Singapore did not achieve this constructive tripartite relationship overnight, or by accident. Industrial relations in the 1950s and early 1960s were chaotic and confrontational. Strikes, work stoppages and lockouts caused widespread disruption. Trade unions were infiltrated and manipulated by communists to serve their own political ends. They instigated the unions to stir up trouble, including the Hock Lee bus riots. No common ground was possible between employers and unions.

It was only after we became independent in 1965, and especially after the British announced the pullout of their forces from Singapore in 1968, that the Government could progressively put things right. The British pullout faced the country with the prospect of a grave economic crisis, as British defence spending in Singapore accounted for 20% of our GDP then and gave employment, directly to 30,000 and indirectly to another 10,000 domestic help.

In 1968, the Government amended the Industrial Relations Act, to restore to management the prerogative to hire, fire, transfer, promote and dismiss. To protect workers from abuse, it allowed workers and trade unions to seek redress through conciliation and adjudication.

The Government also passed the Employment Act to ensure that workers were not short-changed. The Act spelt out workers’ rights and obligations, and stated the basic terms and conditions of employment.

With the institutional framework in place, we could break the old mould of confrontational industrial relations and promote tripartite co-operation. Luckily the union leaders then understood that this was in the deep, long-term interest of workers. They realised that the labour movement could not be built on malingering and obstructionism. They persuaded members to put a stop to industrial strife, to work hard, and to cooperate with employers in order to grow the economic pie for all.

In 1972, the Government set up the tripartite National Wages Council. The NWC brought together employers, workers and the Government to guide wage adjustments each year, as the economy prospered. For nearly 30 years, the annual NWC recommendations have enabled wages to rise in an orderly way, assured Singapore workers a fair share of the rewards of growth, and helped us to avoid any wage explosion that would have undermined our competitiveness.

As we worked together over the years, the tripartite partners developed close relationships, rapport and mutual confidence. We have developed a responsible labour movement that prides itself as being an equal partner in Singapore’s economic success, together with the Government and employers.

This Singapore formula is now one of our major competitive strengths. It has earned us the confidence of investors, and distinguished us from other countries. MNCs which have experienced adversarial or hostile unions in their home countries or elsewhere, know that our brand of unionism is very different.

The tripartite relationship has withstood difficult economic times. It was tested during the 1985 – 86 recession, when we had to cut employer CPF contributions by 15% points. It was tested again in the recent crisis, when our economy slowed drastically, and we had to cut CPF by 10% points. Fortunately each time our strategy worked, and we were able to turn the economy round.

Successful though tripartism has been, the next phase of our economic development will present great challenges for this formula. Globalisation and technological advances will result in a tougher, much more competitive environment. Market conditions now change swiftly and unpredictably. Companies are being forced to become more flexible and responsive, or else be pushed aside by their competitors. They have had to restructure their operations, and substantially alter their approach to managing and rewarding staff.

In the old, 20^th century model of industrial production, there was a clear dichotomy between employers and workers. Workers were employed for long periods by the same firm. This model is breaking down. In its place, to meet the needs of the knowledge economy, is emerging a much more fluid arrangement. Knowledge workers are becoming more like shareholders than employees, with stakes in the success of their firms. At the same time, other workers have lost much of their job security, and few can expect lifetime employment with one company.

The US, and particularly Silicon Valley, illustrates both these aspects of the new labour market. The value of a knowledge company lies not in its fixed assets, building or machinery, but in the brainpower, ideas and drive of the people who work for it. Companies therefore go out of their way to attract and retain the best brains, and to give them every incentive to do their best for the firm.

Knowledge workers like software developers are not just employees receiving a salary. They are made co-owners in the firm. They do not necessarily work for very high pay, but they receive share options which align their interest with the company’s. These options will be worth nothing if the company fails, but can be worth millions if the company does well. So they bust their guts working long hours, without overtime pay. They know that if the company makes it big, so will they. And many have indeed done so.

For example, Microsoft’s success has not only benefited Bill Gates by making him the richest man in the world. It has made several billionaires, as well as hundreds of millionaires, among those who have worked for the company, and were paid in the form of stock options. If Bill Gates had not given his collaborators and employees generous stock options, he could not have built up Microsoft alone into what it is today.

Besides share options, high-tech companies also seek to treat their people well, and create a sense of fun and family among them. So they offer flexible working hours, and provide free soft drinks, basketball courts and coffee bars. One company even took all its employees on a free ski trip when it met a crucial sales goal!

The result of all this is a group of well-paid, satisfied "technology workers" who see no need for unions, notwithstanding the sweatshop hours they have to put in. Their attitude is, if they dislike their jobs and have the skills and training, they can simply walk down the street to the next start-up to get a job.

