Oct 3, 2009
JOBS CREDIT SCHEME
Extend and sharpen this precision weapon
By Tan Khee Giap, For The Straits Times
THE Jobs Credit scheme (JCS), introduced in the Budget this year to encourage companies to retain headcount during the recession, has attracted some controversy. Some have even questioned whether it is justified or effective.
It is useful here to review the primary rationale for the scheme. By assessing the direct and indirect policy outcomes of the scheme, we can arrive at a better conclusion as to whether it should be renewed or modified going forward.
I propose that the scheme be extended by six months, perhaps with a possible extension of another six. To begin with, the scheme should best be viewed as an innovative effort by the Government to help absorb, in part, the variable costs of companies through wage subsidies. This was done to ease the pain of potentially large-scale unemployment and the associated long-term adverse social repercussions for Singapore’s lower-income groups.
The scheme is not meant to stimulate private consumption. The consumption multiplier effect for the targeted lower-income groups – the increase in gross domestic product caused by higher spending – is hardly significant. Moreover, the global financial and economic crisis that buffeted the Singapore economy late last year was due to a decline in external demand for manufactured goods from major developed economies. It will be futile for an open economy like Singapore to prop up domestic consumption.
Theoretical economists would argue that persistent government policies to subsidise prices would generally distort the free market’s resource allocation mechanism and erode the long-term competitiveness of an economy. This argument is correct, but only to an extent.
The JCS, however, is not a long-term policy. Rather, it is a one-off, short-term scheme, the extension of which is subject to review. As such, there should be minimal concerns about distortion and an erosion of competitiveness.
Singapore is one of the most open trading nations in the world. When high unemployment is caused not by the lack of productive efficiency but by exogenous shocks such as a drop in external demand, it behoves the Government to mitigate, if not overcome, such problems.
After years of fiscal prudence, the Government possesses ample fiscal resources to cushion the pain of unemployment amid external shock. The JCS is also sorely needed and timely for small and medium-sized enterprises (SMEs), which contribute 54 per cent of the total employment in Singapore.
It is one thing to offer up highly articulate theories about the need for the unfettered functioning of free markets. It is quite another for free-market fundamentalists to overlook the pains, stresses and social repercussions of high unemployment in a non-welfare-driven economy like Singapore. Lower-income groups have very little financial buffer when their sole breadwinners lose their jobs.
The JCS should also not be interpreted as a policy designed to narrow income disparities, nor as a de facto bonus or pay rise for low-income employees. They may well emerge as indirect policy outcomes, but they were not intended as such.
The JCS comprises a 12 per cent wage subsidy to resident employees earning monthly salaries of $2,500 and below. It is funded through the country’s reserves. It is superior to an across-the-board Central Provident Fund cut, which would have benefited employers at the expense of employees, reduced job losses at the margin, and altered the wage disparity between local and foreign employees.
Admittedly, some companies predict a further deterioration in their business environment and might succumb to retrenchment or factory closures. For such firms, the JCS is a precision weapon – it helps save jobs. That said, however, the weapon can do with even more precision.
Looking ahead, a modified JCS should discriminate between big corporations and SMEs in terms of the percentage of wage subsidies. Wage cost as a proportion of total costs for big corporations and SMEs varies significantly – about 15 and 40 per cent respectively. Such a targeted approach will not be administratively cumbersome since there are working definitions for their determination.
According to studies done by the Nanyang Technological University’s Asia Research Centre, concerted and consistent expansionary budgets by various governments have resulted in earlier-than-expected signs of global economic recovery.
That said, it would take at least three years before the global unemployment rate eases back to natural or ‘normal’ rates. Globally, another round of economic restructuring is occurring, with factories being relocated from expensive to cheaper production bases. A return to robust growth will take time.
Amid such shifts, Singapore has not been spared. Potential economic growth of 5.5 per cent for Singapore would return only by 2011. Unemployment would remain higher than the natural rate of 2 per cent for the next three years. Some production activities which Singapore lost are lost forever.
