SINGAPORE, Dec. 29 (UPI) -- Over the last couple of years, the Singapore government has strived to reinvent the economy in the face of mounting competitive pressures from China and India by putting emphasis on the service industry from tourism to education and health. It has also guided through painful restructuring in the labor market to make the local workforce more competitive. More of this painful medicine is expected in the year to come.

In 2003, Singapore flirted with recession, but remained in the green although its economy was one of the least performing in Asia with a GDP growth expected at around 1 percent, compared with over 6 percent in Thailand.

At the same time, the employment situation worsened to its worst in 18 years with the unemployment rate hitting 5.9 percent in the third quarter. Although there have been some signs of improvement on the labor front in the fourth quarter, economists remain pessimistic that the situation will greatly improve in 2004 and expect the unemployment rate to trend lower toward 4.5 percent as the economic situation improves.

Several indicators point to a recovering labor market: retrenchments slowed noticeably in the third quarter, while employment prospects in the services sector have perked up. Adding to the weight of evidence of an improving labor market, job advertisement volume in November is believed to have recorded its first positive year-on-year growth rate in nine months, rising 3.7 percent year on year.

Nevertheless, rising structural unemployment means that the unemployment rate is unlikely to return to pre-Asia Crisis level of 1-2 percent, economists say. Job losses in the manufacturing and construction sectors have been the main reason behind the decline in total employment over the last two-and-a-half years and with construction still suffering from a property overhang and manufacturing businesses steadily relocating to cheaper locations in the region, employment prospects for these two sectors are unlikely to improve significantly going forward.

The government is well-aware that the local work force is pricing itself out of the region's markets. Singapore workers' wages have risen to the point that the wages of one Singapore worker are equivalent to 3 in Malaysia, 8 in Thailand, 13 in China, and 18 in India. Keeping in mind that on average wages make up 40 percent of total operating costs, this definitely explains why some manufacturing companies have been relocating.

Meanwhile, the rigidity of the wage system has been another big issue for corporates, although many employers are still unwilling to move towards a variable system that would allow wages to fluctuate according to economic conditions.

In the last year, measures have been taken to reduce the cost of doing business in the Lion-state. While corporate taxes have been cut further (to the lowest in the region after Hong Kong), the government decided on a radical pension reform, which it hopes will improve cost competitiveness.

It touched on a "sacred cow" of the Singaporean social system, the Central Provident Fund (CPF) -- its state-run pension scheme -- by cutting down the required contribution of employers to the fund by 3 percentage points. The government estimated that the reduction in CPF rate will translate into cost savings of $750 million a year for the employers.

While some economists believe the cut should have been more severe, the broad thrust of the reform underlined a delicate balancing act at improving cost competitiveness in the face of intensifying global competition while at the same time minimizing its negative impact on domestic consumption.

But going forward, workers will have to agree to lower wages and wage flexibility, while increasing their productivity for a sustainable solution to improving Singapore's competitiveness. Workers and their skills will also have to move up the value-chain toward more high-tech industries.

The government has been encouraging companies to shift away from the predominantly seniority based wage system to one which is flexible and competitive, where wages can move move up or down in sync with company profits.

It believes a desirable wage structure should take into consideration income stability with a fixed component for the workers and the wage flexibility component for the company, with the flexible component increasing with seniority in management.

But although many employers believe this wage restructuring is necessary, most also agreed that implementation will be difficult.

Singaporeans are not a rebellious lot and the pension reforms were accepted without any protest, but wages cuts or changes are a difficult pill to swallow. Wage negotiations with unions in 2004 are likely to prove difficult, even though the unions have limited leverage powers. Government-controlled Singapore Airlines is facing tough talks with its pilot union, which is unhappy about wage cuts and layoffs enacted after the SARS outbreak, especially as the company's profits have rebounded sharply. The outcome of these negotiations are eagerly awaited as they could prove a test case.

The government has already made strong comments that it will not let the unions "do Singapore in."