digital transmission networks and had teleconferencing facilities. In 1989, there was a nation-wide Integrated Service Digital Network in operation. In 1991, World Competitiveness Report gave Singapore 96.67 out of 100 for overall quality of its telecommunications infrastructure.
Fig 3.3 : Rate of Labour Productivity Increase (Percent) (Per Man Measure)
Manufacturing Services
Source: Same as Fig 3.1
One is that perhaps, since the early 80s, the bidirectional causality3 between the growth of the two sectors took effect in the close relationship between the rates of productivity changes in the sectors. Second, and relatedly, is the consequence of economic restructuring in 1979 as a reinforcing factor. The National Wages Council recommended that wages be increased to induce movement from labour intensive manufacturing to capital intensive manufacturing activities. This caused the manufacturing sector to gear up towards higher value-added activities, which can be expected to increasingly require the support of the services sector. Third, both services and manufacturing have tended to become more capital intensive over time as labour shortages since the late 70s have caused labour costs to increase.
In general, services sector labour productivity growth showed smaller fluctuations than that of manufacturing. Elfring (1989:435) gives two reasons for the relatively limited cyclical responsiveness of services. First, it is likely that there is more disguised unemployment in services, especially among the self-employed. Second, the flexibility of the compensation system is higher in services because of commission payments in many sales activities and flexibility of incomes of the self-employed. As Singapore is involved very significantly in tradeable goods, it is very vulnerable to external demand and hence manufacturing output can be expected to fluctuate. Although Singapore’s export of services is also significant, there is often a tendency to hoard labour in the services sector as firms are reluctant to lose workers who have firm-specific knowledge.
3 Section 2.4 of this study showed that there was bidirectional causality between the growth of the services and manufacturing sectors over 1960-1994.
A summary of the per man labour productivity growth rates (Table 3.2) shows that in the earlier periods, especially 1973-80, the services sector productivity growth was higher than that of manufacturing. There was however, a minor slowdown in the productivity growth rate in the service sector; whereas, that of the manufacturing sector showed continued acceleration.
Table 3.2 : Average Annual Growth of Labour Productivity Per Man (Percent) Time Period Manufacturing Services
1973-1980 0.65* 4.72
1981-1988 4.24 4.30
1989-1996 7.04 4.26
Note: * This low value is due to the very low productivity growth rates in a number of years, e.g. 1973, 1974, 1978 and 1980.
Source: Same as Fig 3.1
The productivity slowdown in services identified above is similar to that found in developed countries like the US, the UK and Canada. But Sabolo (1975:96-108) is less convinced and argued that labour productivity in the services sector can grow rapidly, and provides detailed evidence relating to a large number of countries. Leveson (1985:100) also gives evidence of accelerating productivity growth in services. Illeris (1989:46), on the other hand, states that it is subject to discussion as to whether labour productivity has really shown a slower increase in services than in goods production.
As the services sector is very heterogenous, a breakdown in terms of service industries is examined (Table 3.3).
Table 3.3 : Service Industries’ Average Annual Growth of Labour Productivity Per Man (Percent)
Time Period Commerce Transport & Communication Financial & Business Other Services 1973-1980 3.55 9.52 -3.25 3.91 1981-1988 2.27 7.96 3.47 2.57 1989-1996 4.83 3.57 1.49 5.14
Transport and communications showed a substantial slowdown in its labour productivity growth rate; while that of financial and business services slowed down in the 90s. Commerce and other services industries’ labour productivity growth seem to have risen in the 90s. The recovery from the mid 80s recession, the promotional efforts in tourism and a shake out in retail trade, where neighbourhood grocery stores are giving way to chain-store alliances, which are computerised and more organised, may have led to improvements in labour productivity in the commerce sector. The move towards ‘electronic commerce’ to promote borderless transactions for conducting retail trade on the Internet, and Singapore’s step towards building the infrastructure in information and communication to enable this move, can also be expected to lead to productivity gains for the commerce industry.
3.4 Implications of Labour Productivity Growth Rates
Here two issues are examined using the labour productivity growth rates obtained earlier. One is to find out if Verdoon’s law exists for Singapore and the other is to examine if manufacturing employment is hollowed out.