In summary, the Government should take a macro view on a possible extension of JCS by reviewing Singapore’s economic performance going forward. At the micro level, it should also be mindful of the plight of low-income groups, and how potential unemployment could affect them.
Continuation of the JCS for another six months – perhaps for slightly longer – would be welcome by all. It will also make another round of off-budgetary stimulus quite unnecessary.
The writer is an associate professor of banking and finance and co-director at Asia Research Centre, Nanyang Technological University.
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Oct 3, 2009
JOBS CREDIT SCHEME
Keep, scrap or tweak?
D-Day is approaching for the Jobs Credit scheme. Should it be extended, amended or suspended? Insight discusses the $4.5 billion question.
By Goh Chin Lian, Senior Political Correspondent
BRACE yourself for the answer to the $4.5 billion question in 10 days: Will the Jobs Credit scheme be extended beyond December? Will it be tweaked, phased out or scrapped?
Whatever announcement Prime Minister Lee Hsien Loong will make at the labour movement’s Ordinary Delegates Conference will surely be scrutinised to the last letter and comma as it will have a far-reaching impact on the economy and employment.
The scheme was introduced by the Government in January to help companies hold on to workers by defraying part of the local workers’ wage bill. This is achieved by paying employers 12 per cent of workers’ wages for the first $2,500 a month.
Nine months on, economists agree that the scheme has achieved its aim of averting large-scale layoffs and high unemployment among Singaporeans.
Associate Professor Tilak Abeysinghe from the National University of Singapore (NUS) has estimated it could save more than 120,000 jobs over three years.
He believes the scheme and other government measures worked: ‘Given the severity of the contraction in production and exports, we would have expected a much bigger crunch in the labour market than what we have observed so far.’
Layoffs this year are unlikely to reach the high of 30,000 in the 1998 Asian financial crisis, according to labour chief Lim Swee Say.
The resident unemployment rate this year is also comparable to the 1998 situation, even though the recession then was less severe, noted Singapore Management University (SMU) economist Hoon Hian Teck.
The unemployment rate in March this year was 4.8 per cent and in June, 4.6 per cent. It was 4.2 per cent and 3.7 per cent respectively a decade ago.
Officials forecast the economy to contract by 4 to 6 per cent this year. In 1998, the economy shrank 1.4 per cent.
Professor Hoon is convinced that the scheme helped workers ‘keep their jobs in the face of one of Singapore’s sharpest recessionary shocks’.
It also enabled firms to retain skilled workers, so that they could ramp up production quickly when orders started coming in again, says the chairman of the Government Parliamentary Committee for Manpower, Madam Halimah Yacob.
The deputy secretary-general of the National Trades Union Congress adds: ‘We hardly hear of any cases where companies default on CPF payments.’
But with the economic turnaround, rising property and equities market, and growing bullish sentiment, critics are asking if the scheme has lost its rationale and outlived its usefulness.
At $4.5 billion, the amount is equivalent to 2 per cent of Singapore’s Gross Domestic Product (GDP), or 50 per cent of total corporate taxes paid.
As Dr Randolph Tan of Nanyang Technological University (NTU) notes, keeping the scheme for six more months could cost another $1.8 billion. This is based on the third quarterly payout of $890 million last month, to more than 100,000 employers.
No less than Mr Ngiam Tong Dow, a retired Ministry of Finance permanent secretary, has criticised the scheme publicly on at least three occasions this year.
In his view, a wage subsidy is unsustainable if workers here are not as productive as their peers in other countries.
The Government should cut employers’ CPF contribution rates to give bosses more flexibility to restructure businesses and lay off workers, he argues.
Firms that cannot do so would fall by the wayside. ‘But this is better than giving uncompetitive enterprises a short reprieve through Jobs Credit,’ he says.
To him, the scheme is also misconceived in trying to stimulate consumption, given the leakages that would occur in an open economy like Singapore’s.
Others like former Nominated MP Siew Kum Hong panned the scheme as a handout to businesses, at variance with Singapore’s anti-welfare philosophy.
