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Singapore’s competitive edge eroding

Hourly wage cost rise for production staff in 2006 was second highest among 33 locations in US study

(SINGAPORE) A shortage of talent is still the biggest headache for businesses in Singapore, but sharp pay hikes in recent years – on top of increases in rentals and other costs – are triggering concerns about the island’s competitive edge.

And this comes just as the US Department of Labor released data showing that American factories here have been among the hardest hit by the rising wage costs US manufacturers are facing in most of their overseas operations.

In US dollar terms, the hourly wage cost for production workers in Singapore – including contributions to the Central Provident Fund (CPF) – shot up sharply by 17.1 per cent to US$8.55 in 2006 (the latest year for which data is available), bouncing back from a 2.3 per cent dip in 2005. For 2007, costs in US dollar terms probably rose even more, partly due to the strengthening of the Singapore dollar against the greenback.

Only in Brazil, among the 33 overseas locations in the study, was the increase higher in 2006 – up 17.8 per cent to US$4.91, according to a study by the US Labor Department’s Bureau of Labor Statistics (BLS).

Pay in Singapore continued to shoot up in 2007. Polls taken showed Singapore workers have been enjoying the biggest bonuses in Asia in the past two years – and their pay, already higher than that in emerging economies, was rising just as fast as in these economies.

Economists and businesses acknowledge that the jump in pay reflects the tight local labour market, as employers up salaries to attract scarce workers. But the persistence and scale of the increases are leading bosses to keep a closer eye on wage movements. And some observers caution that if they continue, sharp pay hikes will hurt Singapore’s competitiveness.

‘Singapore doesn’t compete on wage costs,’ said Robert Prior-Wandesforde, an economist at HSBC Bank.

‘Nevertheless, there must come a point that the (wage increases) become problematic.’

According to him, Singapore’s manufacturing costs continued to rise sharply last year even as production dipped in the final quarter. HSBC estimated that the unit labour costs of manufacturing here went up by around 15 per cent year- on-year in the last three months of 2007.

‘By any standards, this is an extraordinary rise, particularly for such an internationally exposed sector and, if sustained, will seriously threaten the competitiveness of the sector,’ Mr Prior-Wandesforde said in a report released last week.

For now, according to Song Seng Wun, CIMB- GK’s research head, there is enough business for companies here to sustain higher salaries. Still, he cautions that they have to ‘watch out’ as the global economy grows more uncertain down the road.

Which is what many companies are already doing, although their main worry is still hiring enough staff to meet orders, according to Philip Overmyer, chief executive of the Singapore International Chamber of Commerce.

Yet, at least in the eyes of US manufacturers, the pay hikes in recent years could have blunted some of Singapore’s competitive edge.

‘Hourly compensation costs in Brazil, South Korea (15.5 per cent), the Philippines (16.2 per cent) and Singapore all showed double-digit growth in 2006,’ says the BLS in its study.

The compensation costs on a US dollar basis are often used as indicators of competitiveness of manufactured goods in world trade.

The BLS study shows hourly compensation costs for production workers in the US were flat at US$23.82 in 2006, while those in the 33 foreign locations in the study jumped 4.7 per cent. The result: manufacturing wages in these locations edged up to an average 82 per cent of the US pay level, up from 79 per cent in 2005.

Among the Asian Newly Industrialising Economies (NIEs) – Hong Kong, Singapore, South Korea and Taiwan – the hourly compensation increase for production workers was 9.5 per cent in US dollar terms, raising their wage levels from 37 to 42 per cent of that of the US.

Singapore’s hourly production wage level rose from 31 per cent in 2005 to 36 per cent of that of the US – the highest since 2000.

The stronger currencies of the 33 locations contributed 2.1 percentage points of the 4.7 per cent rise, while domestic wage jumps accounted for 2.6 percentage points.

‘The movements of foreign currencies relative to the US dollar in 2006 had an influence on hourly manufacturing compensation costs measured in US dollars,’ the BLS report says.

In local currency, the hourly production wage costs in Singapore surged 13.57 per cent in 2006, the study says. The Singapore dollar rose 4.8 per cent against the greenback that year.

‘Singapore doesn’t compete on wage costs. Nevertheless, there must come a point that the (wage increases) become problematic.’ – Robert Prior-Wandesforde, an economist at HSBC Bank

 

Source: Business Times 11 Feb 08

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