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The foreign worker problem in economic terms

Posted on 28 December 2012

60-second summary of arguments to use during heated discussions with overly concerned friends

The recent strike by a group of SMRT bus drivers from China have polarised public opinion into two main camps:

1) Civil society, which has framed the issue from a human rights and morality standpoint. The activists argue that the bus drivers were paid unfairly, had poor working and living conditions. All that was because the company was in power to exploit the workers, and so they did.

2) The Gahmen, which has framed the issue from a legal and “industrial harmony” problem. It argues that the strike was illegal (because they didn’t apply for permit 14 days beforehand), and that the workers were out to cause trouble because they didn’t use the legitimate feedback channels to voice their grievances. Therefore they were disruptive to the industrial harmony that Singapore has enjoyed since the 1980s.

Part 1: One crucial question that the economist is concerned with is: Are the foreign workers properly priced?

a) There are some low-skilled sectors where the origin or the worker has no bearing on work performance (ie. a Bangladeshi construction worker can effectively do the same job as a Singaporean worker). In such instances, allowing low-skilled foreign labour in Singapore would depress wages.

b) Intuitively, most Singaporeans would be in favour of the Singaporean worker earning more, because he has the burden of raising his family in Singapore where the cost of living is much higher than for the foreign worker, who would be remitting his wages home where the cost of living is lower.

c) That is a “tempting, but economically flawed solution”. Because if Singaporeans are paid more than the FW, who is equally productive, employers have no incentive to hire locals. Also, wages cannot be based on needs, otherwise workers would be justified in demanding a wage increase from their employer for having more children.

So no, the foreign workers should be priced the same as the Singaporean for doing the same work.

Part 2: But what if we take into account the costs to society brought by the FWs? These include congestion, competition for infrastructure and public goods as well as the unintended effect of depressing wages.

a) The government has tried to take these externalities into account by imposing the FW levy on employers.

b) But this tax would end up being borne by the workers, not the employer, because employers have superior bargaining power. Why? Employers can hire and fire workers (who all basically do the same low skilled job) but workers cannot switch employers easily if they are unhappy with their wages or working conditions.

c) Since it is the worker that will bear most of the tax, the levy does not actually raise the cost of foreign labour.

So the only way to protect Singaporeans from the wage pressures created by the open FW policy, is to tighten the FW policies. This could result in rising prices unless productivity increases at a faster rate.

Part 3: It is in the interest of all firms to maintain Singapore’s reputation as a hot destination for immigrants and FWs. This requires all firms to treat their workers fairly, and to maintain a motivated workforce. But individual employers will be tempted to be the black sheep in their crowd because there will be other firms to foot the cost of treating their own employees fairly, and to continue maintaining the country’s reputation.

a) Greater government regulation is not a good solution because the government lacks information to act against defectors.

b) A better solution is for groups of employers to set standards among themselves, and to enforce these standards, punishing recalcitrant members.

c) These groups have to be small. For example, organised by industry, to reduce the likelihood of free-riding.

tl;dr — Singapore needs to tighten foreign labour supply which would lead to rising wages for all workers. It also doesn’t make sense for Singaporeans to be earning more than foreign workers because employers could demand higher wages for having more children. 

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Wang Pei can be considered a new citizen of Singapore. She has been here all her life, just that her environment's changed beyond recognition.

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