This study finds that low-skilled foreign workers (FWs) were used as substitutes for machinery in the manufacturing sector during the recent period of FW policy liberalisation from 2003 to 2008. Over this period, the increase in employment of low-skilled FWs had caused manufacturing firms to reduce their machinery intensity. This would in turn have likely dampened the firms’ productivity growth.
Smaller manufacturing firms were found to be more prone to this substitution effect, having lowered their machinery intensity by twice as much as the average firm for a given increase in their ratio of low-skilled FWs.
While low-skilled FWs were found to be substitutes to machinery, their overall impact on manufacturing firms’ machinery intensity over the period of 2003 to 2008 was small. This suggests that apart from tightening FW policies to boost machinery intensity and hence productivity, other measures to improve productivity, such as helping firms to focus on R&D and product innovation, are also necessary.
The views expressed in this paper are solely those of the authors and do not necessarily reflect those of the Ministry of Trade and Industry or the Government of Singapore.
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