Tight Labor Market Squeezes Singapore SMEs

Tightened foreign employment regulations and low unemployment rates pose significant challenges to Singapore SMEs in face of competition against larger companies and MNCs.

Singapore has enjoyed a very low unemployment rate in the recent years as a result of its fast growing economy and the influx of foreign investment. According to the recent “Employment Situation, Third Quarter 2013” report released by the Ministry of Manpower’s (MOM) Manpower Research and Statistics Department (MRSD), the seasonally adjusted overall unemployment rate was 1.8% in September 2013, while the long-term unemployment rate remained low and stable at 0.7% of the resident labor force in June 2013.

The Singapore government has recently tightened several regulations governing foreign labor employment. These reforms were designed partly to ameliorate the increasingly vocal concerns of local Singaporeans over the competition they face against foreigners vying for higher status jobs, and partly to force productivity improvements in the economy. The objective is threefold: a) raise the minimum wage that must be paid to a foreigner, b) impose a levy on the wages paid to a foreigner, and c) reduce the “Dependency Ration Ceiling” which determines the maximum ratio of foreign workers to local workers in a business.

The already low unemployment rate in Singapore, coupled with the tightening of regulations for employment of foreign workers, has created a very tight labor market. While both small and large businesses face tough challenges ahead, the SMEs in Singapore could be fighting a more testing battle for reasons elucidated below.

Heightened Recruitment Challenges

SMEs have to compete with established local companies and multi-national corporations (MNCs) to recruit and retain talent. Most qualified locals prefer to work for large local companies or MNCs, so SMEs have to shell out more than the average industry pay to attract potential candidates. In addition to increased salaries, the standards of other benefits and work environment also have to be perked up in order to retain the recruits.

SMEs that are unsuccessful in recruiting locally are forced to look for potential candidates abroad. This has become challenging amidst the tightened regulations.  The higher qualifying salary and the accompanying levies are driving up the salary and compliance cost of hiring a foreigner.

SMEs often do not have sophisticated HR management practices; they resort to unfussy and straightforward arrangements with the employees. This affords them the flexibility of hiring and retaining workers from non-conventional sources, such as home-based workers, students and part-timers. However, such arrangements require sophisticated systems to track, record and monetize individual contributions. Micro-managing the payrolls and entitlements of such workers is tedious and time-consuming. Sometimes, work has to be restructured to accommodate the constraints of workers from unconventional sources, and this again hurts the overall productivity.

Increased Training Costs

Singapore employers have long lamented the shortage of technical and skilled labor locally. SMEs competing with large companies often recruit under-trained and under-skilled candidates. This calls for considerable resource allocation towards training, which again increases the business costs while also causing some lag in business productivity. Furthermore, the tight labor market makes it difficult to retain the employees once they have received the training, thus landing the SMEs in a vicious circle.

Reduced Profits

Wage inflation and spiraling rental and energy prices are causing business costs to spike. However, the red-hot economy of Singapore continues to attract many entrants to the market, which pose as strong local and regional competition to SMEs. In order to retain the customers and contracts, SMEs are forced to absorb such costs. This impacts their profitability, cash reserves, business plans and capital management.

Expansion Challenges

Businesses have to give up sourcing new orders or customers owing to the lack of manpower that hurts their delivery or turnaround time. Continuous expansions of business with limited manpower causes strain on the employee morale, and inevitably lead to attrition. Therefore companies resort to outsourcing or off-shoring some of their activities, which cause a further dent in their profitability.

Productivity Constraints

SMEs find it challenging to make their overloaded employees participate in productivity enhancement schemes and training. For SMEs that employ elderly workers, the challenge is compounded. Also, productivity initiatives require time to reap tangible and significant benefits as it involves substantial time for technology acquisition, training and workflow streamlining.

Some of the SMEs are likely deploying the suggested measures, such as productivity enhancements aided by technology, increased local workforce participation, work redesigning, etc. However, these measures are unlikely to fully offset the negative effects of the tight labor market. In addition to the prevailing challenges, the rapidly aging workforce poses another looming challenge. SMEs have to brace themselves for this silver tsunami that will strike soon, and which will alter the profile of the labor market. The tightening will aggravate with a significant portion of the workforce retiring and a significant portion of the workforce left with inadequate training and skillsets.

Their small size and inherent nimbleness are the relative advantages of SMEs, which they need to use to their advantage in this challenge. Although there are several government agencies such as EDB, SPRING that provide assistance to the enterprise sector at large, more focused and specialized agencies for SMEs capable of rendering industry specific guidance and assistance are the need of the hour.