Wednesday, May 07, 2014

Migration levies and unskilled labor mobility in Singapore

Summary: Several advocates of increased labor mobility have suggested taxes on migrants to compensate natives of destination countries for any inconveniences and to increase the reward of accepting more migrants, as a theoretical matter. In practice Singapore already accepts an exceptionally large number of unskilled and less skilled temporary workers, taxes them heavily, and uses the extensive net revenue to make a significant contribution to the public accounts. It appears that Singapore captures most of the economic surplus of migration, although migrants also benefit significantly. However, the system produces great local inequality and has a number of other problems that may outweigh fiscal benefits in its political appeal. While Singaporean migration policy seems much better than most developed countries', it is not first-best from a humanitarian point of view, and the model's value in promoting labor mobility elsewhere is uncertain, although intriguing.

Immigration taxes: not just theory
When workers move from poor countries to rich countries their economic productivity can increase several times, i.e. they enjoy a place premium. In principle, this extra economic output could be taxed to compensate losers from migration, or to reward countries  for permitting more migrant workers, and a number of advocates of increased labor mobility have suggested just such a system to make openness more attractive to rich country governments and electorates.

Nathan Smith discusses the potential for such a tax-and-transfer system in "Open Borders with Migration Taxes Are the Optimal Policy" at length, using a tax on wages after migrants arrive. The late Nobel Memorial laureate economist Gary Becker, who has just passed away, proposed a lump sum fee for entry. Whereas these proposals involve taxing migrants for the benefit of destination countries, another literature discusses emigration taxes from source countries on highly skilled emigrants, summarized and argued against by Michael Clemens in a recent paper.

One thing that struck me in reading both Becker and Smith was that they suggested that such a tax system had never been tried. But in fact there is already a wealthy country, which allows more immigration by poor and low skill workers than almost any other, using taxes to regulate the number of migrants and profit from their presence: Singapore. Malaysia, while less wealthy, also has a system of migrant levies.

As GiveWell and Good Ventures push forward into the cause of labor mobility, it seems worth drawing attention to the workings of the Singaporean system and its possible lessons for reform.

Singapore's exceptional openness to migration
As Singapore's economy has developed, it has become an increasingly attractive destination, and the government has permitted the expansion of the population of foreign workers (who are not citizens or permanent residents). An informative article from the Migration Policy Institute summarizes this impressive growth in a few charts and tables. Foreign workers made up a a third of the labor force in 2010, and a few hundred thousand more have already arrived since then:

Table 3: Foreign Workers in Singapore, 1970-2010

YearTotal labor forceNo. of foreign workersPercent of total labor force
Source: Compiled from Rahman, 1999:7 (for 1970 and 1980), Singapore Department of Statistics, 2001:43 (for 1990) and Singapore Department of Statistics, 2011:48 (for 2000 and 2010).
Figure 1: Singapore's Total Resident and Nonresident Workforce, 1980-2010
Further, much of the remaining population is made up of foreign-born permanent residents and naturalized citizens:

Figure 2: New Citizens and Permanent Residents in Singapore, 2002-2010
Wikipedia shows over half a million non-citizen permanent residents, and there are at least 750,000 foreign-born citizens, so slightly more than half of the Singaporean population is foreign-born, and significantly more than half of the workforce, as foreign-born citizens and permanent residents are younger and have higher workforce participation.

Number (thousands)
Total populationTotal residentsSingapore citizensPermanent residentsNon-residents

This puts Singapore's foreign-born share higher than any OECD country. David Frum complains that the top foreign-born shares reflect mostly high-skill immigration: Luxembourg and Switzerland with their contiguous EU neighbours, Israel and the Jewish Diaspora, and high-skill focused immigration policies in Canada, Australia, and New Zealand. But Singapore is different: a large portion of migrants are less skilled guest workers from poor countries. Only rentier resource states such as Qatar and the United Arab Emirates surpass Singapore's acceptance of foreign workers, and especially acceptance of those with low human capital (as workers if not permanent residents).

