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Chapter 1
Labour Markets and Competitiveness
The purpose of this chapter is to discuss various issues relating to the labour markets. These issues which will dictate how firms, workers and governments react in the labour markets will be examined with explicit theoretical models in the book. But first, let us look at the nature of labour markets.
Is It Important to Study Labour Markets?
Labour economics is the study of labour markets, how economic agents value between leisure and work, and how firms engage employees against the backdrop of more efficient use of technology, how labour unions choose to either work with the management/government or bargain with the management/government, and how public policy affects labour markets.
Human society now regards work as essential. Without work, there is no income and there is no life for most people. Work defines our identity. So we cannot be happy without work. Substantial amount of our time is spent on work.
Work is the outcome of decisions of the people looking for work, of the firms employing workers and of the government regulating the labour markets. Economic agents will do the utility maximization exercise to find work. Firms will employ workers on profit maximization motive. And public policy can affect creation of work and how work is remunerated. There are too many examples of how poor public policy destroys investment leading to high unemployment rate. Too many governments reward their public sector employees with a generous pension scheme that bleeds the government coffers. With a sustained wrong set of public policy in the labour markets, ordinary citizens are the losers.
To complicate the matter, there is principal-agent problem and asymmetric information in the labour markets. This is why it is important to analyze how firms deal with these issues, how workers shirk work duties if they can avoid detection, and how public policy can influence labour market outcomes.
Are Labour Markets Unique?
Labour markets are the same as other markets in the sense that they are determined by the buyers and sellers. But labour demand and supply of labour are very different from product demand and product supply, although they are related.
Labour demand is a derived demand. When the demand for product falls, the labour demand in producing that product will fall. This is why trade negotiations are important. When there is less trade, there will be less demand for the products and hence less labour demand and unemployment rate will be high.
Labour demand is demand for labour services. Labour demand is not the same as demand for slaves. As labour services are performed by workers, workers have to deliver the labour services personally. This means working conditions are important. However, valuation of working conditions varies from person to person. For instance, some people like jobs which involve more risk. Others like to work in an enclosed room e.g., air-conditioned work places. Jobseekers would ask for wage compensation if working conditions are not conducive. This implies that wage demand may vary although the nature of work is the same.
Labour services cannot be hoarded. If you do not work on a day, you cannot work the next day to recover the lost labour markets services for the previous day. Of course, if you do not work on a day, you can enjoy leisure. But utility is higher if the outcome is a choice rather than lack of choice. Hence, there is more urgency in the labour markets compared to most markets.
At the macro level, the wage share out of GDP is generally in excess of 50% in advanced economies although this percentage declines due to changing technology. Technology makes work more efficient and reduces the number of workers per unit of output. Although one would argue there is a scale effect, meaning we produce more and hence demand for labour is not much affected, many researchers have found evidence that middle income jobs have disappeared.1
If there is less work, where can people find income to sustain life? If technology can make the society rich, and if technology can aid the government to tax the rich effectively without chasing them away, then there is an upside to using technology in a big way. With rich coffers, the government can implement a social safety scheme to allow the workforce to work only, say, four hours a day for a four-day week per person and at the same time, the workers can have enough purchasing power to pursue leisure and other utility yielding activities including learning, we all will embrace technology. There will be a win–win outcome for inventors, entrepreneurs, general public and the government. And no one would complain about the extent to which technology makes people redundant. At this point in time, we do not see this happy outcome coming. Indeed, the evidence consistently shows that technology widens income distribution. The role of government is even more important. But we need smart government and not big government.
If a country is on fixed exchange rate regime, the government can hide bad economic management by artificially selling foreign assets to support the home currency. But when the country does not do well, the government cannot hide bad economic indicators as labour markets indicators will reveal the bad economic outcome and most citizens would know as they would feel the impact of bad economic management in the labour markets. Voters increasingly do not tolerate high unemployment rate. At the same time, in a parliamentary system, the political candidates would propose populist policy in the labour markets. The country may end up with high unemployment, high labour cost, low GDP growth and a big budget deficit. All these would cause the home currency to fall. A vicious cycle will develop.
In sum, when a country has not performed well, the labour markets cannot perform well as unemployment rate will be high. At the same time, bad labour market policy is generally the reason why the country has not performed well economically. In other words, labour markets’ developments are both symptoms and causes of economic development.
Table 1.1 shows the unemployment rate for selected countries.2 Among high income countries, Singapore’s unemployment rate is the lowest. The low unemployment in Singapore is by design and not by chance. The latter chapters of this book are devoted to examine the costs and benefits of Singapore’s strategy in developing a world-class labour market.
Table 1.1:Unemployment Rates of Selected Countries
| Country | Unemployment rate in 2014 (%) |
| United States | 6.20 |
| United Kingdom | 6.10 |
| Germany | 5.00 |
| Greece | 26.5 |
| Japan | 3.60 |
| Hong Kong SAR, China | 3.30 |
| Taiwan | 3.96 |
| Singapore | 2.00 |
| Malaysia | 3.20 |
| China | 4.10 |
| Korea, Rep. | 3.50 |
Sources: Greece, Germany, Japan, US, UK: Eurostat (2015). Unemployment rate by sex and age groups — annual average, %. Retrieved from http://appsso.eurostat.ec.europa.eu/nui/show.do
Hong Kong: Census and Statistics Department (2015). Labour Force, Unemployment and Underemployment. Retrieved from http://www.censtatd.gov.hk/hkstat/sub/sp200.jsp?tableID=006&ID=0&productType=8
Taiwan: The Straits Times (2015). Taiwan’s 2014 unemployment at seven-year low: Govt. Retrieved from http://www.straitstimes.com/asia/east-asia/taiwans-2014-unemployment-at-seven-year-low-govt
Singapore: Ministry of Manpower (2015). Summary table: Unemployment. Retrieved from http://stats.mom.gov.sg/Pages/Unemployment-Summary-Table.aspx
Malaysia: The World Bank. Unemployment, total (% of total labor force) (modeled ILO estimate). Retrieved from http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS
China: Business Insider (2015). China’s urban unemployment rate fell. Retrieved from http://www.businessinsider.com/r-china-says-unemployment-rate-eased-to-405-percent-at-end-first-quarter-2015-4?IR=T&
Korea: OECD (2015). Short-Term Labour Market Statistics. Retrieved from http://stats.oecd.org/index.aspx?queryid=36324#
Labour Cost, Business and Profitability
There is news, very often, in popular media that report some firms have done well because they can employ cheap labour. On the other hand, we also hear of reports that other firms have done well because they pay their workers well.
Both can be right. But looking at the wages is like looking at one side of the coin. We need to examine the other side of the same coin. We all know that firms want to make a profit as expected. Firms can make a profit provided the wages can bring revenue to the firms in sufficient quantity. Hence, I propose that we look at unit labour cost (ULC) which is total wage cost over output (value added). Firms can be competitive if ULC is not high. When firms use cheap labour, the wage cost is low and ULC is not high if quality of the workers is acceptable. But cheap labour can hurt the firms if the workforce cannot produce sufficient output or in some cases, there may be a fall in output due to poor quality of the workforce, causing ULC to rise. On the other hand, when firms pay high wages and they are able to get good value from these high wage workers, then ULC is not high.
Similarly, we can analyze competitiveness in terms of unit business cost (UBC). Singapore is an expensive place to do business because total business cost is very high. The fact that many firms find Singapore still a good place to do business is because of the competitive ...
