NWC reconvenes; CPF cuts inevitable?

Back in 2003 following SARS, the National Wages Council made the recommendation to introduce a flexible wage system to prepare companies for future downturns.

Fast forward six years, Singapore is again staring at a recession, with Prime Minister Lee Hsien Loong warning of the need to be psychologically prepared for more retrenchments.

So have the recommendations that were supposed to be put in place, really worked?

As the National Wages Council reconvenes today, Joanne Chan examines if further extreme measures are needed to save jobs.

A lot has changed for wage policies since the last recession, with new measures mooted to help companies prepare for the next downturn.

For one, the National Wages Council recommended that companies rely more on variable bonuses to reward good performers at the end of the year, rather than the traditional tool of high built-in increments.

And recognising that the economy can turn quickly and companies need flexibility to react to market conditions, the NWC also recommended that companies introduce a monthly variable component which can be cut anytime in the year.

So is Singapore better prepared against retrenchments than the last crisis?

Not quite, says labour economist from the Nanyang Technological University, Randolph Tan, who notes that not enough companies have implemented the monthly variable component.

“That kind of flexibility has actually so far not been fully absorbed by private sector practices. So it’s not clear that the private sector will be able to use any flexibility to keep jobs.”

NTUC Deputy Secretary-General Halimah Yacob admits that while a flexible wage system is prevalent in the unionised sector, it’s not so widely adopted in non-unionised companies.

“For a fact I can confirm that in the unionised sector, it is at least 85% of the companies. Non-unionised sector, my sense is lower, but the numbers have been increasing over the years.”

A report published by the NWC two years’ ago on wage recommendations for June 2006 to 2007 noted the slow progress by companies to introduce the monthly variable component.

And buoyed by the economic boon in the last two years, it’s not clear how many in the non-unionised sector have really implemented the measure.

So what other policies can the Government use to produce the desired effects of being wide-reaching, and have a direct impact on costs?

Traditionally, Singapore has looked to cutting employer’s CPF contribution, says Regional Economist for Barclays Capital, Leong Wai Ho.

“It’s quite likely that CPF contributions rate for employers will be cut. I think traditionally that is the most powerful fiscal policy tool that the government has. For example, a 1 percent CPF contribution rate reduction is roughly equal to about 2.5% in terms of corporate tax rates.”

Following the Asian Financial Crisis in 1997, the NWC recommended that employer’s CPF contribution be reduced from 20 percent to 10 percent.

The cut translated to an eight percent reduction in overall wages.

In October 2003 after the SARS crisis, CPF cuts were again used to help businesses stay afloat, with the rate reduced from 16 per cent to 13 per cent.

This came on top of the recommendations set out by the NWC.

Given the dire nature of today’s economic crisis, NTU labour economist Dr Tan, believes that CPF cuts are again a possibility on the horizon.

Between massive job losses and helping companies cut cost, Dr Tan says the Government may choose CPF cuts.

“It’s one of the ways in which the Government can actually exert control over wages. And if we’re talking about wage flexibility on the whole, this is one area where you could actually make wages flexible downwards. To the benefit of keeping more jobs and staving off even larger job losses.”

But NTUC Deputy Secretary-General Mdm Halimah says such a move will be disastrous for Singaporeans.

If history has taught us anything, it has shown that CPF cuts have deep repercussions on a nation reliant on it for housing and medical needs.

“Most definitely savings were affected, because people have less savings. And when we’re talking about the low-income workers, they were more affected than others. It’s not just a question of their retirement savings, but it’s also their medical needs. The population is growing older. You compare us to 10 years ago, or compare us to the crisis of 1997. The population has grown much older. There are other equally compelling needs, where we need to keep the CPF savings going. And that is for our Medisave and Medishield coverage. And don’t forgot about the impact on people’s ability to pay for the housing loans.”

Mdm Halimah added that companies have been in discussion to implement a whole slew of measures.

“Employers are already in discussion with unions, already introduce a whole slew of measures in order to cut their cost. For instance, the various measures, one of it is temporary layoffs, plant shutdowns, reduction in overtime. SPUR training is yet another option provided in order to help companies reduce their cost. So a lot of companies are already introducing it, even before the NWC is reconvened to discuss about further modifications, refinements to the guidelines.”

So will these measures be enough to stave off retrenchments, or will the Government have to turn to CPF cuts once more?

With the NWC reconvening to discuss new measures for wage reduction, workers in Singapore can only wait with bated breath for the outcome.