HWA CHONG INSTITUTION Year One H2 Economics 2012 Tutorial #13: Unemployment Consequences, Causes & Cures Introduction

n Like most countries, Singapore faces various forms of unemployment. These have significant impact on the socio-economic well-being of our country and prolonged unemployment is something that this small and open economy can ill afford. This essay will focus on whether and to what extent the increased government spending can help Singapore reduce unemployment. Before that however, it would be prudent to explain the main causes of unemployment in Singapore.

Unemployment refers to the part of the labour force that is of working age, willing and able to work but not able to find any. Unemployment is usually expressed as a % of the labour force. Unemployment rate = persons willing and able to work but not employed / labour force.
Explain cyclical unemployment in Singapore Cyclical unemployment is related to the business cycle. During an economic downswing (recession or depression), aggregate demand for goods and services produced within an economy decreases and firms find they cannot sell all their current output, and stocks pile up. Firms will then adjust to the deficiency of demand by cutting back on production and reduce workers, leading to an increase in cyclical unemployment. In 2008, there was the US sub-prime mortgage crisis. Singapore is very dependent on foreign direct investments. During the recession, American investors will have a negative outlook of the economy because the expected rate of returns of investments and hence profitability of investments decrease. Hence, FDIs in Singapore will decrease tremendously. Also, many American were retrenched and loss their jobs. Hence, their disposable income and hence purchasing power decreases. Hence, consumption decreases, which include consumption for imports. Singapore is a small and open economy and is very dependent on trade, and one of our main trading partners is US. Hence, the demand for our exports decreased. In addition, the bulk of aggregate demand (AD) here is made up of export revenue. And since exports from Singapore are dominated by electronics which tended to have a high income elasticity of demand, falling global income could have a pronounced adverse effect on export demand from Singapore. Both a decrease in export revenue and investments will result in a decrease in aggregate demand in our economy. As a result, actual sales are lower than expected sales, leading to an unplanned increase in stocks. In response, firms cut back on production and resources (factors of production) used, which includes labour. Hence, this will lead to the retrenchment of workers and hence cyclical unemployment. This is seen as the unemployment in Singapore soared to a record high of 3.0% in 2009. Explain structural unemployment in Singapore Another important source of unemployment is known as structural unemployment. This is caused by structural change in the economy coupled with occupational immobility of labour both of which are individually necessary but insufficient conditions for structural unemployment. Unlike cyclical unemployment, this is typically industry specific as structural changes may arise due to shifting comparative advantage or industry specific technological advancement. A reason why job vacancies and unemployment coexist is that unemployed workers often do not have the skills demanded by employers. People are made redundant in one sector of the economy cannot immediately find jobs elsewhere because they either do not have the necessary skills or unwilling to move to another area/region where prospects are better (occupational and geographical immobility of labour respectively). Structural unemployment results from the structural decline of industries, unable to compete or adapt in the face of either changing demand and new products or the emergence of more efficient competitors in other countries. Structural unemployment is also caused by changing skill requirements as industries change ways of producing their products. Unlike cyclical unemployment, this is typically industry specific as structural changes may arise due to shifting comparative advantage or industry specific technological advancement.

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HWA CHONG INSTITUTION Year One H2 Economics 2012 Tutorial #13: Unemployment Consequences, Causes & Cures For example, Biopolis was built in 2003-2004, an international research and development centre which helps to develop Singapores life sciences value chain such as Research and Development. Hence, workers who have skills needed for labour work and lack more knowledged-based skills needed in the R&D industry will be unable to get a job in these sectors due to a mismatch of skills, resulting in structural unemployment. Explain frictional unemployment in Singapore Frictional unemployment is caused by imperfect information in the labour market. Workers typically require time to go through the job search process. When workers leave declining industry for expanding ones and when the recurring stream of students passing out from schools and institutions of higher learning start to look for jobs but have not found them yet. The unending flow of people into and out of the labour force and the process of job creation and job destruction create the need for people to search for jobs and for firms to find suitable employees. Since both employers and employees spend time searching what they believe will be the best match available, frictional unemployment arises. Inefficiency of information exacerbates this delay. In Singapore for example, school leavers typically take on average 3 to 6 months to get into a job. It should be noted that frictional unemployment will be made worse when there is cyclical unemployment, where there are fewer jobs available in the labour market. Explain how stated policy (exp FP) works to reduce (cyclical) unemployment in Singapore In order to reduce unemployment, the Singapore government has increased its spending to help businesses and Singaporean households. This can be viewed as an expansionary fiscal policy, in which the government can increase its government spending and/or lower taxes.

