The Singapore Model of Workfare: Three Suggestions

ETHOS Issue 03, Oct 2007

In a market economy, pay and volume of joblessness are jointly determined. Any policy, such as the Workfare Income Supplement (WIS) scheme, which affects a person’s pay will invariably affect the other factor, unemployment. In the current environment of rising property prices, upward revisions of medium-term growth forecasts, and declining unemployment, this point might seem moot. Yet, the establishment of Singapore’s fourth pillar of social security provides the opportunity to look much farther ahead, of some 20 to 30 years.

LONG-TERM RATE OF UNEMPLOYMENT

In my research, I found that based upon our historical experience from 1967 to 2002, the minimum growth rate of real Gross Domestic Product (GDP) required to keep the current unemployment rate from rising is 7.1%.¹ A more detailed analysis with Ho Kong Weng by sub-periods, however, showed that the minimum real GDP growth rate required to keep the unemployment rate steady fell from 9.1% for the period 1967 to 1984 to 6.3% for the period 1984 to 2003.² The pickup of the economy in the last three to four years, and the revision of growth forecast upwards to the 4% to 6% range over the next five to 10 years, may paradoxically set the stage for rising joblessness if growth fails to hit or exceed the high end of the forecast. If this analysis is correct, we may want to evaluate whether the WIS scheme is able to boost the pay of low-skilled workers as well as to reduce joblessness.

WIS: THREE DESIGN MODIFICATIONS NEEDED

The broad design features of the WIS appear to this writer to have the potential both to boost the pay of low-skilled workers and to expand their employment. The large presence of older workers in the current cohort of the less skilled workforce and retirement income inadequacy among older workers arising from increased longevity have led the Government to tune the WIS to boost pay and employment of older workers (i.e., over the age of 35). However, it is likely that in the future, some of its features may need to be tweaked.

With a view to shifting the demand to low-skilled workers, a larger portion of the income supplement should be given directly to firms that employ these workers. It is sometimes suggested that firms attach a social stigma to workers whose employment fetches a subsidy. There is no apparent reason why this should be so when the employment subsidy scheme is a national initiative. Moreover, it boosts workers’ sense of worth when they receive their full pay directly from their employers rather than from the Government.

The next point is the size of the subsidy to be paid compared to spending on workers’ retraining. An optimal policy very likely combines financial incentives with schemes for retraining, job redesign and job-matching. However, the latter schemes could involve significant administrative costs such as assigning more administrators to track and manage individual cases of those receiving training. Such costs ought to be factored into a cost-benefit calculation of how effective the last tax dollar is being spent to help low-wage workers but risk being left out since they are much less explicit.

The third suggestion is to extend the WIS scheme to any full-time worker receiving a low wage—regardless of age—so long as it is above the legal age to work. This will allow a worker to be integrated into the mainstream of work early in life and when he or she starts a family. This should help WIS fulfil a more comprehensive role as an effective fourth pillar in Singapore’s social safety net.

ABOUT THE AUTHOR

Hoon Hian Teck is Professor of Economics at the Singapore Management University. The views expressed here are his own. His research attempts to identify the determinants of unemployment. A 1992 paper co-authored with the 2006 economics Nobel Laureate, Edmund Phelps, entitled “Macroeconomic Shocks in a Dynamized Model of the Natural Rate of Unemployment”, published in the American Economic Review, reformulated the labour-turnover model of the natural rate to pay attention to dynamics. They studied the consequences of a low-wage employment subsidy scheme in a model of the natural rate in “Low-Wage Employment Subsidies in a Labor-Turnover Model of the ‘Natural Rate’”, in E Phelps (ed.), Designing Inclusion: Tools to Raise Low-End Pay and Employment in Private Enterprise (Cambridge: Cambridge University Press, 2003).

NOTES

Hoon, Hian Teck, “Future Job Prospects in Singapore,” in The Economic Prospects of Singapore, eds. Koh, Winston and Mariano, Roberto, (Singapore: Addison-Wesley, 2005, pp. 47–78).
Koh, Winston and Mariano, Roberto, “Distance to Frontier and the Big Swings of the Unemployment Rate: What Room is Left for Monetary Policy?”, Kiel Working Paper No. 1347, Kiel Institute for World Economics (paper originally presented at conference entitled “The Phillips Curve and the Natural Rate of Unemployment” organised by Kiel Institute, Kiel, Germany, June 3–4, 2007).

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