MACROECONOMICS OBJECTIVES IN SINGAPORE

Low Unemployment
Unemployment in Singapore
An unemployment rate of 2-3% is considered as full employment in
economics. It is important to achieve full employment to ensure full
utilisation of the countrys resources. It also means that the country is able to
attain its potential. In an economy with limited natural resources, it is even
more important to ensure that each worker is gainfully employed. There are
costs of unemployment to a country: loss of potential output, costs to the
government to help the unemployed, loss of tax revenues and increase in
social problems. High unemployment is a problem for the Singapore
government as labour resources are underutilised, leading to the economy
producing below its capacity. As such, the Singapore government should
focus on achieving low unemployment using a myriad of strategies such as
supply-side policies and demand-side policies .While supply-side policies are
appropriate in reducing structural unemployment, the government needs to
adopt a combination of both demand-side policies and supply-side policies to
help reduce cyclical unemployment. Hence, the government should not use
primarily supply-side policies to achieve low unemployment in Singapore but
a combination of both types of policies to solve the problem.

Types of Unemployment
Frictional unemployment
Reactionary unemployment is transitional unemployment due to people
moving between jobs. For example, newly redundant workers or workers
entering the labour market such as university graduates may take time to
find appropriate jobs in the wage rates they are prepared to accept. Many
are unemployed for short time while involved in job search. Imperfect
information in the labour market may make frictional unemployment worse if
the jobless are unaware of available employment opportunities. This type of
unemployment is common in all countries, including Singapore.

Cyclical Unemployment
Cyclical unemployment is involuntary employment due to a lack of
aggregate demand for goods and services. This is also known as Keynesian
demand deficient unemployment and is associated with the transition of
the economy through the business cycle. When there is an economic
recession we expect to see unemployment rising because of plant closures
and worker lay-offs. This is due to a fall in demand leading to a contraction in
output across many industries.

MACROECONOMICS OBJECTIVES IN SINGAPORE

Sources of cyclical unemployment: Recession of

Trading partner
Singapore is a small and open economy and highly dependent on trade:
trade (X+M) in Singapore is almost 4 times its GDP. Singapore is affected
significantly by external demand especially from US and the EU rather than
by domestic demand as the domestic market is small.
Singapore, being trade dependent, experienced rising cyclical unemployment
during the global economic crisis of 2008 as well as in 2001, when its major
trading partner, USA faced terrorism attacks. This reduced trade with
Singapore due to contraction of the US economy. This fall in exports
(Singapores exports consists of export of tourism services, export of
biomedical services, education and semiconductors, among others) resulted
in a fall in Singapores aggregate demand and hence the national output,
leading to a rise in unemployment.

Structural unemployment
Structural unemployment occurs due to structural changes within an
economy. This type of unemployment occurs when there is a mismatch of
skills due to the changing structure of the economy. In 2009, hard-disk
manufacturer Seagate announced that it would be laying off 2,000 workers
and relocate its Ang Mo Kio hard disk plant out of Singapore in order to cut
costs. Singapores export oriented economy has been attracting
multinational corporations (MNCs) since its economy picked up in the past
decade. However, while MNCs have come to Singapore, many have also left
Singapores manufacturing industries. By leaving Singapore, these MNCs
have displaced countless of industry workers. Most of such workers did not
have the relevant skills to transit into another industry and has left them
economically displaced.

Sources of structural unemployment

Automation
Automation can cause structural unemployment when people are made
unemployed through capital-labour substitution (which reduces the demand
for labour). Many of the unemployment from low-skill industries have found it
difficult to gain re-employment without an investment in re-training. This
problem is one of occupational immobility.

Loss in competitiveness

MACROECONOMICS OBJECTIVES IN SINGAPORE

Singapores loss in competitiveness in competitiveness in the manufacturing

industries due to competition from low-cost emerging countries that have
entered world market for investments and trade has changed the countrys
economic structure permanently. Other countries, such as china for
manufacturing and Indian for IT software, have gained their comparative
advantage (CA). This has permanently reduced the demand for Singapores
manufacturing exports and hence caused structural unemployment.

Outsourcing
Outsourcing of jobs to developing countries such as China, India and Vietnam
have resulted in unemployment among the unskilled, older and low-educated
workers. This is because Singapore is not considered to be low-cost and
firms, in their efforts to gain more profits, cut cost by shifting their operations
to a location that provides them with the lower cost they seek.

Policies to Combat Cyclical Unemployment

Expansionary fiscal policy
Expansionary Fiscal policy is a form of demand-management policy that
involves the deliberate increase in government spending (G) or a reduction in
tax rates in order to influence aggregate demand upwards. The rise in
production to meet the higher demand created may lead to more labour
demanded. However, the use of expansionary fiscal policy in Singapore is
limited due to time lags (time is needed to recognise the need to spend and
additional time is needed is needed to get approval from Parliament),
crowding-out effect (physical due to limited factors of production such as
land) and, most importantly, its small multiplier due to high leakages in the
circular flow of income (high savings rate and high imports). In addition, the
root of the problem is not addressed since cyclical unemployment is due to
an external economic downturn.
Fiscal policy in Singapore focuses on supply-side effects. Hence, it can also
be used to curb structural unemployment. For example, the government
provides tax incentives (e.g. tax rebates or reduction in corporate taxes) and
subsidies to encourage firms to send their workers for further education and
re-training and to meet the new job requirements. The government is also
working in partnership with the unions and the private sector to address the
lifelong learning needs of its workforce and ensure its continued
employability.

