Private sector economists Manu Bhaskaran and Nigel Chiang argue that in both labour and total factor productivity, Singapore is under-performing relative to trading partners, peers and OECD countries, reflecting deep and systemic issues in the economy, especially in sectors where an over-reliance on labour force growth through migrant labour has affected incentives to invest. This is undermining economic growth, wages and living standards, corporate profitability and international competitiveness.
The authors argue that Singapore’s poor productivity performance could undermine economic growth, wages and living standards, corporate profitability and international competitiveness.
Economic growth is a product of labour force growth and productivity growth. Singapore’s ultra-low fertility rate means that continued economic growth will require perpetual large-scale immigration unless productivity growth can be increased from its currently low and declining rate. Without productivity growth, wages and living standards of Singaporeans cannot rise, and the economy will lose competitiveness over time.
Productivity refers to the amount of output or value-added that can be produced from given factors of production. Labour productivity refers to output or value-added per worker or hour worked, while total factor productivity (TFP) refers to the increase in total production over and above the increase in identifiable inputs. In other words, it tries to measure the productivity resulting from intangible factors such as education and skills development, advances in technology and so on. Growth in both labour productivity and TFP in Singapore has been low and trending downward for decades, including into negative territory for TFP. Where there has been productivity growth, it has been concentrated in just a few sectors, chiefly finance and manufacturing, with this dependence increasing over time, and the rest of the economy performing much worse.
Singapore’s productivity growth has also underperformed its top trading partners, a peer group of other small high-income economies, and the OECD average, with the performance gap widening over the years. Singapore is certainly not unique in facing challenges related to low productivity growth. However, while most of the slowdown in productivity experienced elsewhere in the global economy since the Global Financial Crisis appears to be cyclical in nature, and thus transitory, Singapore’s sub-optimal productivity record since the GFC seems to be structural in nature, and thus potentially more persistent. In parallel, since 2000, real median wage growth has declined, and average local monthly nominal wages are lower than in our peer group in every sector except finance—as much as 40 to 50 percent lower in construction, and accommodation and food services, where productivity is also very low.
Low productivity growth will over time undermine economic competitiveness. Already the rate of return on foreign direct investment in Singapore is lower than in other emerging Asian economies and in a peer group of small countries with similar per capita GDP. Despite this, Singapore has continued to attract FDI inflows, most likely because of investment incentives offered. But growing international opposition and government policies to limit the favourable tax treatment allowing profit-shifting by MNCs casts doubt on the durability of this strategy.
Under-performance in productivity growth also affects the local corporate sector, which struggles with profitability—the return on assets (ROA) and return on equity (ROE) both declined between 2009 and 2018 in six out of ten sectors. The same sectors under-perform the most with respect to profitability, productivity and wages—construction, accommodation and food, other services, even information and communications—and are the ones where large inflows of cheap low-skilled foreign labour may distort corporate incentives to invest and improve firm efficiency. Lack of competition in a domestic market dominated by government-linked companies, and an inadequate public goods ecosystem enabling companies to operate efficiently, are other possible explanations for poor corporate performance.
To the authors, the Singapore economy appears to be in a low-level trap, with deep and systemic issues responsible for the underperformance of wages and productivity. They will address possible policy solutions in a separate article.
Productivity is central to a country’s ability to deliver improving standards of living in a manner that can be sustained over time.
- Economic growth is a product of labour force growth and productivity growth: After years of low fertility rates, our labour force will drop unless Singapore allows in large numbers of immigrants. We believe that whatever policy-makers prefer, the popular appetite for this is limited: it is politically difficult to allow immigration on a scale sufficient to move the needle on labour force growth. For a desired economic growth rate of around 2-3% (which other successful developed economies achieve), Singapore needs higher productivity growth—of around 2.5% to 3% a year.
- Wages and living standards: For economic growth to translate into rising wages and living standards, labour productivity growth is critical: as output per worker grows, it will be easier for wages to grow as well. If productivity slows, wage growth slows, and citizens will find that their living standards are not matching their aspirations.
- Productivity growth is also key to competitiveness: The faster a country raises productivity, the more it can keep unit costs low and so remain competitive in global markets
Given the importance of productivity, Singaporeans should be very concerned at its desultory performance in the past few decades. We argue that:
- No matter how one slices and dices the data, Singapore’s productivity growth has under-performed below what is needed to keep improving our living standards.