Verdoon’s Law
This law postulates a positive relationship between output growth and labour productivity growth. In particular, it states that as output increases, economies of scale enable productivity to increase, so that higher output growth leads to higher productivity growth.
However, it is difficult to check the existence of the law on statistical and theoretical grounds. The main problem is that of causality because it is unclear whether output growth causes productivity growth or vice versa. Thus, regressing output growth on labour productivity growth would provide a spurious estimation. Cornwall (1977) provides suggestions to get around the causation problem.
As a preliminary step, the correlation coefficient between the two variables is first examined; although correlation offers no explanation as to causation. The results showed a very low correlation coefficient of not more than 0.37 for the relationship between output growth and labour productivity growth for the manufacturing and services sectors. In cases when output growth has been high, productivity growth has, in
general, been low. Given such low correlation, it adds little value to use Cornwall’s (ibid) suggestions to establish any causation for interpretation. It is clear however, that if causation was found to run from output growth to labour productivity growth, then output growth is an insignificant determinant of labour productivity growth.
The Hollowing Out of Manufacturing Employment?
In an important paper, Baumöl (1968) was the first to describe the productivity consequences of unbalanced growth among sectors of differing productivity growth. According to Baumöl, the differential productivity growth rates in the services and manufacturing sectors would affect wages in both sectors. Often the services sector is the slower growing labour productivity sector, but eventually, the wage increase in the manufacturing sector would be matched by wage increase in the services sector. Since the wage increase in the services sector is not due to an increase in productivity, the increase in cost would be passed on to consumers and the relative price of services would increase. Producers in the services sector would then have a greater incentive to produce more and this would result in a labour flow to services and hence a rise in the services sector employment share.4 Dowrie (1970) and Faulhaber (et al., eds. 1986) also attribute services sector employment growth to trends in comparative costs due to high rates of technological change in the manufacturing sector.
Sufficient evidence in the literature exists to suggest that productivity growth differential in favour of the manufacturing sector is one of the main causes for the growth of employment in the services sector.5 This relates to the following concern of the senior minister of Singapore, Mr. Lee Kwan Yew, when he claimed in 1995 that Singapore is “... hollowed out ... and has only services - which is a dangerous position, as Hong Kong has found.”6 A Department of Statistics study (Singapore, 1995a) on the other hand, dismisses such fears.
4 Fuchs (1981) and Leveson (1986), on the other hand, explain that the rise in the relative price of services (due to slower productivity growth in services) would slow down consumption of services, but in the face of relatively strong demand for services based on rising income, this would result in rising services sector employment growth.
5 See Fuchs (1969:8), Briscoe (1972), Haig (1975), Baumöl (1985),Wieczorek (1995) and Rowthorn and Ramaswamy (1997).
Table 3.4 indicates that manufacturing employment share has hollowed out and that of services employment share has increased especially since the 1990s.
Table 3.4 : Employment Share By Sector (Percent)
1970 1975 1980 1985 1990 1996
Manufacturing 22.0 26.2 30.1 25.4 29.1 23.5
Services 66.3 65.3 60.7 63.9 62.1 70.3
Source: Singapore Yearbook of Statistics, various issues.
Also, as was experienced by OECD countries, the labour productivity growth of the services sector in Singapore was found to be lagging behind that of the manufacturing sector in the late 1980s (see Table 3.2).
The Department of Statistics study (Singapore, 1995a) reports that increasing shortage of labour, rising business costs, and an increasing number of manufacturing companies relocating to the neighbouring countries, due to an erosion of comparative advantage in labour intensive operations, have been the reasons for such a trend. In addition to detecting if hollowing out has occurred in Singapore, another question of importance is: if it is so, is there cause for concern?
To shed light on the hollowing out issue, the correlation coefficient between the services sector employment share relative to the manufacturing sector and that of the labour productivity growth differential (labour productivity growth of the manufacturing sector minus labour productivity growth of the services sector) between the two sectors was examined (see Table 3.5).7
7 An alternative method is to include the labour productivity growth differential as a regressor in