Featured News “The Market for Lemons” & ‘Foreign Degrees’

“The Market for Lemons” & ‘Foreign Degrees’

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By: Bernard K

The Economist is running this week with ‘Six big economic ideas: a collection of briefs on the discipline’s (economics) seminal papers’. I will use some of these ideas to offer a different way to look at our current conundrums.

George Akerlof, “The Market for Lemons”: Akerlof used the 2nd hand car market to illustrate how a good 2nd hand car (peach) will still be priced as a bad one (lemon), and eventually the good 2nd hand car (peach) market will collapse.

Let’s assume that a ‘peach’ 2nd hand car is valued at $1000 by the buyers, and a ‘lemon’ 2nd hand car is valued at $500. Now, we all know that a mechanic can touched up a bad 2nd hand car (lemon) and makes it look good (peach). So, given the risk that the buyer may get a ‘lemon’, he decides to pay only $750. But the seller who owns the car will know whether the car is a peach or a lemon, and if it is a peach he wont sell, but if it is a lemon of course he will.

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The result is that buyers will only get to buy cars for $750 if the car is a lemon. The really smart buyers will only pay $500 for a 2nd hand car because he cannot be guaranteed that he will get a peach for $750 or even $1000, but for $500 he will at least get the market rate for a lemon.  So this kills the market for ‘peach’ 2nd hand cars because the buyer does not have ‘perfect’ information or what economists called ‘information asymmetry’. So, you are only left with “The Market for Lemons”.

Michael Spence, “Job Market Signaling”: So, in the labor market, how do you tell the ‘peach’ from the ‘lemon’? “Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types.”

Im reminded by what Mr Khaw Boon Wan said about University degrees. “If they cannot find jobs, what is the point? You own a degree, but so what? That you can’t eat it. If that cannot give you a good life, a good job, it is meaningless.” [ST, May 5, 2013]

Is a University degree the problem or is it a Signaling problem? A Signaling problem occurs when: “..low-productivity workers found it easy to get a degree, then they could masquerade as clever types.” Take the case of Nisha Padmanabhan.

Ms Nisha had received a Masters’ degree from “South Pacific University”, a known degree mill which churns out fake academic degrees. And she was employed by Infocomm Development Authority (IDA) of Singapore. IDA had justified Nisha’s employment, saying it was her Bachelor degree that was the qualifying academic criteria.

I don’t know if Mr Khaw had an inkling of the upcoming book; Educational Signaling: A Fad Whose Time Has Come by Bryan Caplan. The argument by Caplan is that University education doesn’t prepare you for the job, it is there as a Signaling of IQ, work ethic and conformity.

It is more about sociology than economics because University degrees don’t make you more productive, but makes you more acceptable to companies given the social norms. The social norm is that a good and well behaved young person gets a University degree to become a respectable citizen; a sort of initiation into the national tribe.

“UNESCO believes that education is a human right for all throughout life and that access must be matched by quality. The Organization is the only United Nations agency with a mandate to cover all aspects of education.” Most global institutions see education as a social goal and is in general discussed within the realm of Human Capital.

First, Mr Khaw Boon Wan in his reduction of University education to a mere vehicle for job prospects has given primacy to economics over social benefits aka Human Capital. However, he is indeed suggesting that a University degree is but a Signaling. Implicit in his statements (as quoted above) is that such a Signaling may no longer be discernible to the employer and hence in his words: “You own a degree, but so what?”

Secondly, he should delve deeper into the problem. Why isn’t the Signaling working? The Signaling isn’t perfect but it can differentiate the market; you have some criteria to say this is a peach and this is a lemon. A differentiated market as per 2nd hand car example, provides for more choices. And in the labor market this means more employment with commensurate pay. This Signaling no longer works because of PAP’s unmitigated opening up of the labor market to Foreign Degrees.

Besides the example of Nisha Padmanabhan, “…Public hospitals and polyclinics had more than 2,100 foreign doctors in their employ, and the number continues to grow as Singapore faces a shortage of trained medical staff.” [ST, Nov 23, 2015]. Among these doctors, some are from Myanmar and Philippines whose medical degrees are generally not recognized in most developed countries but granted “temporary registration” to practice here.  

Now, this acceptance of Foreign Degrees cuts across huge swathes of professions. And if the government which is a major employer in Singapore accepts such degrees, it means that it lowers the bench mark of quality in our economy. And as a provider of multiple services from banking, healthcare, telco, education etc through GLCs, the government actually sets the prices and quality of services. Private competing companies will follow by lowering their expectations of staff quality to compete at the cost of labor.

So, in the labor market, how do you tell the ‘peach’ from the ‘lemon’? Unfortunately, you cannot because the Signaling has its eyes and ears pulled out by the government. The government through its liberal Foreign Workers’ policy led to an undifferentiated Foreign Degrees labor market; this effectively created “The Market for Lemons” only.

The employer or buyer will pay top dollar to hire a peach if you need to compete. But in a market where all cars are lemons why do you need to get a Ferrari to race? If a local University is not discernible as superior to a degree from a 3rd world country such as from Myanmar, Philippines, India or China by our own government, then liked the 2nd hand car example, the only bidding is for lemons.

The peach will either migrate, sell itself short or never see the light of day. The net effect of the Foreign Workers’ Policy is not about buttressing our talents, rather the effect is to kill “The Market for Peaches”; which is our local talents.

The obvious remedy is that the government must now reverse its policy to attract foreign talents from countries that can jack up the cost of labor because these are peaches. If the government is hiring top talents across industries through their GLCs, then for private companies to compete they too must hire peaches.

And instead of paying $500 because the buyers cannot be sure of the quality of the car, they will pay at least $750 because they know they will get a peach. At minimum you provide better depth to the labor market that can handle both lemons and peaches.

Thus, the Foreign Workers’ Policy is not just about the number of foreign workers but also the quality of the workers. By careless regard for the quality of such foreign workers, the government lowers expectations of labor quality. This lowering of the labor quality is first of all the acceptance of foreign degrees generally not on par with developed countries.

Secondly, as a major employer, the government skewed the labor market to compete at lower end of the labor quality spectrum. And finally, through adjusting the social norm, from one that values a University education to one that does not, the Signaling is less discernible.

The final point is important because the employer has no perfect information on the prospective employee. He must rely on certain social norms to make a judgement. And if the culture shifts from one that values education to one that does not, he has less of a Signaling to guide him.

And the logic will be that in the long run, the Singapore brand will wither because the employer cannot differentiate between a foreigner from a less developed country and a Singaporean.  And this will have political implications for the Singapore Identity.

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