- This under-performance goes beyond the broader global productivity slowdown: Singapore has lagged behind peers and competitors, and this trend persists unabated.
- Productivity gains have been narrowly concentrated in just a few sectors, with performance in the rest of the economy pedestrian at best. Over time, this pattern has worsened, so that even fewer sectors are now delivering creditable productivity gains.
- The implications are dire: our living standards, competitiveness, economic growth and perhaps even the way we manage our monetary policy and inflation would be at risk.
The weak productivity performance can be traced to policy decisions that may have distorted the incentive structure of the economy. One likely reason is the massive inflow of foreign labour, much of it poorly skilled, in the 2004-2011 period. Policy prescriptions will be discussed in a later article.
Major weaknesses in Singapore’s productivity performance
Singapore’s productivity performance has weakened over time and in relation to peers
In 2010, the Singapore government embarked on a serious effort toward productivity-driven growth, setting up the National Productivity and Continuing Education Council (NPCEC) to oversee and implement strategies to raise productivity.
Nearly a decade later, the results remains lacklustre. Whether measured by labour productivity or total factor productivity (TFP), the trend of deceleration has persisted for a very long time.
- There has been a sustained deceleration in trend labour productivity growth on two metrics, output per employed person and output per hour worked (Chart 1).
- The abject performance in total factor productivity (TFP) growth, which has been mostly negative in the last 10 years, is even more concerning. This is a measure of the economy’s capacity to extract the most output from combining labour, capital, technology and management ability (Chart 2).
- The long-term decline in trend labour productivity growth is broad-based and evident in most sectors of the economy (Chart 3).
Moreover, just a few sectors, such as finance and manufacturing, delivered the limited productivity gains that were achieved (Charts 4 and 5). This dependence has increased.
- The increase in real value-added per actual hour worked in the information & communications technology (ICT), manufacturing, wholesale and retail trade and finance & insurance sectors between 2010 and 2014 outperformed that for the economy as a whole, as represented by the blue bar in Chart 4.
- From 2015 to 2019, real value-added (VA) per actual hour worked accelerated sharply in manufacturing, and remained robust in finance & insurance, alongside much more marginal productivity gains in the rest of the economy (Chart 5).
This is concerning because:
- There is limited productivity growth in the bulk of the economy—value added per actual hour worked in real terms is rising very slowly in most sectors, with profound implications for wage growth.
- Productivity measurement in the finance sector has undergone wide-ranging changes in recent years, raising questions about its accuracy. For example, there are continuing debates over the measurement of value-added and price changes here. One issue is whether much of the output in finance really consists of economic rents, meaning income derived not from productive activity, but from control over an asset or resource with limited supply. This raises the question of whether the productivity growth is all that real or even desirable.
- Productivity gains in manufacturing are encouraging, but this industry is highly dependent on global trade, which is likely to slow in the coming years due to structural headwinds from a rise in protectionism, wider resort to inward-looking policies, and environmental constraints.
Singapore’s performance has been far worse than its trading partners and peer group (Charts 6 and 7), with profound implications for our economic competitiveness.
- Up to around 2005, output per worker moved more or less in line with Singapore’s top 15 trading partners, under-performing in some years and out-performing in other years (Chart 6). Subsequently, there was a persistent and wide level of under-performance, coinciding with the explosive growth in the importation of cheap foreign labour in the early 2000s. Policies introduced in recent years (e.g. smaller S-Pass quotas for certain sectors, labour force upskilling, upgrading of enterprise capabilities) have helped to close the gap with our competitors, but only briefly. Our labour productivity growth quickly returned to decelerating after 2017.
- Our performance in the broadest and most important measure of productivity—TFP growth—is poor relative to our peer group as well as the OECD group of developed nations (Chart 7), and has been worsening substantially over the years. After a surge in 2003-2004, TFP growth began to decelerate before declining outright after 2005.