He was against firms that were performing well, or which had no plans to retrench, reaping a windfall from the scheme.
In a survey of more than 2,000 small and medium enterprises between April and June this year, 88.7 per cent said they would use Jobs Credit to offset operating costs or increase their cash position.
But 11.3 per cent said they would pass it on to employees as a one-off bonus or a moderate increment to wages.
One example was Maybank Singapore, which used Jobs Credit to pay about 400 employees 0.5 to 1.5 months’ pay in bonuses, on top of a 2.5-month bonus agreed with the union.
NUS economist Shandre Thangavelu expects more wastage or ‘fiscal deadweight’ if Jobs Credit continues next year. More companies would be back on their feet and would retain their workers even without the scheme, he argues.
Keeping it as the economy recovers may further distort business decisions and erode economic competitiveness.
As Associate Professor Thangavelu puts it, companies may drag their feet with productivity improvements knowing they can still fall back on the wage subsidy to reduce operational costs.
Firms may delay shedding workers and not restructure as quickly to compete in new, growing markets, cautions Dr Tan.
Another distortion, according to SMU’s Assistant Professor Davin Chor, is that companies would hire more workers than they normally do, and choose more labour-intensive production methods over more capital-intensive technologies that boost productivity.
Overall, however, the predominant view among the people interviewed is that the scheme is still needed and that businesses still need a shot in the arm.
Dr Tan Khee Giap of NTU argues that as Jobs Credit is temporary, ‘concerns on distortion to economic resources, business decisions and erosion of economic competitiveness should be minimal’.
Singapore National Employers Federation (SNEF) executive director Koh Juan Kiat stresses that bosses look at long-term prospects in making staffing decisions.
‘There were companies which still retrenched as planned due to restructuring despite the scheme. So the Jobs Credit scheme is unlikely to hinder corporate restructuring,’ he says.
As for the charge that the scheme was aimed at stimulating consumption, Dr Tan Khee Giap says that was not its aim.
Finance Minister Tharman Shanmugaratnam had explained that the Government was giving Jobs Credit to all businesses, including profitable ones, to keep the scheme simple.
It did not want to prescribe the use of Jobs Credit, he said, as no matter how businesses spent it, ‘the money will have a multiplier effect on the economy and go towards supporting jobs’.
It is, of course, no surprise that employers and trade unionists want the scheme to be extended. They say that they still have to grapple with economic uncertainties.
Companies are unable to project business conditions beyond three months, according to SNEF’s Mr Koh.
While more firms are hiring now, he notes, there were three job seekers for every job vacancy in June this year, compared with nearly one for one a year ago.
Among trade union leaders, the mood is cautious. Noting that recovery is uneven across sectors, they say that orders are still not coming in as early as before the global crisis. In electronics, there are no confirmed orders beyond December. In the metal industry, visibility is just one month ahead.
Mr Lim said this week that union leaders are concerned that the outlook is uncertain and want the scheme to be phased out in stages.
Madam Halimah concurs: ‘If we pull the carpet from under the companies too soon, it could impact them adversely. These are sound companies that just need a bit more time to be on an even keel after such a severe downturn.’
Three economists think that short of clear signs of strong growth, Jobs Credit should go on for at least six more months.
Although the downturn has bottomed out, they note, recovery will be slow. Past international experience shows that in a recession with deep roots in the financial sector, recovery tends to be U-shaped than V-shaped, says Prof Hoon.
Citing a finding, he says that Singapore’s economy would need to grow 7.1 per cent just to keep its unemployment rate constant. With growth expected to be slower, unemployment will rise.
By Dr Tan Khee Giap’s estimate, it will take Singapore until 2011 to return to its potential growth of 5 per cent, while unemployment will be higher than the 2 per cent natural rate for the next three years.
Signs of a global recovery may also not be permanent, as economies are propped up by expansionary fiscal policies, warns NTU economist Chew Soon Beng. ‘If every country removes its expansionary policy, recovery may be retarded,’ he says.