As for the firms, the government can allocate part of its budget to introduce measures that help to reduce costs. For e.g. reductions in corporate tax and providing rental rebates can help to reduce fixed business costs. Specifically, the Spore government offers huge tax incentives and preferential tax treatment for firms who acquires capital equipment, even in times of recession. To help businesses, the government can help firms to raise their revenue levels by increasing infrastructure spending or sharing new technology information. For eg, expanding and maintaining our already excellent transport network, telecommunication system and wireless technology island-wide will definitely raise productivity levels for firms who can be more efficient in their business process, thus earning more revenue.
For the households, the government can lower personal income tax such that disposable incomes will increase and hence allow households to have more purchasing power and hence increase their consumption levels. Additionally, unemployment benefits can be provided to households on a case-bycase basis. Given an autonomous increase in government spending, it will increase the level of AE and leads to an unplanned decrease in stocks as actual sales are higher than expected sales. As a result, the Singapore firms increase production to increase their stock levels back to desired levels, hence they hire more workers (as well as other factors of production), generating employment. This will generate income for households employed by firms in the capital goods industry. The household will tend to spend a proportion of the additional income on consumption, depending on their marginal propensity to consume (MPC). This further creates income for households employed in the consumer goods industry who will further spend their additional income on consumption. This cycle of spending and respending on consumption will continue until the increase in income becomes negligible. The eventual increase in national income is several times the initial increase in AE. The multiplier, K, represents how many times the national income increases with respect to the initial change in AE.

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HWA CHONG INSTITUTION Year One H2 Economics 2012 Tutorial #13: Unemployment Consequences, Causes & Cures
AE=Y AE a AE AEFE AE1 AE0 b
Very important to make reference to the diagram

Figure 1: Expansionary fiscal policy to increase AE causing NI to increase by a multiplied effect.

Y0

Y1 YFE

National Income

NI = AE*k

Referring to Figure 1a, there is a deflationary gap of ab and the national income is Y0 which falls short of the full employment level of YFE. This signifies unemployment. An expansionary policy will cause an increase of AE from AE0 to AE1 will cause national income to increase by a multiplier from Y0 to Y1 getting closer to the YFE.