Singapore’s productivity challenges are not merely a microcosm of the global trend
Crucially, we cannot simply explain away Singapore’s poor relative performance as a global phenomenon. Many other countries have also suffered recently from weaker productivity growth, which economists partly attribute to a persistent but ultimately transitory “hangover” from the global financial crisis (GFC). But a decomposition of labour productivity growth into its underlying drivers shows a distinct profile in Singapore, compared to the OECD group of economies (Charts 8 and 9).
- In Singapore, capital deepening’s contribution to average labour productivity growth in the post-GFC period (2009-2019) fell 0.64 percentage points from the preceding period (1990-2008), partially offset by a 0.14 percentage point increase in the contribution from labour quality across the two periods. The notable change was what happened to total factor productivity: TFP had marginally subtracted from overall labour productivity before the GFC, to the tune of 0.07 percentage points, but this drag intensified to 0.58 percentage points in the following period (Chart 8).
- In contrast, most of the productivity slowdown in the OECD group of countries can be attributed to a lower contribution from capital deepening, which is expected if economic “scarring” from the global financial crisis weighs on businesses’ propensity to invest. The contribution from capital services to labour productivity growth fell 0.75 percentage points, the contribution from labour quality was effectively unchanged, and TFP fell by 0.16 percentage points.
Put differently, while most of the productivity slowdown in the global economy since the GFC appears cyclical in nature (and thus transitory), Singapore’s sub-par productivity performance in the same period seems more structural or deep-rooted in nature—with poor TFP playing a bigger role—and thus potentially longer lasting.
Poor productivity performance imperils Singapore in many ways
Growth potential is compromised by weak productivity growth
Low productivity growth, especially weak TFP, signifies that the economic system as a whole is not organised efficiently enough to extract value from the factors of production it manages. So Singapore can only achieve desired growth rates by mobilising ever greater additional inputs of labour and/or capital.
The former is difficult given (a) our low, and now contracting, indigenous labour force growth due to extremely low fertility, (b) reduced social tolerance for perpetually increasing inflows of both immigrants and transient workers after past episodes of extraordinary growth in foreign labour (see Charts 10 through 11), (c) intensified environmental constraints in a now even more congested small physical territory. In turn, a slower labour force growth rate implies a lower equilibrium rate of investment, beyond which further mobilisation of capital inputs would be wasteful or inefficient (Chart 14).
This means that our economic growth potential is compromised if we cannot raise TFP growth. In 2019, the International Monetary Fund (IMF) estimated our potential growth (the rate of growth that we can sustain without generating imbalances ranging from excess inflation to financial vulnerabilities) at 2.5% in the medium term, similar to its projections in 2016, which showed a downward trend over time (Chart 15).
There is a real risk that this negative trend becomes ossified in the coming years. Thus, the only path to sustain a reasonably high rate of economic growth is to rectify the likely structural causes of our sub-par productivity performance.
Improvement in living standards is compromised by poor productivity
If we fail to re-ignite productivity growth, translation of economic growth into what really matters for citizens—wage growth and living standards—will be compromised.
- Real median wage growth declined steeply in the first decade of the 2000s, a period of accelerated inflows of foreign labour. Subsequently, real wages experienced a robust spurt in the wake of the GFC, as trade in global value chains expanded impressively and the Singapore economy along with it, but this quickly petered out after 2014 (Chart 16). If recent productivity trends are any guide, the small but material uptick in real wage growth in 2019 will not be sustained, and would not have continued even absent the pandemic.
- While a certain degree of slowing wage growth is expected in and consistent with a maturing economy, it is striking that our wages have not, over time, converged with those of countries with similar per capita incomes (Chart 17). The average monthly wage earned locally in nominal terms is lower than the average across our peer group, in all industries except finance & insurance.
- In some sectors, the differential is alarmingly large (Charts 18 and 19; charts for individual sectors of the economy in Appendix). For instance, the average monthly wage of a worker in our accommodation and food services sector is less than half that in the equivalent sector in Denmark, Netherlands and Sweden (Chart 18). Likewise, a Singaporean worker employed in “construction” and “other services industries” locally earns roughly 40% less than his counterpart in our peer group (Chart 19). Crucially, the same sectors with these wage differentials also struggle with eking out productivity improvements (Charts 4 and 5). This strongly suggests that the twin problems are linked.