The Singaporean Ministry of Manpower (MOM) provides statistics breaking down the makeup of non-permanent resident foreign workers by class. The Employment Pass (EP) is for workers with high salaries ($40,000+ annually  in local currency for new graduates, more for experienced workers) and human capital, the S Pass for intermediate skill levels ($24,000+, although this is increasing), and the Work Permits (WP) covers low skill workers. As of December 2013, almost 3 out of 4 temporary foreign workers were low skill. New permanent residents, however, were almost all high skill or family members of high skill workers.

Pass TypeDec 2009Dec 2010Dec 2011Dec 2012Dec 2013p
Employment Pass (EP)114,300143,300175,400173,800175,100
S Pass82,80098,700113,900142,400160,900
Work Permit (Total)856,300871,200908,600952,100985,600
 - Work Permit (Foreign Domestic Worker)196,000201,400206,300209,600214,500
 - Work Permit (Construction)245,700248,100264,500293,400319,100
Total Foreign Workforce1,053,5001,113,2001,197,9001,268,3001,321,600
Total Foreign Workforce
(excluding Foreign Domestic Workers)
Total Foreign Workforce
(excluding Foreign Domestic Workers & Construction)
How does Singapore regulate immigration rates?
For temporary skilled workers, Singapore has a fast application process which seems fast and efficient by global standards. The basic stance seems to be "the more the merrier". Skilled workers can become permanent residents and citizens after some further assessment as to their net benefit to Singapore, based on their human capital, income, and other factors such as age (Singapore favors younger workers who will spend more time contributing to the economy). My current sense is that the government considers immigrants who raise the average human capital of the permanent resident population, or so-called "foreign talent" (as opposed to less skilled "foreign workers") as an unmixed blessing and is aggressively accepting them.

For low and intermediate skill workers the policy regime is more restrictive. Those seeking work permits must have a job offer in Singapore, come from on of a set of approved countries, and pass various screens. Their numbers are regulated by a combination of Foreign Worker Levies (FWL), and Dependency Ceilings (DC) which govern the share of an employer's workforce which may be made up of less skilled foreign workers. The Dependency Ceilings are quite accepting, e.g. 87.5% of a construction workforce may be made up of such workers. However the taxes are large relative to worker salaries, and often increase with the foreign share of a company's workforce. A employer may pay a construction worker $700 per month in salary, and additionally pay FWL of $450, or $750 above a certain degree of foreign worker use. MOM gives specifics by sector (although levies have risen recently as part of a government effort to slow the growth of the migrant workforce and bias it more towards skilled workers).

Levy rate ($)
SectorDependency Ceiling SegmentationWorker categoryMonthly*Daily
ManufacturingBasic Tier / Tier 1: Up to 25% of the total workforceSkilled2508.22
Tier 2: Above 25% to 50% of the total workforceSkilled35011.51
Tier 3: Above 50% to 60% of the total workforceSkilled55018.09
Note to employers in manufacturing sector:
Employers in this sector are entitled to skilled levy rates for their foreign workers, up to 50% of the total workforce.

Levy rate ($)
SectorDependency Ceiling SegmentationWorker categoryMonthly*Daily
ServicesBasic Tier / Tier 1: Up to 10% of the total workforceSkilled3009.87
Tier 2: Above 10% to 25% of the total workforceSkilled40013.16
Tier 3: Above 25% to 40% of the total workforceSkilled60019.73
Note to employers in service sector:
Employers in this sector are entitled to skilled levy rates for their foreign workers, up to 25% of the total workforce.

Levy rate ($)
SectorDependency Ceiling (DC)Worker categoryMonthly*Daily
Construction1 local full-time worker to 7 Foreign WorkersHigher Skilled (1) and on MYE3009.87
Basic Skilled (2) and on MYE45014.80
Higher Skilled, Experienced and exempted from MYE (3)60019.73
Basic Skilled, Experienced and exempted from MYE (3)75024.66
Process1 local full-time worker to 7 Foreign WorkersSkilled and on MYE2508.22
Unskilled and on MYE35011.51
Experienced & exempted from MYE (3)55018.09

Levy rate ($)
SectorDependency Ceiling (DC)Worker categoryMonthly*Daily
Marine1 local full-time worker to 5 Foreign WorkersSkilled2508.22

Singapore's fiscal gains from low-skill workers
Levies for unskilled workers range from $3,600-$9,000 per annum, with lower rates for skilled workers and certain exempt categories. With around a million workers potentially subject to levies, the proceeds to Singapore should be in the billions of dollars (all figures are Singaporean dollars, about 0.8 $USD each).

