Labor productivity growth in Singapore that has grown at a rate of over 3.0 percent per year since 1970s considerably slowed down to 0.5 percent on average per annum in the latter half of the 2000s. The purpose of this paper is to ask, first, to what extent Singapore's labor productivity performance is explained by the changes in the characteristics composition of its workforce, and then, what the prospect may hold. Using our newly constructed cross-classified labor dataset, we estimate a volume index of quality-adjusted labor input and an aggregate measure of labor quality change in the Singaporean economy for the period of 1974–2011. Having understood the current dynamics of the workforce, we further project labor productivity and potential economic growth for the coming two decades. In this paper, workers are distinguished by the five characteristic dimensions: gender, educational attainment, age, employment status, and residency. Our findings establish the role of labor quality changes in Singapore's economic growth as highly significant over the long run. During the period of 1974–2011, labor quality improved at a rate of 2.19 percent on average per annum, accounting for 37 percent of labor input growth to the 6.78 percent average yearly economic growth.
Our estimates of recent labor quality growth, however, are considerably lower than what have been shown in some previous studies. Moreover, our projections suggest that its prospect in the foreseeable future remains bleak. The downward trend of labor quality growth since the mid-2000s is mainly due to the sharp increase in the number of low-skilled foreign workers. For the next two decades, our projections in the business-as-usual scenario imply a further decrease of labor quality growth. Consequently labor productivity growth will also slow down, from 2.04 percent on average per year in the 2000s, to 1.68 percent and 1.19 per cent in the 2010s and 2020s respectively. Coupled with the downward trend in hours worked, potential GDP growth is projected as 3.10 percent on average per annum in the 2010s and 1.86 percent in the 2020s. Compared with the past experience of 5.47 percent in the 2000s, this represents a considerable slowdown in Singapore's economic growth for the next two decades, if there is no appropriate policy response or boost to TFP growth.
Policies, which successfully upgrade the resident workers' skills and/or induce the substitution of IT capital investment for the low-skilled non-resident workers, will lift the projection of labor productivity growth to 2.64 percent and 1.82 percent on average per annum in the 2010s and the 2020s respectively. However, the projected growth rate of potential GDP is little improved. At 3.22 percent in the 2010s and 2.06 percent in the 2020s, our projections even with successful policies are closer to the lower end of the target range set by the Economic Strategies Committee of Singapore's government for the 2010s. We conclude that the room to boost growth by improving labor quality is very limited, and policies targeting TFP growth may be more fruitful.