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Trade, capital accumulation, and structural unemployment : An empirical study of the Singapore economy

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  • Hiau Looi Kee
  • Hian Teck Hoon

Abstract

The past three and a half decades witnessed a distinctly declining trend in Singapore's unemployment rate, which dropped from an average annual rate of 7.85 percent in 1966-70 to 2.74 percent in 1991-2000. The authors seek to identify and empirically examine the factors that have influenced Singapore's unemployment rate in an environment of low and stable inflation. They incorporate a union bargaining framework into a standard-factors trade model, in which an increase in the relative price or capital stock in the export sector raises the demand wage that firms can afford to pay relative to workers'fall-back income, and consequently lowers equilibrium unemployment. The magnitude of the effects depends on the fall-back income, the weight unions attach to employment, and the elasticity of labor demand, which the authors estimate using data on Singapore. The results show that labor unions in Singapore care more about employment than wages. Together with a small fall-back income and elastic labor demand, the authors show that given the same percentage change in relative export prices and capital accumulation in the export sector, the effect on unemployment is larger for the former. However, the empirical importance of capital accumulation in the export sector dominates increases in relative export prices in reducing unemployment since the manufacturing sector experienced a tremendous increase in capital inputs throughout the sample period, whereas the relative price of exports experienced a far smaller increase and only in the early part of the sample period. The authors conclude that through a very open trading regime, the tremendous increase in capital stock of the exporting sector has been the main reason behind Singapore's declining unemployment rate.

Suggested Citation

  • Hiau Looi Kee & Hian Teck Hoon, 2004. "Trade, capital accumulation, and structural unemployment : An empirical study of the Singapore economy," Policy Research Working Paper Series 3272, The World Bank.
  • Handle: RePEc:wbk:wbrwps:3272
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    References listed on IDEAS

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    Cited by:

    1. Carrère, Céline & Fugazza, Marco & Olarreaga, Marcelo & Robert-Nicoud, Frédéric, 2016. "On the heterogeneous effect of trade on unemployment," CEPR Discussion Papers 11540, C.E.P.R. Discussion Papers.
    2. Gaston, Noel & Rajaguru, Gulasekaran, 2013. "How an export boom affects unemployment," Economic Modelling, Elsevier, vol. 30(C), pages 343-355.
    3. Petrucci, Alberto, 2006. "Wealth Accumulation and Growth in a Specific-Factors Model of Trade and Finance," Economics & Statistics Discussion Papers esdp06029, University of Molise, Dept. EGSeI.
    4. Gnanaraj Chellaraj & Keith E. Maskus & Aaditya Mattoo, 2013. "Labor Skills and Foreign Investment in a Dynamic Economy: Estimating the Knowledge-capital Model for Singapore," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 627-643, November.
    5. Almosabbeh, Imadeddin, 2008. "العوامل المؤثرة في البطالة في الجمهورية العربية السورية دراسة تطبيقية باستخدام منهجية التكامل المشترك
      [The Effective Factories in Unemployment in the Syrian Arab Republic: An Empirical Study by Usi
      ," MPRA Paper 41871, University Library of Munich, Germany.
    6. L. Alan Winters, 2014. "International trade regulation and job creation," IZA World of Labor, Institute for the Study of Labor (IZA), pages 1-75, September.
    7. Bernard Hoekman & Alan L. Winters, 2005. "Trade and Employment: Stylized Facts and Research Findings," Working Papers 7, United Nations, Department of Economics and Social Affairs.
    8. Rudy Rahmaddi & Masaru Ichihashi, 2012. "The impact of foreign direct investment on host country exports: Sector based evidence from Indonesian manufacturing," IDEC DP2 Series 2-10, Hiroshima University, Graduate School for International Development and Cooperation (IDEC).
    9. Gnanaraj Chellaraj & Aaditya Mattoo, 2009. "Can the Knowledge-Capital Model Explain Sectoral Foreign Invesment? Evidence From Singapore," Economics Study Area Working Papers 101, East-West Center, Economics Study Area.

    More about this item

    Keywords

    Banks&Banking Reform; Environmental Economics&Policies; Labor Policies; Economic Theory&Research; Labor Markets; Economic Theory&Research; Environmental Economics&Policies; Labor Markets; Banks&Banking Reform; Economic Growth;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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