This is on top of weak production and consumer demand in Singapore’s key markets in the United States and Europe.
Says Prof Hoon: ‘It seems prudent to keep the Jobs Credit for another year until clear signs of strong growth are evident.’
Dr Tan Khee Giap favours a six-month extension to give ‘breathing space’ to small and medium enterprises (SMEs), and resident employees.
Another emerging view is to extend the scheme, but minimise the wastage and give more effective help by targeting troubled industries and vulnerable groups of workers.
While Jobs Credit was designed to put money in the hands of all businesses quickly and to be simple to administer, economists say the initial urgency to forestall massive retrenchments has eased.
Dr Tan Khee Giap believes SMEs should get larger wage subsidies than big corporations as their wage cost makes up 30 to 50 per cent of total cost, compared with 10 to 15 per cent for the big boys. SMEs also employ nearly six out of 10 workers here, he notes.
Associate Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy agrees that troubled sectors like manufacturing deserve more help: ‘It’s not that they are uncompetitive. It’s the general depressed state of the market.’
Implementation may be more complicated. The creators of Jobs Credit wanted to focus support on viable firms that may be making losses but may grow in the future, but found no way to identify them.
Another group are low-skilled, low-income workers who are more vulnerable than their higher-earning colleagues.
Jobs Credit is pegged at 12 per cent of the median wage of $2,500, to benefit low- and middle-income workers.
But employers get $120 for a worker who earns $1,000 a month, less than half the $300 for someone earning $2,500. Prof Hui suggests giving employers a fixed sum of $200 for all workers.
Madam Halimah wants to extend Jobs Credit only to those who are willing to hire women seeking to rejoin the workforce, re-employ seniors and train workers.
‘The concern is that as the economy improves, employers will pull back on workers’ training,’ she says.
Given the enormous drain on the public coffers, no one expects the scheme to continue indefinitely.
What they wish is a gradual phasing out of the scheme. For example, union leaders in manufacturing hope it will be phased out in stages, in case the recovery takes longer to gather strength.
Prof Chor says a gradual withdrawal will give companies time to adapt, particularly those with short-term cash-flow problems.
The Government must also make clear the scheme is a temporary measure, and announce when it will be withdrawn. ‘That way, businesses would get the message and start planning ahead,’ says Prof Chor.
Prof Thangavelu says that even as Jobs Credit is withdrawn, the Government may consider other help that could strengthen the recovery process. This includes a focus on training workers and improving technology adoption among businesses.
Ultimately, the Government must decide when to let the market take over fully. This will involve job losses, but the pain of restructuring is necessary to position Singapore’s economy for the future.
As the International Monetary Fund noted in its World Economic Outlook report on Thursday, the challenge of governments is to map a middle course between two scenarios.
One scenario is that of unwinding public interventions too early, ‘which would jeopardise the progress made in securing financial stability and recovery’.
The other is leaving the measures in place too long, ‘which carries the risk of distorting incentives and damaging public balance sheets’.
It is with these considerations in mind that PM Lee and the Cabinet will decide on the future of a monumental scheme that helps save thousands of jobs and businesses, but costs billions in taxpayer dollars.
chinlian@sph.com.sg
What experts say
SCHEME SAVES JOBS
Professor Tilak Abeysinghe from NUS estimates the Jobs Credit scheme could save more than 120,000 jobs over three years.
KEEP IT FOR ANOTHER YEAR
SMU’s Prof Hoon Hian Teck says it is prudent to keep the scheme for another year until clear signs of strong growth are evident.
EXTEND IT FOR SIX MONTHS
NTU’s Dr Tan Khee Giap favours a six-month extension of the scheme to give ‘breathing space’ to small and medium-sized enterprises.
Email, SMS your insights
Should the Jobs Credit Scheme be extended beyond December? Or should it be scrapped in view of the economic recovery?
E-mail your views to stpol@sph.com.sg or send an SMS to 9827-7514. For SMS messages, type stpol followed by space, your name and then your message.
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