But not everybody in the high-tech industry is a knowledge worker. There are also less skilled workers whom high-tech companies hire on a temporary basis for flexibility. Microsoft, for example, employs 20,500 regular workers domestically and 6,000 temporary workers or "temps". In other companies like Compaq, HP and Intel, more than 10 per cent of the workers are temps. The temps have no job security, and can be hired and fired at any time.

Unions are not a significant force in Silicon Valley. The knowledge workers with share options see no need for them. The temps usually do not get unionised either, because they turnover so quickly. Forty years ago, one American worker in three was a member of a trade union. Today, the figure is closer to one in seven. In Silicon Valley start-ups, the proportion is even smaller.

As Singapore becomes a knowledge economy, we will be subject to the same trends. Companies will give knowledge workers share options and equity stakes in the firm, because they depend on them just as heavily as companies in Silicon Valley. We are promoting technopreneurship, but we will not succeed unless our rules give successful technopreneurs a realistic chance to find the pot of gold at the end of the rainbow.

Established companies like banks and airlines will also increasingly need to offer workers share options. They have to be as creative, dynamic, and efficient as startup companies to do well. They too depend on harnessing the energies of their staff.

At the less-skilled end, we will also face the same pressures for flexible hiring and firing. Thus half of the workers in Apple’s plant in Singapore are not Apple employees at all. They are employed by sub-contractors, but work in Apple’s premises. If there is a change in the market for iMacs, Apple immediately stops buying from these sub-contractors. It does not worry about retrenching workers or paying retrenchment benefits. That is the sub-contractors’ problem.

We cannot afford to shut out the market forces which are pushing labour markets in this direction. The results have shown that this is perhaps the most efficient way to organise production and innovation, at least during this phase of the global economy. European countries like France and Germany have not accepted the US model. They have sought to develop more stable labour markets with more social safety nets. But they have paid a high price in lower vitality and innovation, and more rigid labour markets, and higher unemployment. But perhaps they can accept this trade-off, because they are wealthy countries, compared to Singapore. We cannot afford to follow the European model.

However, one aspect of US style labour markets which we must not passively accept is the decline in the role of unions, particularly in protecting workers at the lower end. Even in the US, this decline has not gone unchallenged. Lower-end workers are facing problems in the new environment. Temp workers are trying to get organised, to protect their rights and welfare. "Temp agencies" which employ a pool of temporary workers to be hired out to IT companies are moving toward giving their temps medical benefits, pensions and training. They are considering creating "high-technology hiring halls", where companies would contribute to a joint pension and health plan for the hall’s temporary workers so that the workers would not lose their pension credits or health insurance when they have to change jobs.

If this is a problem in the US, all the more having weak unions will not be the ideal model for Singapore. Firstly, we are not just an economy but a society. Unions meet important needs of workers, whether it is welfare benefits for families, help in taking up grievances with employers, or privileges like Fairprice membership and the Orchid Country Club.

Secondly, we gain flexibility working with strong but constructive unions, rather than having weak unions and relying solely on the operation of the free labour market. This is particularly so when dealing with difficult issues. A good example is cutting employer CPF contributions. Singapore was able to do this with the full cooperation of the unions, whereas Hong Kong, which is perhaps an even freer economy, has had to try to work out wage cuts company by company, a slow and painful process.

Thirdly, if workers are not organised under responsible, rational union leaders, we cannot assume that they will remain free individuals, satisfied and unorganised. Should workers become aroused by some problems in the absence of leadership, they may well spontaneously group together to press their interests. This may lead us back to confrontational labour-management relations, and a breakdown of tripartism.

Singapore must have flexible and responsive labour markets, to attract MNCs who operate in the fast changing environment. But we also want to have strong unions who are partners in economic progress, and strengthen the stability and flexibility of our economy. Unions will moderate the shortcomings and extremes of the free market. But they must understand the needs of knowledge workers, and the way the knowledge economy works. They have to adapt themselves to the knowledge economy, just as employers have to adjust to unions playing new roles. This is not just a union problem, but an issue which unions, employers and the government will have to tackle together.

A second, more immediate challenge for us is managing the economic recovery, to restore the economy fully without mishap. We will need tripartite cooperation to manage the recovery, just as we needed tripartite cooperation to cope with the economic downturn.

There are three key issues which we need to focus our attention on: manpower training and upgrading, implementing a more flexible wage system, and restoring CPF contribution rates.

The first key issue is manpower training and upgrading. This has been dealt with extensively under Manpower 21, and needs little elaboration.

