What forces have shaped our nation’s employment and remuneration record so far? Where is Singapore’s unemployment rate headed? What should policy-makers do about it? These are the questions tackled in this paper. It is shown that based on our historical experience, it would be necessary to achieve an annual real GDP growth rate of 7.1 percent in order to keep the unemployment rate unchanged. Moreover, a one-percentage point shortfall of the real GDP growth rate below 7.1 percent in any given year results in a rise in the unemployment rate of 0.12 percentage points over the previous year. Consequently, if the economy is able to generate at most 5 percent real GDP annual growth rate (the high end of the range of official medium-term projections of our economy’s growth rate, which is 3 to 5 percent), it would seem that the unemployment rate is set to rise from its current level based upon the historical relationship. Is there any reason, however, to believe that the Okun’s Law relationship for a fast-developing country like ours might be expected to change once we have reached the status of a mature economy as we now have become? After all, in a mature economy like the US, the critical real GDP growth rate required to keep the unemployment rate steady is only 3 percent. It is likely that the Okun’s Law relationship would indeed shift as the economy matures. As workers adjust their expectations to the reality that the economy has reached a new lower growth regime and they incorporate their revised growth expectations in their wage bargaining, the unemployment rate can remain steady despite slower growth. This steady structural rate of unemployment is, however, likely to be higher than in the past. In response to the worsened medium to long term outlook for the labor market, one is tempted to ask: Can anything be done by policy-makers to reduce the equilibrium rate of unemployment? I believe that reaching out for a weaker Singapore dollar in order to boost international competitiveness, and so to boost aggregate demand and hence employment, or reaching out for budgetary deficits as a direct means to boost aggregate demand is unlikely to have a lasting effect on the structural rate of unemployment. Instead that it would be better to consider policies aimed directly at influencing equilibrium unemployment. One proposal is to introduce an employment subsidy scheme aimed particularly at low-skilled workers, which has the effect of increasing job creation directly. Increased effort to create a business-friendly environment to encourage new start-ups by ensuring minimal red tape and enabling relatively easy financing for them will also work to increase the pace of job creation. Finally, the work of the Workforce Development Agency aimed at retraining low-skilled and older workers to meet the skills demand of new jobs and then matching them to firms offering the job vacancies should help somewhat in bringing down the structural rate of unemployment as our small geographical area works to our advantage when it comes to job-matching.
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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number
01-2005.
Length: 39 pages Date of creation: Jan 2005 Date of revision: Publication status: Published in SMU Economics and Statistics Working Paper Series Handle: RePEc:siu:wpaper:01-2005