Focus on welfare, not wages, of foreign workers

Focus on welfare, not wages, of foreign workers

In his second IPS-Nathan Lecture last November, Mr Ho Kwon Ping suggested channelling the levies that employers pay for the foreign workers they hire into a savings fund, akin to the Central Provident Fund for Singaporeans. These savings would be given to the foreign workers when they leave Singapore.

In response, National University of Singapore economist Ivan Png pointed out that such a scheme, although well-intentioned, is unlikely to help foreign workers much.

He noted that foreign workers already pay, on average, more than $7,000 to work in Singapore. This price mechanism has evolved to allocate the limited number of foreign worker permits. The fees are neither set nor approved by the Ministry of Manpower; they are simply the result of the market responding to a situation where foreign workers' demand for jobs here greatly exceeds the supply of such jobs.

Creating a savings fund would simply increase the demand, raising the fees that foreign workers pay to secure work in Singapore and negating the income increase that the proposed fund would give them.

The likely beneficiaries of the proposed fund would be the middlemen, agents and employers (who respond by cutting wages) - all of whom have more bargaining power than the workers.

The economics of foreign worker policies can often be quite counter-intuitive.

For instance, many of us assume that paying foreign workers lower wages benefits low-skilled Singaporeans. But this is flawed reasoning: If Singaporean workers are paid more than foreign workers doing the same job, why would employers want to hire them?

The foreign worker levy therefore exists to narrow the wage differential between foreign and local workers. But this assumption is also questionable. Since foreign workers have much less bargaining power than employers, the levy is passed on to them in the form of lower wages. This reduces the employer's incentive to hire (more expensive) Singaporean workers or to invest in labour-saving machinery.

Can anything be done?

There are at least three policy goals worth pursuing. The first is to create stronger incentives for employers to hire Singaporeans instead of foreign workers. This is what the foreign worker levy tries to do, probably not very successfully.

The second is to raise labour productivity, the assumption here being that an over-reliance on cheap, low-skilled foreign labour has led to Singaporean companies investing less in automation and in raising the skills or technology content of their operations.

The third is to improve the welfare of the foreign workers in our midst, this objective being the impulse for Mr Ho's suggestion.

Economists have a strong preference for tinkering with incentives to produce the desired outcomes. In this instance, our instinct is to find a better way to "price" foreign workers in Singapore. If a tax on foreign workers (which is what the foreign worker levy is) is not working well, would a minimum wage or a cap-and-trade system work better?

But as I shall proceed to argue, neither a minimum wage nor a cap-and-trade system is able to achieve all three policy goals simultaneously.

Rather than look for a more efficient way to price foreign workers in Singapore, policymakers are probably better off looking to legislative and regulatory measures to achieve the third objective of improving worker welfare.

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