Expansionary monetary policy with an exchange

rates focus

MACROECONOMICS OBJECTIVES IN SINGAPORE

An exchange rate policy is a more viable policy given Singapores

dependence on exports and the fact that cyclical unemployment in
Singapore is probably due to the external economic downturn. Allowing the
Singapore dollar to depreciate against the currencies of Singapores major
trading partners will make its exports more price competitive. This is
because Singapores exports are made cheaper in terms of the foreign
countries that import its goods and while imports are more expensive in
terms of local currency.
However, being dependents heavily on imported goods for its consumption,
production as well as exports, allowing for depreciation may ring about
imported inflation in the long run.

Supply-side policies
Singapore has also turned to short-term supply-side solutions to reduce
cyclical unemployment, by using its CPF system, a compulsory savings plan
that requires both employees as well as employers to make monthly
contributions to each employees CPF account. During an economic
recession, the employers contribution rates may be reduced. This
effectively lowers labour costs of all firms without hurting employees takehome pay, which in turn helps to trim costs of production significantly and
allow many firms to retain a large contribution rate can be reduced too. This
gives the general population a large disposable income, thereby bolstering
domestic demand. For example, during the 1985 recession, the government
reduced both the employers CPF contribution from 25% to 20%. After the
Asian Economic Crisis in 1999, the government reduced the employers CPF
contribution rate further to 10% - to lower labour costs and hence
production costs. Thus, this cushioned the effects of a falling aggregate
demand on cyclical unemployment.
A flexible wage system was introduced in 1958 to replace the need for the
government to initiate wage cuts or wage freezes necessary to counter
cyclical unemployment. These flexibility has allowed firms to adjust their
labour cost by adjusting wages so that they can avoid having to retrench
workers as such as possible during economic downturns.

Policies to Combat Frictional Unemployment

Policies used to deal with frictional unemployment should focus on improving
the labour market information so as to improve efficiency in the labour
market. For example, job fairs are organised by the government to bring
together employers of the same industries to hold mass recruitments.
Employment agencies and job-matching websites are set up to collate details

MACROECONOMICS OBJECTIVES IN SINGAPORE

of potential employees and match them to the needs of prospective

recruitment exercises where workers can seek out their most suitable jobs.

Policies to combat structural unemployment

Supply-side policies
The government has also constantly upgraded the skills of workers to help
them avoid rising structural unemployment and narrow the widening income
gap. To minimise the economic problems due to greater volatility, Singapore
has also put up more social safety nets to help workers who are affected by
structural changes and economic fluctuations. Thus, we have policies such as
the Workfare Package, which is designed to help increase the income of
lower-income workers, and the Job Credit Scheme, which is aimed to
encourage firms to send their workers for training rather than to retrench
them during an economic recession. Attempts to establish a robust security
system that addresses the longevity issue has already begun with the
introduction of the CPF Life scheme. The Workfare Income Supplement (WIS)
also plays its part in addressing income inequality in the low-wage segment.
In general, all these schemes and subsidies serve to increase the income of
the lower-income group and improve their living standards. These policies,
supported by a multi-tier social security system, are put in place to help turn
the tide on inequality and ensure that gains from economic growth are more
evenly shared. However, it must be noted than an opportunity cost is
incurred when the government uses funds for such purposes because less
funds will then be available for other sectors like healthcare and national
defence. Conversely, if these funds come mainly from taxing the rich, the
income inequality situation can be improved.

Labour policies
The Singapore government aims to raise labour productivity through
promoting innovation, investing in people and increasing foreign worker levy.
Innovation enables firms to find more efficient methods of production. The
Singapore government has also invested in human capital to equip them
with relevant skills. The foreign worker levy has been raised so as to force
firms to reduce its reliance on cheap foreign workers and to innovate. These
measures have helped to raise labour productivity. When labour productivity
is raised, then the level of aggregate supply and aggregate demand will rise
in the long run.
Raising labour productivity also enables greater output to be produced with
the same amount of labour resources, hence increasing the countrys
productive capacity. This causes Singapores aggregate supply curve to shift

MACROECONOMICS OBJECTIVES IN SINGAPORE

rightwards. At the same time, higher labour productivity in the long run helps
to attract more foreign investment to Singapore, as firms are able to enjoy a
higher expected rate of returns for their investment. This enables the
aggregate demand (AD) curve to shift rightwards as well. With a
simultaneous shift of both the AD and AS curve, a higher potential output
and employment is achieved.
However, in the short run, raising labour productivity has its limits in
achieving sustained economic growth and full employment, given the
changes in aggregate demand in the short run due to external instability. For
example, falling world national incomes due to the global economic crisis
may cause a decline in trade and in Singapores exports, reducing aggregate
demand and national income in Singapore, stifling economic growth and
employment in the short run. Hence short term measures such as exchange
rate and fiscal policies are needed to enable Singapore to achieve these two
macroeconomic aims.
Raising productivity can achieve sustained economic growth and full
employment also depends on the effectiveness of the measures to raise
labour productivity and is unintended consequences such as time lag, cost
and uncertainty.

Conclusion
In conclusion, raising labour productivity alone is not adequate. This has to
be complemented with demand policies as well to manage short-term
macroeconomic fluctuations. The Singapore government should also take
into consideration the limitations of supply-side policies.
Different policies are used to reduce different types of unemployment. Fiscal
policies, if used as a demand-management tool, have limited effects on
aggregate demand. However, given that fiscal policy focuses on supply-side
effects, it can be used to reduce both cyclical and structural unemployment
in Singapore.