A closer look at productivity

Low productivity has been the bane of the Singapore economy for years, but it appears to be finally improving this year. "Appears", as it remains unclear if real progress has been made.

Productivity growth is projected to reach about 3 per cent this year - the highest since 2010, and a big improvement on last year's 1 per cent expansion.

Simply put, productivity measures the economic output per employed person, and serves as a snapshot of an economy's overall efficiency.

There are some possible scenarios that could explain a better performance this year.

First, and less optimistically, as the economic recovery picks up pace here, firms could be relying on spare capacity to raise production.

Take an electronics manufacturer that may have lowered its output from 10,000 chips a year to 8,000 during the slowdown by reducing working hours.

It can now ramp up to 10,000 again.

But to produce 12,000 chips next year, it may need more staff, lowering productivity figures.

There was a similar effect seen after the global financial crisis when Singapore's productivity grew by 11.6 per cent in 2010, but only 2.3 per cent in 2011.

A second possibility is that firms have used the downtime to upgrade with more automation and do not need as many low-skilled workers as before.

It is likely that both of these scenarios are at play to a certain extent. So it remains to be seen how much of the productivity gains are from true improvements in efficiency.

One thing to look out for is how the manufacturing sector performs when demand rises across other segments besides electronics. If firms can lift output without hiring more workers, that would show they have made processes more efficient.

Another sign would be how the domestic-oriented service sector performs. So far, it is still hiring.

Food and beverage services, accommodation and retail are some of the sectors where the proportion of foreign workers is rising. If these can employ fewer, but higher-skilled, workers, that would be a move in the right direction.

A version of this article appeared in the print edition of The Straits Times on November 29, 2017, with the headline 'A closer look at productivity'. Print Edition | Subscribe