Why productivity dip may compound inflation woes

Economic downturn paired with rising costs would hit firms, workers hard: NWC
Lin Yan Qinyanqin@mediacorp.com.sg

LAGGING labour productivity — while red-flagged by the National Wages Council (NWC) — appears to have taken a backseat this year to inflationary pressures that threaten to spiral out of control, according to some analysts.
And yet if the economy were to undergo a downturn, falling productivity could compound the problem for inflation-hit workers if their jobs are cut, they say.
"If the economy slows down and demand falls while costs continue to rise, profit margins would be squeezed — then low productivity would become a problem," said Dr Chua Hak Bin, the chief Asian strategist at Deutsche Bank Private Wealth Management.
"Job cuts would become serious because maybe firms have found that they have hired too many workers." .The tight labour market last year resulted in high wage costs as firms competed for skilled manpower, leading to a drop in productivity because each unit of output cost more to produce. In its recommendations and guidelines for 2008 and 2009 released on Friday, the NWC said that labour productivity growth declined from 1.5 per cent in 2006 to -0.9 per cent in 2007, due partly to the record employment gains last year.
The NWC noted that the growth in real basic wages outpaced productivity gains for the second consecutive year in 2007. While it was concerned about the emergence of this disturbing trend, it said that over a five-year period, productivity still exceeded the growth in real basic wages.
Real wages are wages adjusted for inflation using the consumer price index.
Referring to the fall in productivity last year, Singapore Business Federation president Stephen Lee said: "When we look at the trend, the gap between productivity and wage growth is now narrowing. We need to be more cautious. The only way to sustain wage increases is through productivity improvements." Others were more sanguine about the future.
Mr Robert Prior-Wandesforde, senior economist at HSBC, felt that continued hiring by employers reflected their optimism about the economy. "I think they are hiring in anticipation of growth and expansion. They could be worried that if the economy picks up, they might have difficulty hiring in a tight labour market," he said. "I don't think employers would be hiring if they were expecting a recession." In its recommendations, the NWC stressed the importance of improving productivity through helping workers acquire more skills and upgrading existing skills, as well as through job re-design and innovation.
Employers were possibly not doing enough of these, suggested Deutsche's Dr Chua.
"The Government has relaxed the terms for hiring foreigners, so maybe the incentive to improving productivity may not be that great, as firms can simply hire more from elsewhere," he said.
"Looking at the situation, it could be an indication that employers are not doing enough to bring up productivity."
In its statement accepting the NWC's guidelines, the Government said yesterday it would work with its tripartite partners to improve productivity and raise skills levels through the implementation of the Continuing Education and Training Masterplan.