Nov. 2 (Bloomberg) -- At Pine Garden’s Cake Pte., Wei Chan used to have three drivers delivering chocolate and martini-flavored cakes around Singapore. Now, the head of the company transports the goods himself because he can’t get enough workers.
A government push to reduce the city-state’s reliance on cheap imported labor has led to an emerging shortage of workers and increased business costs. The squeeze has left Chan with only one driver, a Chinese national, after he failed to obtain new permits to replace the other two.
“I can’t accept new orders and my top-tier people are doing the lowest-end jobs,” said Chan, 40, whose managers also fill in for the lost drivers at his family’s 28-year-old Singapore bakery. “I’m fighting for survival and expanding is definitely not on the cards. Productivity is certainly compromised.”
Prime Minister Lee Hsien Loong has raised foreign-worker levies and salary thresholds after Singapore’s population jumped by more than 1.1 million since mid-2004, driving up property prices and stoking social tensions. The clampdown has driven the jobless rate to a six-quarter low of 1.9 percent, pushing up manpower costs and constraining the central bank’s scope to combat an economic slowdown with monetary easing.
“We are not getting any cheaper as a location and businesses are getting squeezed from all corners,” said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore. “We may approach a labor cliff in about eight years when the workforce starts to shrink based on current participation rates and population growth profiles.”
An Association of Small and Medium Enterprises survey shows more than eight in 10 companies are facing manpower shortages, while Singapore’s authorities said they rejected more foreigner work permit applications and renewed fewer existing ones in the first seven months of 2012. The labor-policy tightening and efforts to raise wages for service workers from nurses to cleaners have added to price pressures.
The central bank, which refrained from slowing gains in the currency in October even after the economy contracted last quarter, said this week Singapore’s economy will grow at below-potential levels for a second year in 2013 while a tight labor market and rising costs of goods and services will add to inflationary pressures. The island uses the exchange rate as its main monetary policy tool.
The economy is forecast by the government to expand 1.5 percent to 2.5 percent in 2012, from 4.9 percent in 2011.
“The Monetary Authority of Singapore has alluded that wage price risks are still there, which is one reason why policy cannot be loosened,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd. “The backlash would have been that they wouldn’t be able to do it preemptively or ahead of the curve.”
The Singapore dollar has climbed 6.1 percent this year, among the best performers in Asia, as the central bank refrained from joining neighbors from Thailand to the Philippines in easing policy to counter the faltering global economy.
In Europe today, a report may show U.K. construction output shrank for a third month in October, according to a survey of economists. Manufacturing in Italy probably contracted at a faster pace in October, a separate survey showed. In the U.S., a Labor Department report may show the nation’s jobless rate rose to 7.9 percent in October, according to economists surveyed.
Singapore’s tighter labor regime means the country will forgo 1.3 percentage points of growth this year in an economy that narrowly avoided a recession, Bank of America Corp. predicts. The island’s nominal gross domestic product has doubled since 2004 as the population grew more than 26 percent to 5.3 million.
The population explosion boosted property prices and strained transportation services in an island about half the size of Houston, fuelling public discontent that led the ruling party to its smallest electoral win last year since independence in 1965. The government responded to citizen dissatisfaction by imposing tighter regulations on the inflow of foreigners, while increasing its engagement with citizens on their concerns.
The crunch has led to scams including so-called phantom workers, where companies pretend to hire locals to boost their foreigner quota, while others falsely inflate wages to apply for permits in categories that are subject to less stringent requirements, the government said.
“The government is acutely aware that there are a lot of tradeoffs involved,” said Varathan. “It is a choice to bite the bullet and move a few rungs up on the productivity ladder because it’s going to be better for Singapore 20 years down the road, not just in two years.”
The foreign workforce excluding domestic helpers increased by 34,100 in the first six months of 2012 to 1.03 million, compared with a 79,800 gain for all of 2011, according to the Ministry of Manpower. Unit labor costs will probably rise 4 percent to 5 percent this year and 3 percent to 4 percent in 2013, the central bank said. It climbed 3.4 percent in 2011.
“Businesses are constantly complaining about a shortage of workers, and inflation and wage pressures are building,” said Chua Hak Bin, an economist at Bank of America. “Singapore is sacrificing opportunities and the costs would be larger when the world economy booms again.”
The economy would add about 36,000 more jobs this year than it is currently creating if the government accommodates employers’ demands for more overseas workers, Chua estimates.
The government is encouraging companies to turn to locals to fill the gap. Finance Minister Tharman Shanmugaratnam said in February the government will partially reimburse businesses for older Singaporean workers on their payrolls.
Singapore is subsidizing training for workers to upgrade their skills and make them more productive. It has also urged companies to implement flexible arrangements to encourage those approaching retirement age to stay at their jobs and entice women with families to rejoin the labor market.
The resident unemployment rate was 2.8 percent as of September, matching the lowest level since 2007. Sixty percent of residents who were retrenched in the first quarter found jobs by the end of the second, compared with 50 percent in the previous period, the Manpower Ministry said in September.
“The resident labor force participation rate has likely reached a record high in 2012 and there is probably limited scope for it to rise much further in the short term,” the central bank said this week. “Demand for low and mid-skilled workers will run up against a number of supply-side constraints.”
The government is persisting with its policy shift as it seeks to meet the goal it set in 2010 to at least double its productivity growth to between 2 percent and 3 percent annually until the end of this decade. In an interview with the Straits Times newspaper published last week, acting Minister for Manpower Tan Chuan-Jin signaled new areas his ministry will next target for tightening.
“The government is strenuously telling us there is no turning back,” said Kurt Wee, a vice president at the Association of Small and Medium Enterprises. “We have told the government they’re running a high-risk strategy that will eventually lead to higher prices for consumers and higher living costs. Policy has been pushed beyond what it should be and it’s getting vicious out there.”
Combined with the weakening growth outlook, the labor squeeze is set to crimp employment creation. A survey of 141 companies conducted in September by the Singapore Human Resources Institute and Remuneration Data Specialists Pte showed only 56 percent plan to hire next year. Job growth may halve to about 2 percent annually in the coming years, the Straits Times said today, citing Lim Swee Say, secretary-general of the National Trades Union Congress and a cabinet minister.
Chan of Pine Garden’s Cake calls the government’s actions a “horrible recipe.” His labor costs climbed to the equivalent of as much as 35 percent of sales from under 30 percent less than a year ago.
“When you have a piece of sugarcane and you continue squeezing it, by the end of it, you’ll have nothing left to squeeze,” he said. “That’s exactly how I would describe the situation in Singapore.”
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