Clearly, Singapore cannot compete on the basis of low costs. Our wages, for example, are already much higher than many countries. According to the 1999 World Competitiveness Yearbook, manufacturing workers here are paid US$7.32 per hour. In comparison, workers in China are paid US$2.11 per hour while those in Malaysia are paid US$2.59. Even manufacturing workers in Taiwan are paid less: US$5.07 per hour.

We therefore have to compete on the basis of capabilities. We must justify our higher wages by offering investors that extra plus in terms of our business environment, the quality of our workers, and the contribution of their operations in Singapore to their overall business and profits.

To do so requires restructuring and upgrading our economy to attract investments in activities higher up in the value chain. These activities will create new, better paying jobs for Singaporeans. But they will also require new skills and capabilities. We will need to upgrade and re-train Singaporeans continuously to acquire these skills, to match these new jobs.

This calls for a tripartite effort. The unions need to encourage workers to take training and upgrading seriously. The employers need to identify the skills which they will need, help provide the training, and invest in the training of their own employees. And the Government needs to help marshal the resources, contribute part but not all of the funds needed, establish the framework for certifying skills, and work out how the ITEs, polytechnics and universities will provide life-long training to workers.

We are developing a full range of programmes to meet the training needs of different groups of workers. Employers, through SNEF, have given their strong support to the Skills Redevelopment Programme (SRP). SNEF has joined the NTUC to be an active partner in the SRP, and has targeted to upgrade some 5,000 workers over the next five years. This will be an additional channel to reach more companies and workers.

To encourage this effort, the Government has earmarked some $6 million within the SRP budget to help achieve the objective of the SRP. Such a concerted effort will enable us to upgrade and enhance the skills and competencies of our workers and make our workforce internationally competitive.

A second key issue in managing our economic recovery is putting in place a more flexible wage system.

One major outcome from the 1985 recession was the implementation of a flexible wage system. We persuaded employers and unions that it was to their advantage to make our wage structure more flexible, and build in variable bonuses and profit sharing schemes into the pay package. Then when times are good employers will be more willing to pay bonuses without fearing that they will be locked in, while in bad times they can reduce the bonuses and save costs instead of retrenching workers.

In more than a decade since 1985, as the economy grew and wages increased, we have progressively built up the variable component of wages, both in the private and public sectors. This has injected a significant degree of flexibility into our wage system. The system was put to the test last year, when it proved its worth. Because of flexible wages, we only needed to cut CPF by 10% points, compared to 15% points in 1985. The balance of the cost savings was made up by reductions in variable bonuses.

But our flexible wage system still has limitations. In the public sector, there are flexible components both in monthly wages and in annual bonuses. But in the private sector, usually only annual bonuses are flexible. So when the crisis struck and we needed to reduce wage costs, companies could only do so by cutting annual bonuses. This meant a time lag, since annual bonuses are normally paid at the end of the year. By then the cost savings may be too late. If the monthly wages had contained a variable component, wages could have been reduced immediately when circumstances became grave enough, as the Government did for civil servants.

This is why the NWC has recommended building up a monthly variable component (MVC) of wages. The Government supports this recommendation, and will work closely with employers and unions to implement the MVC.

One of the obstacles to introducing the MVC is working out guidelines on how the MVC will be adjusted. Both workers and employers want to know under what circumstances employers can cut the MVC. This is a legitimate question. We should work out tripartite guidelines on what should happen at the company, industry or national level to trigger an MVC cut. But this will take time. We should not wait for the whole system to be perfected before initiating an MVC.

We should begin to build up the MVC once companies start paying wage increases. This is the right time to do so. The flexible wage system has just undergone its first major test, and its effectiveness and limitations are still fresh in people’s minds. Also the economy is doing well and wages are rising. In the same way, we built up the annual variable bonuses after the 1985 recession. It will take several years to build up a significant MVC of say 10%. If we do not start now, we will miss a rare opportunity to do so.

Besides lacking the MVC, our wage system still contains other rigidities that hamper our ability to respond quickly to changes in market conditions. For example, we need to do more to encourage companies to provide employee medical benefits based on co-payment by employees, rather than benefits that are entirely paid for by the employer.

We should also review our approach to paying retrenchment benefits. The primary objective of retrenchment benefits should be to help retrenched workers tide over the period during which they are seeking re-employment. But retrenchment benefits as presently practised are not closely linked to this rationale. In some situations, the payment is excessive and is viewed as a windfall by employees. In other cases, workers are retrenched without any benefits, because their companies have no money after paying secured creditors.

