During the last couple of years it has been harder for lower skilled foreigners to get work permits in Singapore. A lot of small and medium sized firms are complaining about the difficulty of finding staff. The government is not changing the new policy. Is it doing the right thing?
One commonly heard argument is that Singaporean citizens are not interesting in jobs with long hours in retailing, restaurants or pubic transport, i.e. the locals are a bit lazy. This is not how an economist would describe the situation. The economist would simply say that the salaries are too low and if the salaries were increased, Singaporeans would be perfectly happy taking the jobs. International studies show that Singaporeans work very long hours in general, so I think the economist's argument is correct.
First order effects. So why are the employers so reluctant to increase salaries? There could be some greedy employers just out to squeeze as much as possible out of its staff. However, I do not think this is the norm. Let us look at the retailing sector. Any visitor to Singapore will find a lot of shopping malls. In fact, some even consider shopping the Singaporean favorite pastime. The more interesting observation is how empty many of the shops are most of the time. Once a retail outlet has bought an inventory, the key costs are staff cost and rental costs. When the staff cost was low, retail companies opened more outlets. This made the owners of shopping malls very happy since they could increase rent as well as build more shopping malls. However, the shopping mall owners need to get the balance right. If they build to much retail space, the rents will go down. So far the shopping mall owners have gotten the balance right. This is partly due to the government, which controls all land use, only releasing limited amounts of of land for retail use. Since land is a scare resource, the owners of the shopping malls have good bargaining power vis-a-vis the retail companies. Naturally, the rents reflect this power position. This is the reason why the image of a greedy retail employers squeezing its staff generally is wrong. If anyone should be labelled greedy, it is the shopping mall owners. However, bear in mind that greed is the very nature of the capitalist system. If you have market power you increase prices. Finally, to answer the question that starts this paragraph. The employers are reluctant to increase salaries because, on the whole, they would not be profitable if they did. Thank the shopping mall owners for having the retailers in a tight grip.
Second order effects. What I have outlined above are the first order effects of the new government policy; staff shortages and employers complaining. Let us now consider the second order effects. Second order effects are always more interesting. Higher staff costs means that the retail companies need to save costs. Retail space and staff are complements. If you reduce on you must reduce the other. Companies will reduce their need for more expensive staff, by cutting the number of retail outlets. This is perfectly possible because most shops are not overcrowded with people. The obvious second order effect is that there will be less demand for retail space. This will put downward pressure on rents. My conclusion is that people living in Singapore will shop just as much even with 10-20% fewer retail shops. So the retailers revenue will not change much. Staff cost will go up, but rental cost will go down (in relative terms at the very least). In fact, it is conceivable that the retailers total costs will shrink. The big loser will be the shopping mall owners. With 10-20% fewer retail shops, rents are likely to go down. How much is impossible to say. Rents are not likely to change much in prime shopping malls like like Paragon, Ion, or Ng Ann City, but are likely to drop in less attractive malls.
Productivity improvement. International comparisons shows that Singaporean salaries are generally low, but so is productivity. The government wants Singaporean companies to invest in skills upgrading and innovation to increase productivity. That is why they are making it more expensive to hire staff. The way this productivity enhancement will happen in retail is probably though smaller retail space; sales per square meter will increase and sales per staff hour will increase. In other sectors of the economy, the productivity enhancement might come through other means, e.g. automation, new technology. The new policy will create winners and losers so expect arguments on both sides to be put forward in the coming years. However, in my opinion, broadly speaking, the government's policy is correct.
Practical consequences. When relative prices change, there will be winning industries and losing industries. Within the industries there will be winning companies and losing companies. If I were an investor, I would look at the real estate companies in Singapore. The ones that are mostly exposed to the Singapore retail market will probably not do so well compared to the ones with more international operations. The retailers can adjust more quickly to the new environment. I would favour retailers that show signs of closing some outlets, possibly investing in technology to enhance productivity (e.g. self scanning in the supermarket), and naturally having a strategy that makes them unique in the eyes of the consumer, which has to go an extra mile to the nearest retail outlet.
Note to students. This blog entry has been written largely without data. That is a good starting point, but in your projects you also need to justify your statements with data. (The data might or might not support your initial viewpoint!) One important piece of data is the amount of retail space per capita in Singapore and some comparison countries. Finding the data is very easy, but the quality control you need to go through is very time consuming. A five minute search gave me some data on retail space per capita: Western Europe 2-5 sq feet per capita, US 25, Hong Kong 12, Australia 6, Singapore 11. It would take several hours to do the necessary quality control.
UPDATE. Amazon.com recently introduced free shipping on many products to Singapore. This is another factor that will reduce the need for shopping malls in Singapore.
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