Labour productivity dragged down by domestic sectors
Government's 'aspirational' target of 2-3 per cent annual productivity growth remains, says MTI

SINGAPORE's labour productivity has been weighed down by a shift in employment towards less productive sectors, with domestically oriented industries lagging far behind export-oriented ones. Still, the government's ambitious 2-3 per cent annual productivity growth target remains, albeit as an "aspirational" goal, said Ministry of Trade and Industry (MTI) Permanent Secretary Ow Foong Pheng on Tuesday.

According to a new MTI study, the productivity performance of export-oriented sectors has far outstripped that of domestically oriented ones. From 2009 to 2014, productivity growth of the former stood at 5.3 per cent per year on average - significantly ahead of the latter's 0.8 per cent.

The trends remain the same even if 2010's rebound - achieved when the economy recovered strongly - is stripped out. Between 2010 and 2014, the productivity of export-oriented sectors grew by 2.2 per cent per year on average, driven by the biomedical manufacturing, precision engineering, and transport engineering sectors.

In stark contrast, the productivity of domestically oriented sectors fell by 0.1 per cent per annum on average over the same period, with the sharpest decline seen in the retail trade sector.

The findings should not come as a surprise, said MTI economists Goh Tee Wei and Fan Shir Li, who co-authored the study. Apart from the fact that exporting firms must constantly improve their products and processes in order to compete globally, they note that "firms which are able to expand to overseas markets are likely to be more productive in the first place".

Compounding Singapore's low productivity is the fact that overall productivity growth continues to be dampened by a shift in employment towards less productive sectors, such as construction and food & beverage services.

In addition, capital intensity growth has slowed in more recent years, weighed down by a deceleration in machinery and equipment growth.

Labour quality improvements have also eased, due to faster growth in the number of less-skilled workers in the economy relative to skilled ones.

"The increase in less-skilled workers in recent years may in part be due to the manpower needs of the construction sector, as well as the entry of less-skilled Singaporeans into the workforce ... Less-educated Singaporeans have been encouraged to enter the workforce amid a tight labour market, possibly incentivised by schemes such as the WIS (Workfare Income Supplement)," said Mr Goh and Ms Fan.

Apart from the need to help companies to invest in capital and improve their technological and business process capabilities, the MTI economists said that their findings have two broad policy implications: "First, to boost overall productivity growth, there is a need for the government to continue to drive productivity improvements within the sectors, especially the domestically-oriented ones. Second, the government should continue with efforts to restructure our economy towards more productive sectors, and to equip Singaporeans with the skills to enter these sectors."

The findings seem timely, as productivity growth has continued to prove elusive. On Tuesday, MTI said overall labour productivity contracted 1.5 per cent year-on-year in Q4, marking the third consecutive quarter of decline. For the whole of 2014, labour productivity contracted by 0.8 per cent - a reversal of 2013's 0.3 per cent growth.

Said Mrs Ow: "We will continue to redouble our efforts on a sector-specific basis ... When the ESC (Economic Strategies Committee) set those targets (of 2-3 per cent annual productivity growth over the decade), they were actually aspirational targets - something to strive for - and we'll continue to strive for that."