5. Singapore has maintained an annual unemployment rate at approximately 2% since 2010. It was 1.9% in 2013. Discuss the effectiveness of policies that Singapore government currently adopts to maintain low unemployment in view of competitive pressures from emerging economies. [25m]

Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full time employment. Competitive pressures from emerging economies would mean a relatively cheaper workforce in other countries thereby causing their goods to be cheaper than Singapore’s. This may cause our exports to decrease and hence unemployment results.

Summary of Unemployment Types

  • Demand Deficient or Cyclical Unemployment. – Lack of AD in economy (e.g. Recession)
  • Structural Unemployment – workers lack necessary skills or geographical immobility
  • Frictional unemployment – workers in between jobs

As a result of competitive pressures from emerging economies, Singapore can suffer from the above 3 types of unemployment and hence it is important to employ the correct type of strategy to tackle the root cause. In this essay we will discuss the effectiveness of policies that the Singapore government currently adopts to maintain low unemployment in view of competitive pressures from emerging economies.

There are two main strategies for reducing unemployment –

  • Demand side policies to reduce demand-deficient unemployment (unemployment caused by recession)
  • Supply side policies to reduce structural unemployment

Demand Side Policies

Demand side policies are important when there is a recession and rise in cyclical unemployment. (e.g. after after 2008 global financial crisis)

1. Fiscal Policy

Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth. The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending. Lower taxes increase disposable income (e.g. income tax cut rebates in 2009) and therefore help to increase consumption, leading to higher aggregate demand (AD).

With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity in the economy.) If firms produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.

For example, the unprecedented severity of the global financial and economic crisis justifies a draw from Singapore’s past reserves. The President gave in-principle approval for the Government to draw $4.9 billion from past reserves to fund the Jobs Credit Scheme and Special Risk-Sharing Initiative.

Impact of Higher AD on Economy

fiscal

However,

  1. It depends on other components of AD. e.g. if confidence is low, cutting taxes may not increase consumer spending because people prefer to save. Also, people may not spend tax cuts, if they will soon be reversed.
  2. Fiscal policy may have time lags. E.g. a decision to increase government spending may take a long time to have an effect on increasing AD.
  3. If the economy is close to full capacity an increase in AD will only cause inflation. Expansionary fiscal policy will only reduce unemployment if there is an output gap.
  4. Expansionary fiscal policy will require higher government borrowing – this may not be possible for countries with high levels of debt, and rising bond yields.
  5. In the long run expansionary fiscal policy may cause crowding out, i.e. the government increase spending but because they borrow from private sector, they have less to spend and therefore AD doesn’t increase. However, Keynesians argue crowding out will not occur in a liquidity trap.
  6. Singapore has a small multiplier so the effect of an injection may be smaller.

2. Monetary (Exchange rate) Policy

The exchange rate represents an ideal intermediate target of monetary policy for
several reasons.
• First, it makes sense in the context of the small and open Singapore economy.
Singapore has no natural resources, and is almost completely dependent on
imports for necessities such as food and energy. The import content of
domestic consumption is correspondingly high, with nearly 40 cents out of
every $1 spent going to imports. Singapore has to export to pay for these
imports. The economy is thus extremely open to trade, which totalled more
than 300% of GDP in 2011.
• Second, the economy’s openness means that the exchange rate bears a stable
and predictable relationship to price stability as the final target of policy over
the medium-term.
• Third, the exchange rate is relatively controllable through direct intervention in
the foreign exchange markets. An exchange-rate-based monetary policy thus
allows the government to retain greater control over macroeconomic outcomes
such as GDP and CPI inflation, and thus over the ultimate target of price
stability.

 

For example in 2009, MAS maintained the current policy stance of a zero percent appreciation of the S$NEER policy path. By not appreciating it’s exchange rate, Singapore can also increase the AD by making it’s goods more competitive. The effect is shown in the above diagram.

Evaluation

  • Changes in the exchange rate have quite a powerful effect on the economy but we tend to assume ceteris paribus – all other factors held constant – which of course is highly unlikely to be the case

    Counter-balancing use of fiscal and monetary policyFor example the government can alter fiscal policy to manage AD

    Time lags – it takes time for demand for exports and imports to change following a movement in the currency. Businesses need to have the capacity and access to credit to expand their production.

    Low elasticities of demand: In the short term, the effects of exchange rates on export and import demand tends to be low because of low price elasticity of demand. Effect depends on Marshall Lerner condition fulfilled or not.

    Business response to the challenge of a high exchange rate: Businesses can and do adapt to a high exchange rate. There are several ways in which industries can adjust to the competitive pressures that a strong pound imposes. Some of the options include:

    Cutting their export prices when selling in overseas markets and therefore accepting lower profit margins to maintain competitiveness and market share

    Out-sourcing components from overseas to keep production costs down

Supply Side Policies for Reducing Unemployment

Supply side policies deal with more micro-economic issues. They don’t aim to boost overall Aggregate Demand, but seek to overcome imperfections in the labour market and reduce unemployment caused by supply side factors.

Policies to Reduce Supply Side Unemployment

1. Education and Training. The aim is to give the long term unemployed new skills which enable them to find jobs in developing industries, e.g. CET, Skills Future Credit, retrain unemployed workers to have basic I.T. skills which helps them find work in service sector. – However, despite providing education and training schemes, the unemployed may be unable or unwilling to learn new skills. At best it will take several years to reduce unemployment.

2. Employment Subsidies. Firms could be given tax breaks or subsidies for taking on long term unemployed. This helps give them new confidence and on the job training. However, it will be quite expensive and it may encourage firms to simply replace current workers with the long term unemployment in order to benefit from the tax breaks.

3. Reduce Frictional and StructuralUnemployment. It is argued that higher frictional rates of unemployment in Singapore is due to lack of information. The Singapore Workforce Development Agency (WDA) aims to help workers advance in their careers and lives by developing and strengthening skills-based training for adults. They work with various partners–including employers, industry associations, the Union and training organisations–to develop relevant skills-based training that is accessible to all in the Workforce, whether young or old, from rank-and-file to professionals and executives. WDA also provides jobs portal and consultation services to match the workers profile to the correct job.

5. Improved Geographical Mobility. Often unemployed is more concentrated in certain regions like the CBD. To overcome this geographical unemployment, the government could give tax breaks to firms who set up in out of core region areas. Alternatively, they can encourage the use of other areas for government activities. For example Woodlands and Jurong  are being developed as alternate CBDs. For e.g. Government agencies such as MND is being relocated to Jurong.

In conclusion, Singapore’s low unemployment is a result of several well timed and well thought policies. It must remain vigilant in view of changing global economic dynamics and be ready to adjust it’s array of policies to maintain low unemployment.