Solving a National Productivity Puzzle
Business Journal

Solving a National Productivity Puzzle

Singapore's productivity continues to lag that of other developed economies. Behavioral economics may help close the gap.

Has Singapore's workforce reached the limits of its production possibilities?

Singapore's productivity continues to lag that of other developed economies, despite heavy investments by its government and businesses. To close the productivity gap, Singaporean leaders should look to behavioral economics. This emerging science, which provides new insights into improving human motivation and performance, suggests that Singapore's workforce must make key adjustments to become more competitive.

Though many of Singapore's workers are well-compensated and seven in 10 report that they have their "ideal job," a closer examination reveals a different picture. Gallup's finding that only 9% of the country's workforce is engaged -- or emotionally invested in and focused on creating value for their organization every day -- is echoed by recent surveys showing that seven in 10 are seeking new jobs because of bad bosses.

A stubborn productivity gap

The National Productivity and Continuing Education Council (NPCEC) was set up in 2010 to drive productivity growth of 2% to 3% each year through 2020. From 2000 to 2012, Singapore achieved an average growth of 1.7% per year. And based on available data for the first three quarters of 2013, that trend seems to be stubbornly persistent.

As of October 2013, the NPCEC had launched initiatives in 12 priority industry sectors, earmarking more than $700 million in grants, skills upgrading, process redesign schemes, and other programs. These "whole of government" efforts are designed to support and motivate a workforce that many countries would envy: an average 46.2 hour workweek per worker, a 79% employment rate among workers at the prime ages of 25-64, record workforce participation rates, a literacy rate of 96.4% with one in four residents having graduated from a university, and consistent high scores on the OECD's PISA rankings of global education.

The quality of Singapore's workers and the time they spend working seem as high as possible. Has this workforce reached the limits of its production possibilities? Or is Singapore's ambitious productivity goal actually attainable? This is the puzzle Singapore's government and business leaders must urgently solve.

A flawed approach to productivity growth

As foreign worker inflows are set to tighten this year, companies are looking to the government for ways to grow productivity with the country's existing workforce. High on some companies' wish list for the government's 2014 budget are additional incentives for innovation and research and development (R&D). Traditionally, a higher pace of technological innovation translates to a higher rate of multifactor productivity growth. So at first glance, this seems like a logical approach. Any gains from government investment may be limited, though, as Singapore's previous record shows. From 2002-2011, the compound annual growth rate in gross expenditure on R&D was 8.6%, and the budget for such expenditures is $16.1 billion for FY2011-2015. Yet the resulting effect on productivity has been modest at best.

Perhaps Singapore's leaders have been searching for productivity growth in the wrong place. A burgeoning body of research suggests that labor productivity may be improved by improving, well, labor -- and not using the traditional tactic of paying workers more. Studies like those conducted by Dan Ariely, a behavioral economist at Duke University, and a team of researchers found that performance can actually decrease as performance incentives increase. Other unwanted effects of very high reward levels include breeding a transactional organizational culture with pervasive greed. New research from Sanford DeVoe, a professor of organizational behavior at the Rotman School of Management, shows that the more people earn, the more important that money becomes, to the point that it becomes embedded into their feelings of self-esteem and self-worth. Company loyalty then becomes worth only as much as the compensation package, resulting in little or no performance gains.

A behavioral model of productivity

In his bestselling book Drive, Daniel Pink suggests that people are most productive when they can achieve autonomy, mastery, and purpose in their work. Intuitively, all leaders believe that engaged employees are more productive, and Gallup research has quantified the extent of this productivity boost through more than 25 million interviews in 189 countries and 69 languages. The most engaged work units are 21% more productive than the least engaged; they also have higher profitability and customer ratings and lower absenteeism and attrition. Engaged workers know what is expected of them, use their innate talents every day, connect with the mission and purpose of their organization, and know their opinions count in charting the direction of their company.

Many large companies already have employee engagement programs, but most of them fail to engage their employees. If company leaders are not strongly committed to driving engagement, the result is often myriad initiatives that don't align each employee's efforts with the company's strategy and goals.

Managers must also understand how engagement relates to each employee's day-to-day business realities. And companies need to select and reward managers for their ability to help employees connect their work to the company's mission and purpose. Businesses also must use the right instrument to measure engagement. Too often, instruments collect information that is irrelevant, impossible to act on, or not proven to influence key business metrics.

Instead, real cultural change happens when the top leadership team clearly defines the values and benefits of engagement and when talented managers communicate and reinforce those benefits at all levels in a company. But this can happen only when leaders and managers deeply understand that any productivity or innovation returns they will gain from their investments will come from their employees. Companies must carefully select managers for their ability to get things done through others by maximizing their team members' strengths and aligning them with the organization's mission and purpose.

Businesses must also coach managers and hold them accountable for building an engaging environment for their teams. Instead of automatically rewarding top performers with a promotion to management, for example, companies that are committed to engagement determine whether those top performers have the talent to manage. If they don't, they move into alternate career pathways where their talents are held in equal regard with those on the managerial track. As organizations restructure in this way, engaged teams of top performers, led by talented managers, can quickly realize strong gains in productivity, which further encourages the transition process.

Benefits for small and medium-sized businesses

Large businesses aren't the only ones to realize these benefits. There are strong implications for small and medium-sized enterprises (SMEs) as well. SMEs hire about 70% of the labor force and contribute almost half of Singapore's GDP. The rapid pace of business can strain the limited resources of a small staff, making it difficult for an SME to attract and retain quality employees. And the talents that make an entrepreneur great don't always make that person a great manager, which can cause problems if a business aims for rapid growth. Entrepreneurs and owners of SMEs must be extremely careful to hire and promote people who have the natural ability to manage. Mark Zuckerberg, for instance, recognized the value of having Sheryl Sandberg on his team as Facebook grew.

Investments in innovation and R&D are important to Singapore's future, as are investments in upgrading workforce skills, and they must continue as the country seeks to grow in a fiercely competitive region. To maximize the return on these investments, however, businesses must select leaders and managers who can engage their employees and build resilient workplaces that are ready to cope with the demands of a volatile, uncertain, and complex marketplace. It is time for Singaporean leaders to take on the responsibility of engaging their workers and closing the productivity gap.

A version of this article originally appeared in The Business Times.

Chee Tung, Leong is Manager, Singapore and Southeast Asia, at Gallup. He is based in Gallup's Singapore office.
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