Thursday, November 13, 2014

Can Singapore's Labour Productivity Improve Much Further?

Not a day passes without an exhortation from our government to increase productivity (especially labour productivity). So how is labour productivity usually measured? It is: Total Output /Total Man Hours Worked. Total Output of a country is its Gross Domestic Product (GDP), which is the Value Add of the economy without double counting outputs which are also inputs to another activity.
The charts below show statistics on average daily wage cost (US$) and Labour Productivity in Manufacturing (US$) of ASEAN countries plus China 
Chart 1 shows two types of column bars representing average daily wage cost and labour productivity both measured in US$. *Numbers taken from McKinsey Global Institute. This chart roughly shows that Wage Cost and Productivity have a very strong correlation. That is, higher productivity goes with higher wages and vice versa, though we are not saying whether it is the tail that wags the dog or dog that wags the tail.
But Chart 2 gives more insights. Here I have divided Productivity by Wage Cost so that we now standardize everything into a ratio. Thus, the higher the Productivity, and the lower the wage cost, the bigger will be the ratio. This ratio therefore serves to highlight Productivity taking into account Wage Costs
We see that the chart now looks quite different. Malaysia ranked third in Chart 1 but now ranks fourth. Philippines was fifth in Chart 1 but is now fourth. But most importantly, China is now almost equal to Singapore (2.03 and 2.16 respectively). And Singapore may be tops, but taking into account wage costs, the difference with the other countries is not so overwhelming. Malaysia, Thailand and the Philippines are about equal, behind which we have Indonesia and Vietnam.
These two charts illustrate that businesses cannot make decisions to invest just based on absolute $ Wage Cost. More importantly- is the wages paid justified by how much the worker can produce. Currently, it looks like Singapore workers are still very much ahead in terms of Labour Productivity. But workers in China are catching up fast.
Then of course we have the question of by how much more can Singapore increase its productivity. Labour Productivity is dependent on a multitude of factors, aside from the worker’s skills. It depends on the machines and equipment that supports the worker, automation and the use of IT to increase efficiency, the state of the country’s transportation and logistics infrastructure, laws and regulations, educational system, etc. All these are ‘provided by the country’s government’ and built up over the years; and it is these that the newly developing economies (like Myanmar) lack, therefore making their labour productivity very low. 
In that sense, Singapore has already plucked the low-hanging fruit and it is difficult to sustain a high level of growth in productivity. China too, has already made fantastic progress on these factors. However, we have to remember that these numbers are only about Manufacturing productivity. In modern economies, Manufacturing seldom account for more than 20% of GDP. Services is the dominant sector. Even for Manufacturing, many modern manufacturers provide services for their manufactured goods. It is no longer enough to sell a customer a product. You have to service the product be it a car, an aircraft, computers or factory machinery. It is much more difficult to increase productivity in Services e.g. F&B, hairdressing, music and the Arts; where there are limits to automation, mechanization, economies of scale, and standardization.

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