Moderate Wage Growth In Tight Labour Market

Despite a tighter labour market, wage growth in Singapore is expected to stay moderate for the rest of this year, dampened by weak productivity gains and the difficulty some businesses face in passing on costs to consumers, the Monetary Authority of Singapore (MAS) said yesterday.

“Short-term wage dynamics in the economy appear to have been buffeted by opposing macroeconomic forces. While the constraints on labour supply ought to have led to a stronger wage response to increased hiring, moderate economic activity and a weak productivity performance in the near term could have dampened wage expectations,” the central bank said in its semi-annual macroeconomic review.

“Hence, although wage growth is expected to pick up in this year amid the tight labour market, it is unlikely to exceed the historical average of 3.7 per cent,” it said.

The steady rise of part-time workers in the resident workforce, a higher proportion of jobs in sectors with lower average pay, sluggish conditions in the export sector and weak labour productivity had resulted in a slowdown in wage growth to 1.6 per cent in the second half of last year. This was down from 3 per cent in the previous six months and the 10-year average of 3.7 per cent.

The MAS said wage gains in the coming months will remain uneven across sectors. Those in the accommodation and food services sector, retail trade as well as administrative and support services will probably enjoy larger gains, as vacancy rates in these areas have been high. The healthcare and financial services sectors will also probably see more hiring, while the construction sector and manufacturing will see smaller employment gains.

The central bank said some businesses have found it difficult to pass on rising labour costs to consumers, especially in segments where there is intense competition, such as retail and holiday travel. And with global oil prices expected to stay well below the previous year’s levels despite the recent gradual recovery, economists said the Consumer Price Index (CPI) will continue to fall, after having recorded five straight months of declines since November.

“There has been a cut in electricity tariffs, so core inflation is expected to moderate quite a bit. We expect it to be down to around 0.5 per cent by July or August before picking up a bit from there,” said Credit Suisse economist Michael Wan.

The MAS said core inflation is expected to range from 0.5 to 1.5 per cent for this year, while CPI-All Items inflation is forecast at between minus 0.5 per cent and 0.5 per cent, reiterating the forecast in its mid-April policy statement.

The expected softening of Certificate of Entitlement bids and housing rentals will continue to keep private road transport and accommodation costs in check. Meanwhile, the suite of budgetary measures such as the reduction in concessionary foreign domestic helper levy, one-year road tax rebates and abolition of national examination fees will also alleviate inflationary pressures.

Despite the expected fall in consumer prices in the coming months, economists noted that domestic consumption remains firm: A signal that the Singapore economy is not in distress.

“We have to remember that a lot of the fall in consumer prices is the result of administrative measures and low oil prices. Together, the items affected by these factors form a large portion in the CPI basket, so they are dragging down prices. But taking them out, the other components in the basket are still seeing prices going up, so the economy is not in the doldrums,” said UOB economist Francis Tan.

“This is not a permanent situation. The base effect due to these factors will wear off, oil prices are coming back up, people are still consuming, wages are still growing steadily although at a slower rate — so it will pass,” he added.

The central bank said in the report that wages could rise more sharply next year, especially if economic conditions improve and the unemployment rate falls further.

“Next year, inflation is expected to rise as global oil prices pick up and the effects of budgetary measures dissipate. At the same time, the labour market will be tight. The risk remains that underlying domestic cost pressures in the economy could mount, leading to stronger cost pass-through to consumer prices, especially if economic conditions improve,” said the MAS.



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