992, the average variable performance bonus dropped from 1.21 months’ wages to 1.17 months’ and the growth of total earnings slowed from the 9-10 percent range seen in the boom years of 1989-91 to 7 ½ percent.
Recent years have also seen additional policy measures to increase the supply and quality of labor. In 1989, criteria for the granting of resident status to foreigners were relaxed with a view to encouraging more skilled labor to move to Singapore, particularly from Hong Kong. Employment and other legislation was reviewed to remove potential impediments to increased part-time employment and increased labor force participation of females and the over-55 age group.5 Other steps were taken to encourage later retirement. Beginning in 1988, employers’ CPF contribution rates were differentiated according to age, with lower rates for those over 55 as an incentive to continued employment. The Parliament legislated in 1993 to raise the minimum retirement age to 60 years.6 (The minimum age for access to CPF retirement benefits remained, however, at 55.) The focus of training initiatives under the SDF in recent years has been on employees of small local companies and on older workers.
Labor Market Institutions
Labor market institutions that are in some respects unique to Singapore made an important contribution to the nation’s development from the 1960s. This subsection examines the role of the labor unions, the industrial relations system, the NWC, and the system of foreign worker levies. The CPF is examined in Section VII.
Labor Unions
While Singapore has a tradition of active labor unions, the unions have generally exercised their influence in cooperation with the Government and employers rather than through militancy. The role of the unions and their close relationship with the Government can be traced back to the country’s political history. When pro-communists within the governing People’s Action Party (PAP) split from the party in 1961, there was a parallel split of the Singapore Trade Union Congress into pro-communist and non-communist groupings. The noncommunist National Trade Union Congress (NTUC) emerged as the leading union body as the communist faction lost support and withered. Strong personal ties between PAP and NTUC leaders developed from that point and the links were formalized, for example, by an exchange of members between the legislature and the NTUC, the appointment of the NTUC Secretary-General as a minister without portfolio in 1980, and the formation of a NTUC/PAP Liaison Committee. What made the relationship a productive one from an economic standpoint was a shared view of the broad policy framework needed for Singapore’s development, particularly in light of the setbacks of the 1960s. The unions were willing to “sell” sound economic policies to their members and to support restraint when needed.
Union density declined as the structure of the economy shifted toward services in the 1970s and 1980s, and now stands at less than 25 percent of the eligible labor force, with a concentration in manufacturing and construction. However, collective bargaining agreements are often extended to the nonunionized workers within individual enterprises. The unions are organized along a mix of craft, industry, and enterprise lines, but craft and industry unions typically have large numbers of “house” branches that negotiate with their employers. This structure is compatible with the enterprise-based flexibility that has been a priority of policy since 1986.
Industrial Relations System
The incidence of industrial disputes was high until the mid-1960s. As the development strategy increasingly emphasized foreign investment and international competitiveness, industrial relations policy sought to minimize strikes and establish a framework for orderly collective bargaining.
Legislation enacted in 1967 banned strikes and lockouts in water, gas, and electricity services and tightened restrictions on strikes and lockouts in other essential services in order to protect the public interest. This legislation also led to the fragmentation of the omnibus public sector employees’ union by requiring employees of statutory boards to form their own separate unions. In 1968, the Employment Act enshrined in legislation the principle that wage negotiations should be based on economic growth and efficiency, rather than on abstract notions of justice. In the same year, the Industrial Relations (Amendment) Bill restricted the domain of issues on which unions could negotiate. The Act established the rights and duties of employers and standardized the work week, retrenchment, retirement, and other fringe benefits. Matters defined as managerial prerogatives and beyond the scope of bargaining were recruitment, promotion, reclassification, transfer, retrenchment, and dismissal of workers, and the assignment of duties to workers. In 1982, the Trade Unions (Amendment) Act defined the role of trade unions as being to promote good industrial relations between employees and employers, to improve working conditions, and to raise productivity for the mutual benefit of employees, employers, and the nation.
The Ministry of Labor’s Conciliation Service is available to facilitate the peaceful settlement of industrial disputes. As a last resort, disputes may be referred to an Industrial Arbitration Court. Strikes can only legally be called when all means of arbitration have failed. The incidence of industrial stoppages has been negligible since the late 1960s, in contrast to the industrial strife that typified the 1950s and early 1960s.
National Wages Council
The NWC was established in 1972 out of concern that the tightening labor market would lead to disorderly and inflationary wage bargaining. The Council was designed to provide a framework for orderly wage settlements consistent with national economic objectives. It comprises government, employer, and union representatives and a neutral chairman, and reaches decisions by consensus.
Every year since 1972, the NWC has issued a recommendation regarding the appropriate increase in wages in the economy as a whole, and the recommendations have all been approved and gazetted by the Government under the Employment Act. (The recommendation is usually issued in May or June and applies to the year beginning July 1.) In formulating its recommendations, the NWC takes into consideration such factors as past and prospective economic growth, productivity performance, international competitiveness, inflation, and the global economic situation and outlook. The guidelines have become more flexible over time, being expressed as a single figure up to 1980, as a range in 1981-85, and in qualitative form since 1987, consistent with the shift to the more market-oriented “flexi-wage” system.
The quantitative wage recommendations were never binding, but the public sector consistently adhered to them, and economywide movements in average earnings tended closely to reflect them.
Foreign Worker Levies
As a rapidly growing nation with rising real wages and a tight labor market, Singapore is a magnet for foreign workers. The policy has been to keep the door open to foreign labor as a safety valve for the tight labor market, while limiting the overall numbers. As well as concerns about the social impact of large numbers of foreign workers, there is the economic concern that if employers are allowed too ready access to this source of relatively low-cost labor, they will be reluctant to restructure and to rationalize their use of labor.
As control mechanisms, limits on the number of work permits on issue have been supplemented by a system of levies on employers since April 1982, designed to dampen the demand for foreign workers and encourage their allocation to the most productive uses. The levies are adjusted from time to time in response to the strength of demand. For example, the monthly levy rate in manufacturing rose from S$140 per worker in 1987 to S$300 in 1990. In 1992, a second-tier rate of S$450 was applied to employers who depend on foreign labor for between 35 percent and 45 percent (the ceiling) of their work forces.
There are two groups of expatriate labor: skilled workers and professionals on employment passes; and (by far the larger group) unskilled work permit holders who can enter and work in Singapore only if their prospective employers apply for work permits on their behalf. Work permit holders come primarily from Malaysia (the traditional source), beginning in the late 1970s, from nontraditional sources such as India. Indonesia, the Philippines, and Thailand, and after 1983 from new sources such as Hong Kong and Korea.
Econometric investigation by Lim Chong-Yah and Associates (1988) and Otani and Saasanpour (1988) suggests that factors other than the loss of competitiveness may have contributed more to the recession.
The Ministry of Labor has estimated that there were in excess of 200,000 work permit holders in 1993 (in excess of 12 percent of the work force), compared with 150,000 (11 percent) in 1988. They are concentrated in manufacturing, construction, and personal household services.
A review committee appointed by the NWC in March 1993 reported in November 1993 (Singapore, Ministry of Labor (1993)).
The 1986 Economic Committee recommended a target female labor force participation rate of 50 percent by 1995. This was, in fact, reached in 1991 (50.5 percent).
The long-term goal is a retirement age of 67.