Total levies collected amounted to $1.9 billion in 2010 and $2.5 billion in 2011. Total government operating revenues in 2010 were $45.5 billion and $50.5 billion for 2011, so worker levies alone accounted for 4-5% of operating government revenue. Since then the migrant population has grown substantially and levies have been hiked, by a third or more in many cases, with further increases scheduled, so the current percentage is likely significantly higher. Even so, the figure will be small compared to the economy, because low-skill workers contribute disproportionately little to economic output, but is high as a proportion of compensation costs. While Singaporean natives with such low incomes would pay no income tax, the top levy rates for unskilled workers (charged to employers) can be half or more of wages.

A Singaporean blogger made this chart combining 2011 wage data with the new 2013 top levy amounts for unskilled workers at firms in the categories of highest foreign workforce. These figures underestimate the share of levies in cost to employers because employers can cut wages in response to the levies, but may overestimate them if many firms do not have enough foreign workers to reach the top rate:

Further large increases are scheduled over the next several years.

The government also charges a broad-based value-added tax at a rate of 7%, which covers essentials such as food and medical care, property taxes applicable to housing used by migrants, and a remarkable variety of fees which seem to mostly succeed in charging migrants for their marginal cost to public services. For example, the public transit system has a good farebox recovery ratio, there are road congestion taxes, resources such as water are priced in relation to their cost, and so forth.

The government is also able to capture increases in housing prices driven by migrants through land sales, which deliver proceeds to the government between 1/4 and 1/3 of tax revenue each year, corporate tax on businesses enjoying lower wages and increased economic activity, and income tax on high skilled Singaporeans whose wages are increased through complementary effects (although wage and income taxes from the existing low skilled population face some downward pressure).

Combining these sources of revenue low-skill migrants may now account for 10% of government revenues, worth 1.4% of GDP.

On the expense side, low-skill foreign workers' terms of entry have been structured to hold government costs to an absolute minimum. Work permit holders may not become permanent residents, marry locals, have children (which Singapore might then need to grant citizenship to), or otherwise gain eligibility to the Singaporean welfare state. Services such as garbage, roads, and transit are funded by use charges of various kinds. Crime rates are extremely low in Singapore, so policing costs are probably not a severe issue, although they may be a source of uncharged costs. Workers must also receive insurance by way of their employers, which reduces their wages and averts demands on public health systems:
Work-permit holders are also subject to a regular medical examination that includes a general physical checkup, a chest x-ray, and a test for HIV/AIDS. They may not marry Singaporeans or PRs without the approval of the controller of work permits, and failure to get approval may result in repatriation. Female work-permit holders (typically domestic workers) who, through the compulsory medical screening process, are found to be pregnant are also subject to repatriation without exception.

On top of these controls, employers of work-permit holders are also required to post a S$5,000 (US$3,820) security bond for each (non-Malaysian) foreign-born worker. All employers of foreign-born domestic workers must also take out medical insurance (S$15,000, or US$11,450) and personal accident insurance (S$40,000, or U.S.$30,535) coverage for each such worker, since employees in this sector are not entitled to workman's compensation.
Enforcement of the immigration and tax laws imposes costs, but these are substantially defrayed by the security bond which is forfeited in the event of violation, and by processing fees.

In total, the fiscal effects of these low-skill guest workers seem overwhelmingly positive, albeit still small relative to the size of the economy or the economic output of higher-skill workers. To change this the foreign worker population would have to be increased by many times, and it is unclear how much the Singaporean place premium would decline.

In addition, Singaporeans enjoy the non-fiscal benefits of cheap low-skill services, higher wages for skilled workers who are complemented by foreign workers, and increased business activity.

