Workers fear their pay packets will shrink

Deputy Prime Minister Lee Hsien Loong warned that wage reforms were necessary in order for the city state to fend off fierce competition from emerging economies.

"Wage restructuring is painful medicine, but it will make our economy healthier and fitter," said Mr Lee said.

But he denied the widely-held belief that wage reforms would mean smaller pay packets.

"Wage restructuring does not mean an across the board wage cut... it means linking workers' pay more closely with their performance, making it depend less on seniority," he explained.

Singapore is losing ground as a manufacturing hub, as India and China emerge as the new Asian hotspots for foreign investment.

Shrinking

And the economy, once one of the region's richest, has suffered a series of setbacks.

The recent Sars epidemic caused the economy to contract by 4.2% between April and June, following a severe recession in 2001.

And unemployment is stubbornly high at 4.5% and expected to rise further still.

The statement about wage reforms came at a speech to celebrate the state's 38th birthday.

In a televised speech, Prime Minister Goh Chok Tong announced the government was further slashing its economic growth forecast this year to between zero and 1%.

But he also promised that things would pick-up next year.

"We have lowered taxes and fees, and will continue to do so to meet the competition... if we make these adjustments, we will have a clear start when business conditions pick up," he said.