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Improving living standards

Current Economic model

The government raved about the country’s phenomenal economic growth. But why are Singaporeans not satisfied? Many point to the ever increasing Gini coefficient and the seemingly absence of increase in economic well being (real income growth). While Singapore could boost to have the most number of millionaires per capita, the sad fact is, while the rich becomes richer (and faster), the rest of the society is not. Why is that so?

The key ingredient to drive improvement to quality of life

Not surprisingly, the key reason why many people don’t feel better off even with economic growth is simply the P word – productivity. A study by McKinsey Global Institute concluded that productivity coupled with free competition drives higher real wages and improves quality of life even among developing countries with incomplete infrastructure. While Singapore’s economic growth had been impressive for the past few decades, the ranking of Singapore workers’ productivity level has been dismal. For those without basic economics background, let me explain using an over-simplified illustration:

Let’s say Company A hires 10 workers and pays each worker $1 a month. Each worker can produce 2 goods maximum monthly that can sell for $1.50 each. For simplicity, assume no capital cost or any other cost. So input is $1 x 10 workers = $10 and output is $1.50 x 10 workers  x 2 goods = $30. The owner of Company A earns $20 as gross profit per month.

Now the economy is booming and there are more demand for Company A’s products. Demand for the goods increase from 20 to 40 per month (100% increment). The owner expanded production and hires 20 workers. As each worker continues to produce 2 goods monthly, the marginal increase in input is the same as the marginal increase in output. Company now pays $1 x 20 workers = $20 as input in order to earn $1.50 x 20 workers x 2 goods = $60. Input increased by 100% and output increased by 100% because demand increased by 100%. The owner of Company A thus now earns 100% more at $40 as gross profit per month.

We see that just because demand increase does not mean the company will pay more to each worker. The ones most proficient in using resources and capital (ie the ower of Company A/ business owners/ capitalists) are the ones that stand to benefit the most from economic growth. On the other hand, the typical workers are not paid a much higher wage since the owner of the company can simply hire more workers to increase output.

When we factor in labor mobility and demand-led inflation, we can see how the picture starts to get real ugly. Higher inflation erodes real wage (or purchasing power) of the workers. The influx of cheaper labor supply from another region adds downward pressure on real wages and contributes to higher displacement rate of local workers. In fact, cheaper labor supply would only benefit Company A more. Business owners and companies don’t discriminate workers. If they can only pay $0.50 per worker to get the same amount of output, they will only get to gain more.

In order to be better off, each worker must produce more than 2 goods a month. Let’s say each worker can now produce 4 goods a month, Company A can continue to hire just 10 workers and can also afford to pay each worker more. In fact, the company can now pay up to $2 per worker each month. Input would be the same as hiring 20 workers whose productivity is only 2 goods a month and output will still increase from 20 goods to 40 goods. The owner will still enjoy an increase in gross profit. The only difference is workers now also enjoy a higher wage. Even if the owner is to increase the wage from $1 to $1.50 instead of $2, output would be the same and the workers will still be better off. The rise in real wages will also increase new demand for goods, giving rise to consumption led demand increment rather than population led demand increment.

One might argue that there are many other complex factors but it is not difficult to see how productivity is the key agent behind a higher quality of life. The fundamental idea is very simple. With more output at a given level of input, there is more to go around. One produce more means one can now consume more.

The current economic model in Singapore that still prioritizes labor input rather than improving productivity will only create a country that distorts social harmony. Having attracted so many MNCs to set up operations in the island with low tax and political stability, the government is compelled to let in foreign labor to anchor those good companies in Singapore. But without a corresponding increase in productivity, it creates a cycle of self-feeding system of labor demand.

More companies mean more demand for labor. The authorities are unwilling to see a tight labor market for fear of companies deciding to uproot to other cheaper countries. So they yield to the request of increasing labor directly through allowing more foreign workers into the country. Having allowed a large population of foreign labor to the local population creates more demand for other companies’ products and country resources. Capital and resource owners enjoyed a windfall and wanted to hire more because productivity did not improve. So they demand the government to let in even more foreign workers. End result? More inflation, more stress on country infrastructure and resources, more social divide, stagnating of real wages among the lower and middle income, increasing disparity between the rich and the poor, and ultimately, unhappy citizens who do not feel that they are not better off even with all that hyped up media announcements of a fantastic economic growth in the country. It is no wonder Singaporeans are an angry lot in recent years.

Productivity can be improved in many ways. Technology is one. Education or training is another. Let’s not forget about creativity as well. But productivity may also be expensive and time consuming to generate and it can be easily replaced by additional inputs of labor and/or capital. Allowing more labor does not give the companies any incentive to improve productivity. In my opinion, it is better to swallow the bitter pill while the country is still relatively rich and stable. Restricting the option of labor would force companies to improve productivity in order to make business sense in such an environment.

Of course, this is an opinion of someone with limited economic training and I am not expecting many business owners to welcome such an idea. I would actually expect business owners to haul vulgarities into my face and reasoned that operating a business is a much more complex process. I am no business guru but I do believe having to do with less labor and improve productivity is quite possible. Productivity does not have to be high-tech. Good training and hiring the right people often pays much more dividend. How many times have you seen workers dilly-dallying away in shops waiting for business to come in instead of actively approaching customers or create more compelling marketing tactic? A perfect example of productivity as witnessed from my previous travel in France is a single waiter serving a café of 10 tables while it would usually require 3-4 workers in a café of similar size in Singapore. In the United States, you won’t see a legion of workers working on the construction sites, unlike Singapore where we compensate productivity with thousands of foreign labor workers.

Categories: Economics
  1. Terence
    February 24, 2012 at 6:36 am

    Obviously written by someone who has never worked before

    • February 24, 2012 at 3:15 pm

      Hi Mr Terence, while I respect individual views, I don’t see how my article can show ‘obviousness’ of someone who has never worked before. To put it blatantly, it is my opinion that it is rather naive of you to even comment ‘how obvious I am someone who have no working experience’. To use your words, your comment is “obviously written by someone who has superiority complex problem. To put it in the context of the banking scene, you see offshore banks as more glamorous than local banks, never mind whatever job title one holds in the local bank”.

      I am no business guru nor am I highly trained in economics, and I am indeed pretty young. But I can safely inform you that I am in the work force, although it is up to you to believe or not. This is my blog and I blog my views. What I had blogged is highly simplified so as to cater to a more general population. Should you have differing views, do feel free to share them. I am a believer of discussions. Moreover, I believe you are aware that there is such a term called ‘cognitive bias’ or ‘framing’.

      If you are someone that had never bothered about improving your productivity, it does not matter whether or not you have not worked before or have worked for 30 years. You will always complain when the easy way out of business operations is taken away. That’s simply human nature. Take for example: How do you improve your productivity as a personal wealth manager at HSBC? Previous training in economics and finance helps a little but not much in your job. it does not matter if you are a first class or scored a perfect score in your masters’ thesis. Not even a PhD in economics with all that complex mathematics and econometrics will help you to become a great PWM/ RM if the soft skills are lacking. Do you wait in the bank for walk ins? Or do you actively network and utilize your training in human psychology to pull in more clients?

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