Benefits to foreign workers
It's clear that work permits are a financial win for Singapore, but how lucrative are they for migrants? The basic purpose of a tax-based rather than quota-based system is to redistribute gains of migration away from migrants and to the taxing authority. Foreign worker levies cause employers to offer lower wages, reducing the effective place premium until rates of migration are acceptable to the government. If workers faced no costs of migration, migration taxes could be increased until the take-home pay of unskilled migrants was as low in Singapore as at home. This might be consistent with this quote:
A comment Member of Parliament and chairman of the Migrant Workers Centre Yeo Guat Kwang made in 2010 might give an indication: "When we look at the migrant workers’ issue, we are not looking at it from the perspective of human rights… At the end of the day, whatever factors would be able to help us to sustain the growth of the economy for the benefit of our countrymen, for the benefit of our country; we will definitely go for it.”
In practice, there are various costs that make foreign workers demand a wage premium relative to conditions at home. Workers need to pay travel costs, to deal with a higher cost of living in Singapore, to pay fees to employment agencies to match them with Singaporean employers, and must face the serious psychological costs of separation from home and loved ones (while being forbidden to marry locals in Singapore). Those with the lowest costs of moving will benefit substantially, while marginal migrants will enjoy only marginal net benefits.

Also, aside from taxes taking a bite out of migrant compensation, large flows of unskilled workers may also suppress wages for those with the most similar skill sets (even as wages increase for those with complementary skills). While Singapore is one of the world's richest countries in GDP per capita, the share of wages in the economy is low, and wages are especially low for those fields most exposed to large unskilled foreign workers. The population is younger, with high workforce participation, long work hours, and high capital investment making up for low labor productivity. Some more charts from Heart Truths:




Wages in these professions are lower than the worker levies alone would account for. There are various reasons why this might be the case Average skill levels in these professions may be higher in other countries, Singapore's total factor productivity may fall short of the frontier (although TFP statistics may be distorted if human capital is accounted for incorrectly), competition between very similar migrants may lower wages, or other factors.  I will leave the question to economists, although I will note that computer programmers also have relatively low wages in Singapore.

I haven't yet found a high-quality study of the place premium for unskilled workers in Singapore, of the sort that exist for the United States and United Arab Emirates, but there are other pieces of less probative evidence available.

Newspaper articles suggest that work permit holders in Singapore earn wages within a small factor of what they could earn at home. For instance:

Experts, however, pointed out that Singapore faces strong competition from the Middle East and Cyprus, which have been employing Sri Lankan and Filipino construction workers for several years now, and pay them more than $1,000 a month.

In contrast, construction workers here, such as those from India and Bangladesh, are paid as low as $700 a month.

Association of Employment Agencies (Singapore) president K. Jayaprema said the salaries of construction workers here have stagnated in the past decade.

This is because employers feel that "the workers are still earning more here than what they earn at home" and do not want to raise salaries.

She pointed out that construction workers also spend $1,000 to $2,000 on courses, and to take the test to come to Singapore to work.

They save on this money when they go to places like the Middle East, which do not have such requirements.

Ms Jayaprema, who owns an agency recruiting Indian and Bangladeshi workers, said: "Workers see this as a cost in coming here and they want to recoup the cost with good salaries."

Agents said Indian construction workers can earn about $600 working at home, which is not far from the $700 they fetch in Singapore.

Chinese construction workers can earn close to $1,000 at home which is near the average of $1,200 they draw here.

While Sri Lanka and the Philippines can help to meet some demand, experts expect India, China and Bangladesh to continue to be top draws because employers have become used to working with them.

A majority of Bangladeshi workers in the construction industry may be made to pay their employers for the renewal of their contracts. Typically, they need to be employed in Singapore for at least 17 ½ months if they are to earn enough to pay off their placement costs. For most of the last decade, their basic pay has been stuck at $18 a day. (USD 14.4)
Another describing what seems to be an unusually bad case:
Zahir doesn’t have a written contract; his terms for work were verbally negotiated. He says he was originally promised a wage of $28 a day, but was only paid $22.