Explain limitations of stated (FP) policy in reducing unemployment in Singapore This type of solution is primarily aimed at dealing with cyclical unemployment or demand deficient unemployment. However it is not necessarily useful in dealing with structural and frictional unemployment. In fact, it may even worsen the situation. Structural and frictional unemployment are respectively caused by occupational immobility of labour and imperfect information. Stimulating AD through pump-priming of the economy will create more job vacancies but this does not make it easier for the unemployed whose skills are irrelevant to take up those jobs, nor does it make the job search process easier. If anything, it may make the search process harder as every unemployed person now has to go through a lot more potential jobs to find a match. Even as a weapon against cyclical unemployment, fiscal policy is not without its limitations. Particularly in Singapore, due to the very high leakages in the form of savings and import expenditure, the size of the multiplier is very small. High savings in Singapore is caused in part by the Central Provident Fund Scheme which enforces over 30% of earned income by households to be saved, and in part due to conservative finance by the government, keeping the budget almost always in surplus. The high marginal propensity to import has been a result of a general lack of natural resources and hence most of our inputs for production as well as consumption are imported. The resultant small size of the multiplier meant that even if the government were to raise its spending, the eventual effect on national income would be rather limited. Furthermore, given the relatively small size of government spending compared to other components of AD (esp. (X-M)). A fall in export revenue of say 5% would require an increased government spending by some 100%, as export revenue more than 20 times government spending. This alone makes fiscal policy infeasible as a demand management policy tool. Hence the government has adopted fiscal policies with a supply side slant. Explain how SSP works to reduce unemployment in Sg (possible paragraphs) For example, Singapore firms could tap on the Skills Development Fund (SDF), as well as the Skills Programme for Upgrading and Resilience (SPUR) which was implemented during the 2009 Budget as part of the Resilience Package (SGD $20.5 Bn) Government funded upgrading courses can help structurally unemployed persons pick up new skills like language skills, IT skills, management skills as
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HWA CHONG INSTITUTION Year One H2 Economics 2012 Tutorial #13: Unemployment Consequences, Causes & Cures well as entrepreneurial skills. Some examples include courses provided by Community Centres across Singapore as well as upgrading courses provided by the previous Productivity and Standards Board (PSB), now subsumed under Spring Singapore. With the newly-acquired skills, workers would be able to increase their labour productivity and hence enable firms to lower their unit cost of production. This is an incentive for firms to retain workers during times of recession. Moreover spending on infrastructure development and education or on R&D could significantly impact the aggregate supply, and in the medium term lead to increasing demand for labour. For instance, spending on R&D and on transport infrastructure eventually leads to greater productivity and increased cost competitiveness and hence export competitiveness. The resultant increase in export demand would in turn generate more jobs. This supply-side view of fiscal policy can thus be a solution for cyclical unemployment. To deal with the emerging threat of structural unemployment in Singapore, the Government is working in partnership with the unions and the private sector to develop School of Lifelong Learning. This is a comprehensive system to address the lifelong learning needs of the workforce and ensure their continued employability. It includes the Skills Redevelopment Programme (SRP), which focuses on the retraining of the less-educated workers who are most vulnerable to structural unemployment. Besides, the government has set aside a $200 million Manpower Development Assistance Scheme (MDAS) to support the various manpower development initiatives through co-funding of projects with industries. To deal with frictional unemployment, policies that focuses on improving labour market information would help improve efficiency in the labour market. These can range from setting up of employment agencies (like those in the US) to job matching websites like JobStreet.com and JobsDB.com which helps collate potential employees details and match them to the needs of prospective employers. Explain limitations of SSP reducing unemployment in Sg The main concern with such a policy lies in the attitude, aptitude and age of the workers who were sent for the courses. There is usually great resistance in acquiring new skills, especially among older worker. Furthermore, workers who are lacking in baisic education and literacy may find the acquisition of new skills to be extremely difficult. This problem might be more prominent as the ageing population in Singapore get larger due to our low birth rates. Since retraining takes time, and during the short term, many affected families do face some difficulty in maintaining their basic lifestyle. During the retraining period, these unemployed may not have the sufficient savings (at their disposal) to tide over the tough times. Moreover, with the job fairs, frictional unemployment may not be solved quickly since workers have more choices of employers to choose from and vice versa. This would have lengthened the job searching process. Evaluation (possible paragraphs) To help low income families tide over the tough times, the Singapore government has repeatedly adopted many schemes that can help these affected families (especially those in the lower income groups) such as rebates on conservancy charges, freezing of repayment of housing as well as education loans. Conclusion In my opinion, given the resilience of Singapore and its labor force that is responsive to training and upgrading, structural unemployment is relatively easy to tackle. The Singapore government should adopt the fiscal policy with a supply side slant to solve the structural and frictional unemployment problems. As for cyclical unemployment, there is actually nothing much the Singapore government can do to minimize cyclical unemployment, except to minimize retrenchment of workers, and hope for speedy recovery of the global economy. Since unemployment in Singapore is multi-casual, a multi Hwa Chong Institution. All Rights Reserved. Tutors' Copy. Last edited by Mr William Tan

HWA CHONG INSTITUTION Year One H2 Economics 2012 Tutorial #13: Unemployment Consequences, Causes & Cures pronged approach is required to reduce unemployment in Singapore, supply-side policies have long gestation period, hence short-term measure have to be implemented as well, to prevent unemployment from escalating.

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