Beware pitfalls on road to better productivity

THE Work Credit Scheme (WCS) introduced in Budget 2013 aims to incentivise employers to pay higher wages to employees earning below $4,000 in gross wages per month. This is done through the Government co-paying 40 per cent of wage increases for this group of workers for the next three years.

The rationale for the WCS is to help businesses shoulder the higher wage costs arising from the tightening of foreign labour inflow, and to encourage them to share the fruits of productivity gains from the restructuring towards more efficient and innovative production.

This is a noble aim. However, the transient nature of the WCS and the absence of any link between the wage credit and productivity enhancement efforts, or specific components of wage increase, can produce undesirable outcomes.

With the WCS in place, a firm that would have been prepared to award a $1 wage increase in the absence of WCS will now be no worse off if it grants a $1.67 increase which is offset by the 40 per cent WCS rebate from the Government - the firm gets back 40 per cent of $1.67 or 67 cents in rebate.

Therefore a $1.67 increase effectively costs $1 to the firm. All other things remaining constant, with WCS we can therefore expect average pay increases for workers to be about 67 per cent above the level without WCS.

It is hoped that the WCS will lead to higher wages that lift workers' morale and spur productivity improvements, setting in place a virtuous circle sustaining further wage increases supported by productivity improvements.

But there are pitfalls to the WCS' current design.

First, wage credits or rebates are tied only to gross monthly wages. This comprises basic salary, overtime pay, bonuses and commissions components. An employee's gross monthly wage is computed based on the Central Provident Fund (CPF) contributions banked in by the employer.

In most salary contracts, basic pay is understood to be permanent and is cut back only in exceptional circumstances such as when adverse economic conditions threaten the survival of the firm. Paying a higher basic pay is a better way to motivate worker effort, initiative and loyalty throughout the year, than paying a bonus after a year's work.

Because the WCS is only a temporary scheme in place for three years, we can expect firms to pay most of the additional wage increases in the form of larger bonuses which can be stopped after three years, rather than higher permanent basic salary pay rises. To reap the full benefits of the WCS, chances are firms will use existing workers, in particular part-time workers, to work longer hours rather than hire new workers to meet additional manpower needs.

Second, the automatic computation of wage credit payouts using CPF records could lead to more firms gaming the system by over-declaring actual wage increases by overpaying CPF contributions to existing workers.

There could also be increased incidence of employment of "phantom workers" as rogue employers try to milk the WCS by faking employment of workers, especially older workers, to receive rebates that could far surpass the excess CPF contributions made.

Enforcement efforts now focus on employers who don't pay or underpay CPF contributions. With the WCS in place, we can expect overpayment of CPF to increase.

The rewards for gaming the system by over-declaring wages or by employing phantom workers can be significant especially where older workers are involved.

For example, for an employee aged 55 to 60 years whose total CPF contribution rate is 23.5 per cent, a deliberate overpayment of $1 of CPF contribution by the employer will result in a WCS rebate of $1.70 to the employer from the Government - a 70 per cent return. For those aged 65 years and above whose total CPF contribution rate is 11.5 per cent, the rebate is about $3.45 for every $1 contributed by the employer.

When coupled with the Special Employment Credit Scheme of 2012 which pays employers 8 per cent of the total gross pay of up to $3,000 a month, the total rebate can be as high as $4.15 for every $1 of CPF over-contributed by the employer. The possibility of more collusion between employers and employees to reap such high returns also cannot be dismissed.

What outcomes can we expect from the WCS?

At the macro level, we can expect national statistics on wages to show significant higher wages received by those currently employed in the lower half of the wage distribution. Employment rates of older workers will also increase. But this effect will only be temporary as firms will lower bonus payments or reduce employment when WCS is withdrawn from 2016.

Productivity statistics would likely show an improvement, as firms would prefer to work with and pay existing workers more, rather than hire additional new workers. More part-time workers may also move on to full-time work.

Employee turnover rates can be expected to fall in the next three years as firms will seek to retain existing workers to reap the full benefit of WCS rebates. Employees will be enticed to stay to enjoy higher pay increases.

By lowering costs, WCS rebates could also prolong the existence of unproductive firms instead of hastening productivity improvements by businesses.

Even a brief survey like the one above suggests the WCS is potentially fraught with loopholes and opportunities that can be detrimental to the national productivity drive. It may result in a temporary but artificial rise in productivity figures for the reasons cited above, without real and lasting productivity enhancing transformations at the workplace.

What can be done to ensure that the intended desired outcomes are realised? For a start, the WCS can be reconfigured to place greater weight on basic pay increases in the computation of WCS rebates. This will help ensure that wage increases support productivity improvements and encourage real sharing of lasting productivity gains.

Putting in place comprehensive measures to detect gaming actions of employers and imposing heavier penalties for such actions may be needed.

Policymakers need to think about the unintended and undesirable impact of WCS and put in place counter-measures before the projected $3.6 billion is disbursed. Otherwise, the possibility that we will find ourselves in exactly the same position three years from now, after WCS has lapsed, is a very real one indeed.

The writer is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

This story was first published in The Straits Times on March 12, 2013

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