“I complained to my boss but he kept saying, ‘Next month I give you more money.’ But he never gave,” he says. But his employer liked him so much that he didn’t ask Zahir for a kickback before renewing his work permit; workers for other employers had to pay between $800—$1200 to continue working in Singapore.
Between agent fees and kickbacks, many find themselves in debt even before work begins. Reza (not his real name) is one such example. Twenty months ago, his family in Bangladesh borrowed money to pay a training center $7,236 for a job in Singapore mixing cement.
“Every month I made $400—$500. Makan [food] was about $100. I sent home $250—$300,” he says.

Fees and kickbacks further reduce net returns, but suggest that efforts to reduce them could increase humanitarian gain or room for higher levies. The construction industry may also offer less of a place premium than some other sectors employing foreign workers. It seems that entry into the Singaporean job market is a good move for most work permit holders, but far less so than access to countries such as the United States or Japan where wages are several times better (e.g. over $10 per hour).

However, if more developed countries instituted immigration policies resembling Singapore, competitive pressures would tend to force lower taxes to attract the same quantity of migrants. And while wages in these professions are far lower than American or Japanese rates, they still represent a big gain for migrants from the poorest countries.

Michael Clemens finds that Indian construction workers increase their daily wages severalfold when migrating to the UAE to work for a particular construction firm, with large financial benefits. Since Singaporean wages are within striking distance of UAE wages in construction, likewise we should think that on average foreign workers are still making large relative gains.

Ethical problems and objections
Singapore's immigration system creates substantial economic value in largely win-win transactions for those involved (compared to typical rich country immigration policies, which almost entirely forbid economic migration by unskilled labor), and provides significant income boosts for many poorer people. However, the system has many features that are ethically problematic under various views.

The Foreign Worker Levies severely tax the compensation of poor workers for the benefit of relatively well-off citizens and permanent residents. This may be seen as exploitation, which some would consider worse than outright barring migrants, even though this makes everyone worse off. Better not to benefit at all than to benefit very unequally.

Separately from the taxes, the presence of poor people within the bounds of a community offends those with special local inequality aversion, who find economic inequality within their own communities more objectional than global or foreign inequality. The lesser legal rights and status of work permit holders also offend egalitarian views more broadly.

Singapore has no minimum wage, and the wages of many foreign workers are well below minimum wages in countries such as the United States. Employers are also permitted to pay foreign workers lower wages to compensate for levies. If these features were removed the job market for foreign workers would be severely undermined. Applying taxes to worker paychecks instead of an employer charge would ameliorate the problems, but high Western minimum wages would still price much of the unskilled labor force out of work. Indeed, opponents of unskilled migration in the United States have offered just that argument for raising minimum wages. Those who feel strongly attached to minimum wages may favor them even at the expense of the welfare of potential migrant workers.

Singapore also discriminates explicitly based on age and nationality in its immigration policies, favoring young workers, and providing specific lists of nationalities for low-skill work permits. The MOM website explains that work permits are normally granted to Malaysians or to citizens of of three ranked classes of countries:

Non-Malaysian WP holders generally fall into one of these three source country/territory groupings:
  1. North Asian Sources (NAS) – Hong Kong*, Macau, South Korea and Taiwan
  2. Non-Traditional Sources (NTS) – India, Sri Lanka, Thailand, Bangladesh, The Republic of the Union of Myanmar and Philippines
  3. People's Republic of China (PRC)
The most favored (with relatively higher skill and pay) work permits, in manufacturing and services, are restricted to Malaysia and other countries with large Chinese populations, plus South Korea. Those from the poorer surrounding countries are confined to fields such as construction, marine, and domestic work. The Singaporean population is mostly Chinese, with large Indian and Malay minorities, and this country list may be seen as discriminatory. 

The system also offends against principles of reproductive and sexual autonomy by expelling guest workers to prevent them from marrying Singaporeans or having children and ensure that guest workers return home.

Deportation and similar immigration enforcement efforts are used to police attempts at unauthorized immigration to avoid taxes, analogous to cigarette smuggling when cigarettes are legal but highly taxed, or prohibited for certain sub-populations such as minors.

From many cosmopolitan perspectives, one can object that while the taxes are set to limit migration as severely as they do, for loss of further potential gains, restriction of individual freedom of labor, and the limits to poor migrants' gains from high taxes. Tax revenue might be used to fund foreign aid to the world's poorest, as suggested by Bhagwati, or to fund global public goods rather than to reduce the tax burden on well-off natives.

