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2019 GCE A Level Economics (9757) Essay Q2b: Foreign Worker Levies & Labour Shortage in SG

Discuss whether making changes to the foreign worker levy is likely to be the most effective way the Singapore government can address the labour shortages experienced by such firms. [15]

Similar to many countries, Singapore too is facing an ageing population. Besides the many other possible difficulties Singapore might face one of which is the labour shortage that we are experiencing. As mentioned in part (a), the large number of baby boomers retiring and leaving the workforce as inevitably caused some stress to firms in Singapore in terms of manpower. In order to address this problem, the Singapore government has came out with several policies which includes the reduction of foreign worker levy.

In order to reduce the labour shortage problem, the Singapore government could decrease the levy. Foreign worker (FW) levy works like a tax levied on firms on their employment of foreign workers. In Singapore, our FW levy differs from sector to sector and within sector, the levy could also differ based on the nationality of the worker. With a fall in levy, firm’s marginal cost falls, ceteris paribus, firms will be more able and willing to hire FW, hence increasing the supply of labour and reduce problem of labour shortage. This policy could be effective in the short run as firms have more choices to source out for suitable non-Singaporean workers to maintain their level of production and not be restricted by the relatively small pool of workforce available in Singapore. However, there may be unintended consequences such as decreasing wages of domestic low skilled workers due to the enlarged pool of low skilled workers in Singapore.

Additionally, the Singapore government has also been emphasising on the need for Singapore economy to restructure; encouraging firms to upgrade, shift towards the use of technology and automation to increase productivity. There was Productivity and Innovation Credit (PIC) Scheme from year 2011 to 2018 which allows firms to enjoy up to 400% tax deduction or allowances or receive a 40% cash payout if investments were made to Enterprise Development Grant (EDG) to support firms that explore new areas of growth, or look for ways to enhance efficiency. If successful, this will means a reduction in demand of manpower (labour) in the firm, thus addressing the problem of labour shortage, rendering policy to be effective. In comparison, although both reducing FW levy and increasing productivity via technology instead of labour both has their pros and cons; bearing in mind that Singapore government has always been aiming to be self-sufficient, this policy of moving towards high-tech, high-knowledge might fit our model more. Since the success of it will essentially means that firms might then need lesser workers i.e. demand for less labour. This would also mean that Singapore labour market would also be less vulnerable to policies set by other countries involving how their people can be employed to/in Singapore. Nonetheless, this policy may not see fruits in the very short run. It takes time for firms to buy in this idea of ‘upgrading’ and even if they do, it takes time for firms to find, customise and finally use the machine/technology.

Thus, there is a need for another policy which the Singapore government uses – extending retirement age. In 1955, Singapore’s retirement age was 55, and in 1993, increased to 60 years old, and in 1999, increased to 62 years old. Last year, PM Lee announced that the Government will increase it to 65 by about 2030, while the re- employment age will go up from the current age of 67 to 70. This allows older employees who are still fit and able to work to continue working and essentially mean that the fall in supply of labour in each firm will decrease. Not only will help alleviate the labour shortage that Singapore is facing, this may also lighten Government’s fiscal burden. For the firms, an extended retirement and re-employment age will mean that it can continue to hire workers who are deemed suitable to continue working in the firm, fall in supply of labour is less significant, firm spend lesser money, time and effort to look for and train new suitable candidates especially if firm requires specific skillset. Hence, this policy is effective especially in the very short run. However, even with the extended age, the period of time which these senior employees can continue to serve is still limited. Thus, although it may be effective in the SR, this is not a long term solution.

In light of the discussion above, it seems that in order to address the labour shortage problem, the Singapore government should continue to deploy varied ways as it has been doing. These policies when put together will be effective in addressing the problem because, both the quantity demanded for labour and supply of labour is targeted. In the very short run, retaining older workers through re-employing them could help in lowering the fall in supply of labour and ensure the continuation of their businesses. At the same time, firms can look into employing new workers be it Singaporean or FW to support its production in the intermediate period in order to increase the supply of labour. While doing so, firm could explore the use of IT and automation in order to consequently, in the LR slowly reduce dependency on labour which means a fall in quantity demand for labour. Hence, with an eventual increase in quantity supplied of labour and decrease in quantity demand for labour, labour shortages within Singapore firms would be reduced.



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