We need to rationalise our approach to paying retrenchment benefits. Overly generous benefits may appear to be an attractive perk, but they make our wage system more rigid and will not be in the long term interests of workers. Employers will be more reluctant to hire more workers when business is good, preferring to pay existing workers to work overtime instead. Companies will be more cautious when making new investments, because they will have to calculate the higher costs if for some unforeseen reason conditions change and they have to lay off staff. The result is fewer job opportunities and lower earnings for workers.

This has happened in Europe, where the laws make it difficult and expensive to retrench workers. We are nowhere near the European situation. But we must still make our wage and labour system more flexible, so that we can ride the tides and storms that will buffet us from time to time.

Finally, the restoration of the employer CPF contribution rates. The Government originally planned to cut the CPF for two years from 1 Jan 1999, before starting to restore it. However, because of the rapid recovery this year, the labour market has begun to tighten. The seasonally adjusted unemployment rate has come down from a peak of 4.4% last December to 3.3% in June. Wage settlements are starting to creep up.

Hence the Government announced that we would bring forward the CPF restoration to next year. Otherwise the CPF reduction would simply be converted to higher wage settlements, eroding the cost saving to companies and making it harder to restore the CPF contributions later on.

The question is how much we should raise CPF by, and when exactly to do so. The Government will only make a definite decision after we get the 3^rd quarter economic figures, and MTI has a growth forecast for next year. This should be in November. However, since both workers and employers naturally have a keen interest in the issue, let me share with you the Government’s preliminary thinking.

In principle, the Government prefers to begin restoring the CPF contributions without delay, and to build it up as quickly as the economy can take. The CPF constitutes important old age savings of workers. It is also an invaluable buffer of last resort in a severe downturn. We should therefore build it up as soon as we can.

However, right now despite the strong economic recovery, we must continue to watch our costs carefully, particularly in the electronics sector, where restructuring is continuing apace. Disk drive and PC manufacturers are still retrenching workers, because they face tremendous pressures to reduce prices and costs. To sell a PC for below $1,500, manufacturers have had to shave costs to the bone. Similarly, the disk drive industry expects to see a 17% growth in output but zero growth in revenue because prices will fall by 20%.

Over the longer term, this restructuring is inevitable. It is part of the process of upgrading and renewing our economy. But our cost cutting measures have bought us some time. We should therefore be careful not give up our wage restraint policy too quickly. Otherwise, we may inadvertently force companies to retrench and relocate faster, before our workers are ready for new jobs or before new jobs have been created for them.

How quickly can we restore the CPF rates? It is useful to look back at what we did after the 1985 recession. Then we had to raise employer CPF contribution rates by 10% points, from 10% to 20% (see Annex).

For 8 years from 1987 to 1994, we enjoyed a period of sustained growth, averaging nearly 10%. Yet, we took the full 8 years to raise employer contribution rates by 10% points. The quantum of increase varied from year to year, depending on our economic performance. Some years the increase was only 0.5% points, some 1 or 1.5% points. The largest increase was 3% points in 1989, which followed two years of very strong GDP growth – 10% in 1987 and 12% in 1988.

In retrospect, perhaps we should have moved a little faster in restoring the CPF rates after 1985. But we could not be sure that growth would continue to be strong. Also it is quite likely that the strong growth was partly the result of our cautious approach in restoring CPF rates.

It is against this perspective that the Government will decide on the pace and timing of the CPF restoration. MTI has forecast 4-5% growth for this year. Even if we exceed this forecast, we will still be nowhere near the 10 to 12% we achieved back in 1987 and 1988. So I do not expect a 3% point increase next year. An increase of about 2% points looks much more realistic.

In terms of timing, companies have told us that they recognise that the economy is recovering more strongly than expected, and therefore the CPF restoration needs to be brought forward. However, as they have made plans based on the CPF cut, which they had expected to last for two years, they have asked the Government not to change the basis of these plans too suddenly or drastically.

This is a legitimate concern. Our intention is to adjust the CPF rates some time in the first half of next year, but not on 1 Jan 2000. This will give companies enough time to adjust, and enable employers and workers to fully factor CPF into their wage calculations when negotiating wage settlements for the year. As the NWC has often stated, CPF is part of wage costs, and CPF adjustments must be taken fully into account in making wage settlements.

But as I explained, these are only preliminary views. The Government will only announce a final decision on the quantum and timing of the CPF increase in November.

The tripartite partnership that we have today has been built up over the past three decades. It is a dynamic relationship that will shift as our society changes and our economy upgrades. It is a precious national asset that must be carefully nurtured.

The tripartite movement has a full agenda. I hope your deliberations will result in clearer insights into the issues that the tripartite partners will have to tackle together. I am confident that we will continue to work together to explore new areas of co-operation, bring this partnership to a higher plane and rise to future challenges and opportunities.

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