Will the Jobs Credit Scheme Be Effective In Saving Jobs?

Below is an extract of the speech delivered in Parliament by NMP Siew Kum Hong, querying the effectiveness of the Jobs Credit Scheme. The full speech is available on his blog @ siewkumhong.blogspot.com.

I now turn to the Jobs Credit scheme. It is one of the lynchpins of the Budget, and it seems to have caught the imagination of Singaporeans. Call it what you will, but it is fundamentally a wage subsidy for employers. It equates to a 9 percentage point cut in the employers’ CPF contribution rate. It will cost taxpayers S$4.5 billion dollars, and will be funded by our reserves.

The objective of this scheme is to save jobs. But how effective will it be?

Clearly, the effectiveness of the scheme for each employer will depend on the proportion of its costs attributable to wages. If wages form just 10% of an employer’s overall costs, then the Jobs Credit scheme will reduce its total costs by up to 0.8%. On the other hand, if 70% of costs are wages, then the scheme will reduce total costs by a maximum of 5.5%. These are theoretical maximums, based on improbable assumptions of 100% local employees, all earning $2500 per month or less.

The Minister has explained that the global economic crisis is caused by a worldwide collapse in demand. Simply put, there is massively reduced demand for the goods and services produced by our economy.

Last week, the EDB released a report on the manufacturing sector’s business expectations for the next six months. This report paints a shocking picture of just how dire things are expected to get. An across-the-board negative outlook for the first half of 2009 for manufacturing, with similarly negative forecasts for output and employment for Q1. For instance, 92% of data storage firms and 81% of precision engineering firms predict a drop in output.

When demand falls off a cliff like this, many businesses will face a drop in revenue far exceeding 8%. Businesses will have no choice but to cut costs to stay afloat.

In this context, I suspect that the Jobs Credit scheme will turn out to just a band-aid. Yes, it will provide a temporary cushion for businesses, especially SMEs. Yes, it will make employers a little bit more reluctant to lay off locals. Yes, whatever protection it creates will probably benefit the low-income more than the high-income. But it will still only be a band-aid at best, in stopping job losses.

And what a very expensive band-aid it will be. Citigroup’s head of Singapore research Dr Chua Hak Bin has pointed out that if the Jobs Credit scheme helps to save 50,000 jobs, then the cost of saving each job is $90,000 – three times the median annual salary of each job in Singapore. Even if it helps to save 100,000 jobs, the cost of saving each job is $45,000 – still 50% more than the median annual salary.

And contract workers, who are probably most at risk when a business cuts staffing costs, may not benefit from the Jobs Credit scheme. Contractors are usually hired by employment agencies and farmed out to companies. The agencies will receive the subsidy. They have no incentive to pass it on to the companies. Unlike with property tax rebates, the Government has not exhorted these agencies to pass the savings on to their customers. And so, the scheme could make contractors, who form a growing proportion of the workforce, even more vulnerable than they otherwise would be.

I agree with people like NUS professor Shandre Thangavelu, who has said that the Jobs Credit scheme will only have a short-run impact on the retrenchment behaviour of employers. Even the MOF team who designed the scheme is unable to predict just how many jobs it will help to save, and for how long. Mr Poon Hong Yuen, who led the team that put the scheme together, said:

"If just because of this they rethink (retrenchments), then I think it’s already quite an achievement."

I would praise the Ministry for its willingness to take a chance on the Jobs Credit scheme. I think this sort of policy risk-taking is important and helpful. But I don’t think the risk will pan out in this case. And I think Mr Poon sets a surprisingly modest target. At $4.5 billion, I would expect more.

The Jobs Credit scheme will end up benefiting capital owners disproportionately. It will reduce business costs, but I do not expect it to save very many jobs, and even then not for very long. It is essentially a special transfer to capital owners, such as business-owners and entrepreneurs. And considering that around 50% of the Singapore corporate sector is foreign-owned, a big chunk of this transfer will leak out of Singapore.

Today’s Straits Times Forum carried a letter from someone who works in an SME, praising the Jobs Credit scheme. But if you drill into the details, it is clear that the business was not considering retrenchments in the first place. Instead, it is considering using the Jobs Credit funding to invest further in its business. In these times, that is not a bad thing. But it clearly shows up the limitations in the scheme’s ability to achieve its stated goal of saving jobs.

The Jobs Credit scheme will have, at best, a marginal impact on businesses’ decisions on whether to retrench. Businesses facing collapsed demand will still retrench. Businesses doing well will reap a windfall benefit. MNCs will still, by and large, follow their corporate headquarters’ directions on retrenchments.

True, the Jobs Credit scheme is not meant to be the complete answer. It is not a panacea. It is one piece of the puzzle, albeit a big centrepiece, and there are many other measures to reduce business costs and help businesses through this difficult period. But the question must be whether spending $4.5 billion on the Jobs Credit scheme produces the most bang for the buck for Singaporeans.

This is a hand-out for businesses. But we have always opposed hand-outs for Singaporeans. Why are businesses different? In giving all this money away to businesses, are we somehow being psychologically held hostage to the ideological dogma that the best way to help Singaporeans is to help businesses, instead of helping Singaporeans directly?