Coping with Opportunism

In an economy characterised by creative destruction, jobs are destroyed even as new jobs are created. A feature of the U.S. economy is that hiring and job separations are positively correlated both across firms and over time. This is consistent with an economy characterised by churn. Historically, Singapore has undergone various stages of economic restructuring as it moved up the ladder of comparative advantage. While in the earlier phase of growth, foreign direct investment played a central role in providing the technology to move up the ladder of comparative advantage, the next phase of growth is likely to be characterised by small and medium-sized enterprises playing a more vital role in contributing to the sources of productivity growth. The process of economic restructuring to boost productivity of small and medium-sized enterprises by helping them improve management practices and selling into overseas markets will contribute to overall productivity growth. Since it is in the nature of many startups to fail, the pace of job destruction might pick up. This is on top of major technological shifts that displace jobs characterised by routine tasks. To keep the unemployment rate low, it is necessary to create an environment in which there is an increased pace of new firm creation so that, even as workers lose their jobs from businesses that fail, new job vacancies are simultaneously created…