Singapore’s economic competitiveness is also at risk if productivity does not improve
If productivity growth lags, unit labour costs could rise, leading to a loss in competitiveness. But Singapore does not compete on the basis of costs alone. It must compete on the capacity to deliver a premium return to investors. Here, too, there appears to be the beginning of a problem.
- Singapore offers the lowest rate of return to investors not only among other emerging Asian economies (where higher returns are arguably needed to offset greater country risk), but also among the peer group of small, open economies with similar per capita GDP levels (Charts 20 and 21). Both groups offer similar average rates of return on FDI.
Despite performing poorly on these metrics, why has Singapore still succeeded in attracting strong flows of investment commitments? Inducements offered to investors to locate their operations and regional headquarters here could have tilted the scales in our favour. While the terms of such incentives are not publicly disclosed, they show up in the income tax section in the notes to the financial reports of public companies.
- For example, US fabless semiconductor company Xilinx, which first set up its regional headquarters in Singapore in 2005, reported in its latest Form-10K filing in May that the Singapore Economic Development Board (EDB) had in 3Q19 awarded it a “Development and Expansion Incentive” that would bring its local tax rate down to 5% for the fiscal years 2022 through to 2031, down from 17% previously (see highlighted notes in Exhibit 1). The company was also granted “Pioneer Status” from 2005 through to 2021, which reduces its local tax to 0% (see highlighted notes in Exhibit 2).
This strategy may have worked in the past, but may not provide the same opportunities in future, given the growing international political and policy backlash against such practices. More governments are introducing measures to limit MNCs’ ability to utilise these expedients to reduce their tax payments. Recognising this, many corporations themselves are choosing to voluntarily reduce the use of such profit-shifting mechanisms.
The bottom-line: if our productivity does not grow apace with that of our trading partners, the region and our peer group, we lose competitiveness, and over time our economic growth will be further compromised.
Trends in productivity are also reflected in the under-performance of local companies
Economy-wide productivity trends must also be reflected in the micro-level performance of companies. Indeed, large swathes of the local corporate sector struggle with improving profitability, as measured by return on assets (ROA) and return on equity (ROE).
- Return on assets (ROA) has ticked up slightly after a long period of stagnation, while return on equity (ROE) has reached an all-time high. However, we caution that headline metrics mostly flatter to deceive: profitability declined between 2009 and 2018 in six out of ten sectors, as measured by the ROE/ROA delta (Charts 22 and 23).
- More importantly, as with wages, there is considerable overlap between sectors under-performing in profitability and sectors with poor productivity growth e.g. other services industries, construction, accommodation and food services, and even information and communications. This suggests that sub-par corporate sector performance and poor productivity growth are fundamentally linked. (Charts 24 and 25).
Why the sub-par performance? Several hypotheses
What are the underlying causes of our underperformance, particularly the negative trend in TFP growth? At one level, it means that the economic system is not organised efficiently enough to extract value from the factors of production it manages. And that means that Singapore can only achieve growth by mobilising ever greater additional inputs of labour and/or capital. In any economy, it is corporations that combine factors of production to create value. If the economy is doing this inefficiently, it must mean that corporations in the country are not performing well, as shown by the declining trend in returns on capital for local companies. We offer several hypotheses that could explain this.
First, local corporations are simply not efficient. In a well-functioning economy, competition should spur individual companies to keep improving and become more efficient, or risk being driven out. It is possible that there is simply not enough competition in the domestic economy to bring this about.
Indeed, one does not need to look very hard to observe the dominance of government-linked companies (GLCs) in everyday economic life: across telecommunications, banking, supermarkets, insurance, point-to-point transportation, and commercial and industrial property.
The Herfindahl-Hirschman Index (HHI) is a standard measure of competitive pressure in a market, calculated as the sum of squares of the market share of each competing firm in a market. However, to our knowledge, the data required to compute HHIs for the different sectors, and for the Singapore economy as a whole, are not publicly available.
A second explanation is that the economy is not being provided with the public goods needed for companies to operate efficiently and competitively. For example, we arguably lack a comprehensive eco-system comprising dedicated financing and administrative elements such as a SME-focused export-import bank, to help high-growth small companies scale up and squeeze out inefficient older companies.
Our third hypothesis is that poor corporate performance results from distortions in the incentive structure of the economy, inducing firms to operate in ways that appear to be optimal individually, but which collectively yield sub-optimal results.
