Published on 30 Nov 2021

Wage recovery to put more stress on rising consumer costs

Prof Boh Wai Fong suggests that should there be an increase in productivity, higher wages might not necessarily lead to increased inflation because there would be more supply to meet demand.

Rising wages will push up Singapore inflation in 2022, although external forces remain the main culprit

behind price increases, labour-market watchers told The Business Times.

Continued border closures have put upward pressure on salaries, which are also picking up from a

pandemic-related trough in 2021 - and the cautious border reopening is unlikely to provide near-term relief.

The Covid-19 pandemic has "basically been a roller coaster for wages", said Walter Theseira, associate
professor of economics at the Singapore University of Social Sciences. He also noted that factors such as
wage cuts, no-pay leave and job losses among both foreign and local workers led to flat or declining income

in 2020.

"But as we started to recover from Covid-19, the border closures and lack of foreign worker availability
became the main constraint on business expansion, leading to wage inflation in manpower-constrained

areas," Theseira told BT.

Private-sector firms have suggested that salaries are picking up. Separate industry polls from Mercer and
ECA International both recently pointed to an average pay increase of 3.5 per cent in 2022 - a bigger jump

than in 2021, when Mercer projected a rise of 3.3 per cent, and ECA, 2.8 per cent.

The Monetary Authority of Singapore (MAS) also noted on Nov 23 that "wages have picked up and are
anticipated to rise at a steady pace as slack in the labour market dissipates". "Rising imported and labour
costs, alongside the recovery in domestic economic activity, will support a steady increase in core inflation in

the quarters ahead," it added.

Charnon Boonnuch, South-east Asia economist at Nomura, noted "significant upward inflation pressures from
stronger demand conditions", and added: "Labour markets have had a V-shaped pick-up so the pass-through

effects of rising wage pressures is likely to manifest in higher core inflation in coming months."

Manpower constraints from pandemic-related border measures were highlighted as one driver behind the
elevated labour costs, with Terence Ho, associate professor in practice at the Lee Kuan Yew School of Public

Policy, saying that these disruptions could have raised demand for local workers and put pressure on wages.

"As the labour market tightens and business and worker confidence recover, resident wage growth is
anticipated to strengthen next year," he said. "Policies aimed at improving the wages of lower-wage residents

will also contribute to overall wage growth."

The boost to wages has been most notable for skilled workers in high-demand industries such as infocomm
technology, cybersecurity and finance, OCBC chief economist Selena Ling told BT, as firms that are still

expanding "have had to hunt mostly within the local labour market".

But, even as international travel gradually resumes, Ling suggested that wage pressure is not likely to ease:
"For 2022, wage inflation is likely to accelerate even though international borders are gradually re-opening,

albeit still far from pre-Covid norms."

She flagged the reopening of the land crossing with Malaysia as a significant travel arrangement to watch in the near term, since it opens the door to more than 300,000 commuters, who mainly work in manufacturing and domestic-oriented services such as retail and food and beverage.

But Theseira flagged concerns about whether the employment of such Malaysian commuters in Singapore will normalise any time soon.

The unprecedented closure of the border last year meant "many of those workers decided to stay in
Singapore, and employers who were dependent on them had no choice but to raise wages or pay for their

accommodation costs here".

There is no clear roadmap to restoring the commuting model, he said. "Malaysian work permit holders won't be as accessible as they were for some time", which affects wages and costs.

Figures from the Department of Statistics indicate that year-on-year changes in the unit labour cost (ULC)

were negative from the second quarter of 2020 to the first quarter of 2021, during the pandemic.

But the ULC - which measures the manpower costs behind business or economic output - rose by 17.8 per cent year on year in the second quarter of 2021, and 6.1 per cent in the third quarter.

Concern that the higher wages will pass through to inflation may be overblown. Granted, Ho- a former director of planning and policy at the Ministry of Manpower - noted that "the continued pick-up in demand and higher wage costs will also push up prices".

But he also observed that inflation has been driven by other factors such as imported inflation for energy, food and other goods, and domestic costs such as rents and COE premiums.

Indeed, Barnabas Gan, an economist at UOB, observed that Singapore's average monthly income growth was 1.9 per cent in the first half of 2021 - compared with 3.3 per cent in the period from 2015 to 2019 - and came against a very low year-ago base.

"Even though Singapore's average monthly income grew 1.4 per cent in 2020, the city-state saw a deflation of 0.2 per cent in the same year.

Wages will likely remain to be a driver for inflation in 2022, but empirical evidence suggests that Singapore's consumer prices are more significantly driven by import prices," said Gan.

Professor Boh Wai Fong from the Nanyang Business School also speculated that statistics that show a global rise in wages in wealthy economies may actually be misleading.

"As more people in low-paying jobs quit or are laid off, the average wage is then increased as a result, since unemployed people are not included in the calculations," she said.

She also suggested that "if there is an increase in productivity, higher wages might not necessarily lead to increased inflation because there is more supply to meet the demand".

All the same, OCBC's Ling anticipated more monetary policy normalisation from the MAS as "domestic labour market tightness will increasingly contribute to structural inflationary pressures", especially given the gradual pace of border reopening.

"Rising labour costs when employers hunt in a limited talent pool is inevitable. Throw in Singapore's ageing

population; there may not be any immediate panacea unless the gates are thrown open again," she remarked.

Rising wages will push up Singapore inflation in 2022, although external forces remain the main culprit behind price increases, labour-market watchers told The Business Times.

Source: The Business Times