The increase in local, visible inequality of income and legal status seems inextricably tied to large-scale migration of unskilled labor limited through migrant levies, but many of the other problems, such as national-origin discrimination and reproductive liberty restrictions could likely be ameliorated. However, the combination of high local inequality and local enforcement measures may mean that the Singapore system is not a politically feasible alternative to current policy in many rich countries. I would be very interested to hear about reception of the idea in policy and government circles, and polling data on the question of whether rich country citizens find the system more or less attractive than current immigration practices or other reform schemes.

Could the Singapore model be scaled to improve global labor mobility?
The biggest theoretical attraction of migration taxes is that the revenue could "buy off" opposition to increased low-skill immigration in wealthy countries, with unambiguously win-win payoffs. If the model of openness to labor mobility combined with levies were to spread, more and more migrants could benefit, and competition for migrants would tend to make the levies less severe.

Unfortunately, Singaporean levels of unskilled immigration (i.e. the level Singapore has permitted through the tax rates it has set) fall far short of what would be needed absorb most of the potential labor force in poor countries, as implied in models that project doubling of world GDP primarily through workers taking advantage of fixed place premium gains. Singapore's workforce has a foreign share of over 1/3, but to meet the projections of those models even all developed countries combined would need to have large supermajorities of foreign workers, as in the United Arab Emirates (UAE). So while levies might fall somewhat, the revenue-maximizing rate would be well above zero unless such massive foreign workforces were accepted by at least some capacious countries.

We can imagine that this might happen through competition for migrant workers and the associated revenue, with rich country governments deciding to accept foreign workers heavily outnumbering the native population  to maximize revenue. In principle governments purely interested in financial gain would tend to drive migration taxes to minimal or Pigovian levels, approximating open borders. However, this has not yet happened in Singapore, and might be even harder elsewhere.

Bringing developed countries up just to Singaporean migration levels might not be enough to approximate open borders, but it could still greatly improve the lot of hundreds of millions of relatively poor people and provide a noticeable boost to economic output and revenues in destination countries. One hope would be that governments could be persuaded to initially try high migrant taxes, which would then provide a slippery slope to more open borders: as governments face fiscal needs and crises they would be tempted to lower the rates to increase total migration and revenue.

Unfortunately, it is not clear that public opinion is very responsive to such financial gains. Most countries have higher government spending than Singapore, and net taxes of guest workers might make up perhaps 5% of revenues with Singaporean scale low skill immigration. That could enable noticeable tax cuts, or a modest check mailed to each citizen (the latter seems likely to generate more support), but not a major improvement in native standard of living on its own.

Singapore's adoption of migration taxes rather than quotas and acceptance of numerous immigrants may both reflect a common cause, Singapore's general tendency to technocratic policymaking:

Singapore frequently adopts the kind of policies that economists would call "economically efficient, but politically unpopular."  For example, Singapore has (nearly) unilateral free trade, admits unusually large numbers of immigrants, supplies most medical care on a fee-for-service basis, means-tests most government assistance, imposes peak load pricing on roads, and fights recessions by cutting employers' taxes.  In most democracies, advocating any of these policies could easily cost a politician his job.  In Singapore, policies like this have stood the test of time.
That is, the migrant levies may not make migrants much more popular with the Singaporean electorate, but mainly simply reflect a nationalistic government attempting to extract as much as possible for its citizens. The government does seem to make some use of the revenues (and their funding of programs for natives) in political debate, but this might not be particularly important. In opinion polls the Singaporean public is mostly opposed to admitting immigrants so long as jobs are available.

Further, while the government recently proposed increasing the foreign share of the workforce to 50% in a white paper there has been strong popular backlash, and the government has tightened conditions and continues to raise tax rates.

A push to switch from quotas and bans to levy-based regulation of migration might provide new traction and a new fiscal angle for advocacy of increased labor mobility in the United States. It might also fail utterly, or lead to extra migrant taxes without greatly expanding mobility. But it has the potential for tremendous humanitarian and economic improvement over the status quo, and enough novelty that I suspect further exploration could be worthwhile for those investigating options for improved migration.

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