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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.
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.
Loss in competitiveness
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.
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.
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
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.