For example, the large inflow of cheap, unskilled labour in previous years may have depressed wage growth, reducing the incentive for companies to move up the value chain by investing in productivity-enhancing equipment and/or implementing better ways to organise internal processes. In the near term, reduced wage growth may increase retained profits. But over time, relative competitiveness suffers: firms in our indigenous corporate sector become less capable of competing in global and regional markets, which ultimately affects profits.
If this hypothesis is right, we should see moribund wage growth, sub-par productivity growth, declining capital investment by the private sector and poor profitability of local companies. And indeed our analysis earlier in this article has established negative TFP growth in much of the past decade, a material decline in the private sector’s contribution to gross fixed capital formation or investment, and an uninspiring performance by Singapore’s corporate sector.
Because the rate of labour force growth (averaging 3.2% per year over the last three decades) far exceeds population growth (2.2%), sub-par productivity growth, as measured by output per worker or hours worked, is consistent with rising GDP per capita. The following chart indexes GDP per capita and wages in selected ‘low productivity, low wage’ sectors to a common starting point, allowing us to observe their relative growth rates.
We can see that GDP per capita and nominal wages in the selected sectors largely rose in lock-step until 2009, when they started to diverge (Chart 26). This divergence subsequently intensified: as GDP per capita continued climbing, nominal wage growth in “transportation and storage”, “community, social and personal services”, and “accommodation and food services” stagnated. Strikingly, wages in “administrative and support services” have virtually stood still from their 2005 levels.
Crucially, the significant gap visible today between nominal wages in the selected sectors and GDP per capita is a feature, rather than a bug, of our growth model, which is premised on mobilising ever-increasing labour inputs for GDP growth. The large and rapid inflow of foreign labour has depressed wages, business investment and productivity growth. Sub-par productivity growth eventually showed up in the under-performance of local companies, but the economy continued to grow thanks to an expanding labour force.
We find the second and especially the third hypotheses worthy of further research, since they raise deep questions about the efficacy of the development model Singapore has chosen.
To conclude, the Singapore economy appears to us to be in a low-level trap. Large inflows of low-skilled cheap foreign workers have depressed both wages and the incentive to raise productivity, making the economy increasingly reliant on ever more inflows of cheap labour, which further restrains wage growth and produces even less incentive to move up the productivity curve, while also hurting the wages of lower-income Singaporeans.
Put differently, our analysis suggests that deep and systemic issues are responsible for the underperformance of wages and productivity in Singapore. In a future article we will consider policy recommendations to achieve a better outcome, including (a) whether more intensive measures are needed to reduce the dependence of the economy on transient migrant workers with low skills and if so, how they can be implemented; (b) whether a national minimum wage policy is needed; and (c) how to address the poor performance of local companies.
 The views expressed here are those of the authors and do not reflect the views of any institution they are affiliated with.
 To isolate the trend from the cyclical component of productivity growth, we apply the Hodrick-Prescott (HP) filter, a commonly used mathematical technique to strip out short-term fluctuations associated with the business cycle from a time series. The resulting “trend productivity growth” is a measure of the productivity changes that reflect long-term and/or structural, as opposed to cyclical, factors.
 Thomas Philippon, Ariell Reshef, Wages and Human Capital in the U.S. Finance Industry: 1909–2006*, The Quarterly Journal of Economics, Volume 127, Issue 4, November 2012, Pages 1551–1609.
 Rognlie, Matthew, Andrei Shleifer, and Alp Simsek. 2018. “Investment Hangover and the Great Recession.” American Economic Journal: Macroeconomics 10 (2): 113-53.
 Statistically, we can decompose labour productivity growth into three sources: the contribution from labour quality i.e. education and know-how and experience level of workers over time; the contribution from capital services (amount of capital per worker), and total factor productivity i.e. the residual productivity growth that cannot be accounted for by identifiable inputs.
Appendix: additional charts and data
Source: CEIC, Department of Statistics (DOS), authors’ calculations. Notes: All figures are for 2018. We extrapolated Singapore’s average monthly wages from 2013 (when the time series was last updated) onward to 2018 by assuming nominal wages grew in line with productivity growth.
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