AFTER falling a few places last year, Singapore recently reclaimed its usual stop near the top (third) in IMD’s ranking of the most competitive economies in the world. The prestigious ranking scheme, based on both statistical measures and survey results, gathers a lot of media attention and countries that place highly in the scheme seem poised for continued economic success. This seems particularly true of Singapore, which is not only one of the wealthiest countries in the world, but is also stable politically, well-positioned geographically, heavily digitalised, blessed with a terrific educational system, excellent infrastructure, high rates of savings and investment, and a government that is honest, hardworking, efficient, and highly supportive and protective of property rights. Quite a bundle of competitive assets in other words.

This said, imagine what the city-state could do if it could substantially increase its labour-productivity growth rate, for, according to a number of studies published by academic economists over the past three decades, Singapore’s performance has been lagging by this metric. Before analysing the labour-productivity question in Singapore, a few words about the concept itself. On the surface, labour productivity seems a straightforward concept, but it comprises several component parts, making it difficult to measure precisely, much less to assess the relative contribution of each component. Labour productivity is usually defined as real economic output per hour worked, but the level of output achieved per labour hour can depend on a variety of factors, not just the quality or skill level of those doing the work. For one thing, labour productivity is powerfully affected by the amount and quality of capital — durable goods (machinery, software, etc) used in the production process by those doing the work. But that is not all, because the way labour and capital and other inputs (such as energy and purchased services) are combined can also strongly affect how much real output is generated per labour hour. This broader measure is known as total factor productivity (TFP).

In the growth-accounting models, TFP is the residual unexplained by an increase in quantity and quality of the labour force and the stock and vintage of capital equipment. This residual is generally believed to arise from a number of factors such as management and entrepreneurship which employ these factor inputs. In the long run, growth in knowledge and technical progress are other factors.