There has been much debate over the liberalisation of services under the Singapore FTA. In particular, the provision of professional services; for example by architects and doctors. Many professional associations have alleged that the FTA will lead to an influx of people who will undercut local professionals or provide substandard services.
In terms of the FTA, these fears are entirely misplaced. As per the Schedule of Specific Commitments (Chapter 7, Annex 7A ) the movement of persons is restricted to intra-firm transfers of specific categories.
This is no different to the provisions currently available under the BOI where a certain number of expat staff are allowed. The movement of professionals outside this limited sphere is closed, hence the question does not arise.
Hypothetically, if the movement of professionals were allowed would Sri Lanka’s professionals be worse off? Given the large number of professionals in accountancy, medicine and law who successfully migrate overseas it seems unlikely that the skills levels in general are lacking, hence they have little to fear.
Constraint to growth
While the FTA does not permit the free movement of people, the fact is that the country faces shortages of unskilled and skilled workers which is a constraint to growth. Therefore, the government should formulate a policy to address this problem.
The first survey on labour demand conducted by the Department of Census and Statistics1 reveals that nearly half a million vacancies exist in the private sector (excluding micro enterprises).
Businesses are unable to fill the vacancies due to various reasons including lack of skills, limited education and poor attitudes.
Another survey found consistent evidence of a labour shortage in the manufacturing sector. “Nearly 38 percent of officials in firms interviewed said that they have nine percent of unfilled vacancies and 76 percent of firms with vacancies have taken more than four months to fill them.”2
Labour scarcities have an adverse impact on growth, while shortages of skills impacts both productivity and growth. Studies have shown that migration of people, just as international trade does, benefits both the sending country and the receiving country (Van der Mensbrugghe and Roland-Holst 2009)3.
The destination country benefits because immigration increases the supply of labour, which raises employment, production and thus GDP (Ortega and Peri 2009)4.
Complex question
The shortages definitely exist, but will foreign workers depress wages to the detriment of locals? This is a complex question and the impact depends on a combination of factors including the skills of migrants, the skills of workers, and the characteristics of the host economy.
They also differ between the short and long run when the economy and labour demand can adjust to the increase in labour supply.
The immediate short run effects of immigration on the wages and employment of existing workers depend particularly on the extent to which migrants have skills that are substitutes or complements to those of workers (e.g. Borjas 1995).
Where the foreign labour has the same skills as local workers (ie- are substitutes), then, all other things being equal, we may expect that wages will decline. This leaves unaddressed the question of the unfilled vacancies. What is apparent from the surveys is that there are jobs which local workers do not want, for whatever reason. Local workers may be available but are either unsuited or unwilling to take these jobs.
Filling these vacancies with foreign labour will have a minimal impact on local wages and increase overall growth as the firms facing labour shortages grow faster when the labour constraint is removed.
Therefore, a strong case can be made to allow limited migration of workers.
The country should allow migrants to fill labour shortages and meet specialised skill gaps.
As far as skilled migrants are concerned, the skills of migrants will be complementary to those of existing workers, therefore, all workers experience increased productivity which in turn can be expected to lead to a rise in the wages of workers. What of the competence of workers? In the final analysis, decisions on hiring foreign workers, whether skilled or unskilled will be taken at the level of the firm.
Firms do go through a process of screening, but it is only through experience that they will gauge the competence and skills of foreign workers. There will inevitably be individual mistakes and misjudgments but this is a learning process.
If firms find that foreign workers lack competence, they will stop hiring them. What business wants to be saddled with an unproductive worker?
Footnotes:
1. Sri Lanka Labour Demand Survey 2017, Department of Census and Statistics.
2. An empirical investigation of labor shortage in the manufacturing sector in Sri Lanka, Ranasinghe et al.
3. Vander Mensbrugghe, D. and D. Roland-Holst (2009), Global Economic Prospects for Increasing Developing Country Migration into Developed Countries, Human Development Research Paper No. SO, United Nations Development Program (UNDP), New York.
4. Ortega, F. and G. Peri (2009), The Causes and Effects of International Labour Mobility: Evidence from OECD Countries I980-2005, Human Development Research Paper No. 6, United Nations Development Program (UNDP), New York.