In it is more difficult for firms

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In recent years, Singapore has
experienced rising unemployment rates and slowing economic growth. This,
accompanied by the influx of foreign workers, has been the source of dissent
for many Singaporeans. Thus, the government has placed emphasis on trying to
curb the influx of foreigners by moderating the growth of the foreign
workforce, evident from the decrease of foreign employment from 80,000 in 2011,
to 26,000 in 2015.

Measures that the government
has employed include the levy hikes for S-Pass and Work Permit Holders, reducing
the Dependency Ratio Ceilings and reducing Man-Year Entitlement quotas. These
policies have been effective to a certain extent, as seen from the fall in
foreign employment, but they present another set of limitations that the government
has to take into account. Levy hikes have proven to add to companies’ costs,
since the tighter dependency ratios already put a cap on the number of foreign
workers that firms can hire. This impacts the SMEs in Singapore to the greatest
extent, which could severely affect Singapore’s economy as local SMEs
contribute to nearly 50% of our GDP, while employing 70% of the workforce. Hence,
this more radical approach of auctioning foreign worker permits, similar to the
Certificate of Entitlement (COE) quota system, has surfaced as an alternative
way to decrease reliance on foreign labour, while encouraging better

Under the auction mechanism,
the price of foreign worker permits would mainly be decided by an open bidding
system. Firms have to bid for the different tiers of permits successfully
before they can employ foreign workers legally, just like how car buyers have
to bid for the COEs for different classes of vehicles in order to purchase
them. The direct effect is the decrease of the supply of foreign labour in
Singapore. This could then lead to the strengthening of Singapore’s social
fabric as well as a rise in productivity, due to several advantages the auction
mechanism brings.

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Firstly, the auction
mechanism drives up the prices for foreign worker permits, while causing the
demand for local workers to become more income inelastic. Due to the
uncertainty and fluctuation of the permit prices, it is more difficult for
firms to profit maximize in the long run, should they continue employing
foreign labour. Also, the existence of competition for foreign worker permits would
mean the surge in prices, as well as the cost of production for these firms. Thus
they would naturally turn to the close substitute of foreign labour – local labour.
The positive relationship in the cross elasticity of demand for these two
components implies the more than proportional rise in demand for local labour
when there is a rise in the price of foreign labour. Alternatively, firms might
also choose to invest in technology and innovation, to expand upon their productive
capacity, to cut down on manpower costs. This allows Singapore firms to become
more self-reliant, as well as increase the nation’s long run aggregate supply,
boosting economic growth.

Other than that, the auction mechanism
also generates greater government revenue from the rising permit prices. They
can then channel the additional revenue into investments in education and
retraining of the workforce. More supplements can be provided to schemes such
as SkillsFuture and WorkFare, allowing the upgrade of skills of the lower
skilled workers and preventing severe structural unemployment from occurring in
future. This is especially crucial in the ever evolving economy today, with
Singapore rapidly transiting from a manufacture-based industry to one that is
service-based, requiring more specialist skills that older workers may lack.
The auction mechanism presents a win-win solution as it causes firms to
reconsider employing highly skilled foreign workers, and at the same time improving
our local workforce and equipping them with the most updated skills tailored to
the needs of today’s economy. The trade-off between growth and unemployment is
thus minimized.

Then again, the approach of
auctioning foreign worker permits should not be treated too optimistically. There
are certain considerations to take into account in order to determine whether the
auction mechanism is regarded as a socially optimal way of improving the
employment rate as well as productivity in the Singapore economy. It may be too
general a method to raise productivity, as this universal method may have different
outcomes in different sectors. For instance, for service based companies, it
may not be the wisest choice to cut down on manpower as it involves the
judgement and analysis of humans that machines have yet to be able to achieve.
The sector thrives more on social exchanges, where experiences and knowledge
can be shared to breed productivity. In this case, the companies may not be influenced
to hire less foreign workers as the importance of social capital outweighs the
increase in price of permits, and these firms would run the risks of making
losses, which is detrimental to the economy. However, the manufacture based
companies could stand to gain from the auction mechanism as they focus more on
technological innovations, helping them to cut cost in the long run by
increasing efficiency with more advanced machines.


Categories: Industry


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