Foreign worker policies through lens of economics

Foreign worker policies through lens of economics

THE recent strike by a group of bus drivers from China at public transport operator SMRT has polarised public opinion in Singapore.

On one side, civil society groups have framed the issue as one of human rights and morality. They have decried the uneven distribution of power between corporations and workers, the unfair wages paid to foreign workers, and the poor conditions they labour under.

On the other side, the Government has emphasised the illegality of the drivers' actions, the availability of legitimate channels for workers to voice their grievances, and the country's "zero tolerance" of acts which disrupt industrial harmony.

What seems to be missing from the debate is an economist's perspective. There has not been a wider discussion of the economic rationale and implications of the Government's foreign worker policies.

Analysing Singapore's foreign worker policies through the lens of economics leads to some surprising conclusions which suggest that neither the position taken by the civil society groups nor the current government approach is viable on its own.

A good place to begin our economic analysis is to ask whether foreign workers are properly priced. Foreign workers are prepared to work for lower wages than Singaporeans doing the same job. Allowing low-skilled foreign labour unfettered access to Singapore would therefore depress wages in those sectors that are more dependent on foreign labour.

A tempting, but economically flawed solution, is to require employers to pay differential wages so that a Singaporean worker earns more than the foreigner doing the same job. But somewhat counter-intuitively, this does not serve the interests of Singaporeans. If Singaporeans are paid more than foreign workers who are equally productive, what incentive would employers have to hire the Singaporean worker?

The argument that Singaporeans should be paid more because they have more needs or face higher costs is also misguided. Wages should reflect the marginal productivity of the worker, not his needs. If wages are based on needs, workers would be justified in demanding a wage increase from their employer for having more children.

Externalities

IF IT is bad economics to (artificially) raise the wages of Singaporean workers relative to foreign workers, should we then impose additional costs of the latter so that they are more expensive to hire? Foreign workers impose "external" costs on society. These costs include increased congestion, competition for infrastructure and public goods, and wage depression. These costs are not borne by the foreign workers or their employers; instead, they are borne by society.

The standard economic response to this market failure is to impose a tax that forces the parties in the economic exchange - in this case, the foreign workers and their employers - to internalise the social costs of their exchange. This provides the economic justification for the foreign worker levy that the Government imposes on employers who hire low-skilled foreign workers.

Economically speaking, it does not matter which party the Government imposes the tax on. Economics predicts that the foreign worker levy would be borne by workers.

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