JC Econs Essay Macroeconomic Policies & Unemployment in Singapore & USA Model Answers
In Singapore, being a small and open economy, our policy responses to achieve the main macro objectives are expected to be different for large and less open (LLO) economies such as the USA.
(a) Explain the likely causes of unemployment in Singapore.
(b) To reduce the increasing unemployment, President Biden has proposed a $6 trillion fiscal spending to overhaul the U.S. economy. starting 1 Oct 2021. Assess whether Singapore will solve the problem of increasing unemployment differently from the USA.
JC Economics – Causes of Unemployment in Singapore
Define unemployed: refers to people of the working age who are available for work and actively seeking a job but cannot find a job.
Measured by unemployment rate, which is the percentage of unemployed persons
Response to signpost: Brief description of unemployment in Singapore Unemployment rate has been rising since 1998, reaching a peak in 2003. Although the unemployment situation has been recovering in recent years after 2003 but at 4.2% in 2005 (Note: unemployment rate in 2007 is 2.1%). Finally, unemployment in Singapore peaked in 2020, at 5.19%, the highest since World War 2. (due to COVID-19)
Development: Identify and explain main causes of unemployment in S’pore: Structural & Demand-deficient unemployment.
– arises when the economy undergoes economic restructuring where skills of some workers are not in demand. Structural unemployment arises when changes in technology or international competition change the skills needed to perform jobs or change the location of jobs. As a result of this changing structure of the economy, there is a mismatch between worker’s skill and job requirements. Such a structural change can arise from demand side or supply side such as:
If there is a permanent fall in the demand for the product of a particular industry, the output will have to be reduced and sectoral unemployment will result. If more capital is used to substitute for labour, this can also result in unemployment. This is known as technological unemployment.
In S’pore, structural unemployment is caused by: . S’pore loss of competitiveness (higher labour and rental cost compared to China, India) Relocation of manufacturing firms to lower-cost locations like China and India + outsourcing especially of electronic/IT companies → loss of jobs in manufacturing industry, especially electronics sector sectoral unemployment. Shift to higher value-added activities which are more capital intensive technological unemployment.
[Note: the key cause of unemployment in S’pore is structural unemployment and thus is the more pressing concern in S’pore compared to other types of unemployment.]
Demand-deficient unemployment – arises during downturn in a business cycle. • Due to economic recession (e.g. 1998, 2001, 2008, 2020 global recession), aggregate demand falls. Firms cut back on production and hence reduce the amount of labour they employ. This results in a leftward shift in the aggregate demand. Maybe due to lower investments, consumption or X-M.
(Note: since Keynesian theory believes that wages are sticky downwards, real wage will remain at a low level, Thus there is an excess supply of labour at resulting in Demand-deficient unemployment: optional point though)
In SG, demand-deficient unemployment is caused by: Global/regional downturn due to global IT downturn, slowdown in US economy, terrorism in the 2001, SARS in 2003. Singapore is significantly affected by external events as it is heavily dependent on trade. External demand makes up about % of total demand. AD in 2020 remained depressed even till 2021…
3) Search Unemployment (Brief Mention)
Like any other economy, S’pore has some degree of search unemployment. Due to imperfect information in the labour market and hence a time lag before people find suitable jobs, e.g. school leavers looking for a job, people changing jobs. Search unemployment usually does not last long and hence govt is not that concerned with search unemployment.
Conclusion (which type of unemployment is currently more significant?)
Structural unemployment is a major concern in the near future as the economy continues to restructure. This is particularly significant as about 50% of our labour force do not have post-secondary qualifications as in 2007, and will not have the skills to take on the newly created jobs which tend to be in the services (e.g. IR) and higher-value-added sectors(e.g. biomedical sciences). Government will need to continue its emphasis on education and training.
Cyclical unemployment, however, is a transient problem as the economy moves along the global business cycle. It might worsen in the near future due to the impending US recession but its impact is likely to be mitigated by strong growth in China and India. On the other hand, search unemployment is least important with growing technology, leading to better. dissemination of information of job vacancies (e.g. online job engines).
JC Economics – Macro Econs Policies for Unemployment in USA vs Singapore
The aim of this question is to assess whether fiscal spending (expansionary fiscal policy) could be effectively used in Spore to curb rising unemployment. There is certainly substantial room for evaluation in the answer to the question. And students will not only have to compare by looking at the differences in the causes of unN but also consider the differences in the nature of the economies.
Identify that the US government uses expansionary fiscal spending (fiscal policy) to reduce unemployment. FP is a demand-management policy which involves the manipulation of government spending or taxes to achieve the macro-economic goals of the government.
Thesis: Singapore can adopt the same policy to reduce its rising unemployment
Explain the effect of how an increased fiscal spending raises AD and hence increase production and duces unemployment with the use of a diagram. As firms increase their production to respond to frising ing demand for goods and services, demand for FOP eg labour will rise reducing therefore cyclical UnN
(sketch AD-AS diagram as exercise.)
For Spore, cyclical unemployment (demand deficiency) is usually caused by downturn in external demand conditions, is, economic downturn of our trading partners Spore government spending is unlikely to reverse of match up the size of the external demand Nonetheless, to help domestic economy cushion the severity of external downturn, Fiscal expenditure such as public works spending, infrastructure spending, subsidised training programs for workers and transfer payments like the Economic Restructuring Shares could shift Aggregate Demand to the right to mitigate the fall due to external conditions.
Singapore government has the ability to finance by drawing on past reserves unlike US who has a budget deficit and compared to US, we have fewer time lags
Anti-Thesis: Singapore has to implement their policy differently to reduce unemployment
Evaluate the effectiveness of increased government spending to reduce unemployment Eg Our high MPM and MPS mean a large amount of leakages in the circular flow of income which size of national income multiplier small.
Does not help to reduce the main causes of unNi n Singapore, namely structural unN
Other policies would be more effective given the nature of the Singapore economy
As Spore economy is an open economy, and if there is a lack of external demand due to our export uncompetitiveness leading to increasing unemployment, we could use the exchange rate policy. Exchange Rate Policy Depreciation of exchange rate to boost export which could bring about increases in AD and thus reduces unemployment. Explain how this process works (eg. discuss Marshall Lerner conditions)
Higher prices of imported inputs, hence higher cost of production for some producers, reducing the effect of cheaper S$;
Drives up cost-push inflation Generally this is not viable other than during deep recessions (Eg. 2008 2009)
For structural unemployment, supply-side policies are more appropriate.
Supply-side: Retraining, reduce business costs (e.g. CPF, wage cuts / flexibility ) boosting export competitiveness, tax incentives and subsidies to encourage further education and re-skilling. Tax incentives like the reduction of corporate tax could be used. If foreign firms respond to lower corporate taxes this could retain structurally unemployed workers by conducting retraining programmes to meet their new job requirements
Government could also provide subsidies to retrain workers in the private sector.
For wage cuts-while wage cuts are not possible in other countries, they have been proven to be workable for Singapore due to the close working relationship between Trade Unions and the Spore govt. (Tripartite relationship)
For frictional unemployment, government spending in the form of making more jobs available in the civil service could help new entrants into the labour force. Govt spending in the forms of setting up employment bureaus & job fairs and job agencies in Community Development Councils would help to ease frictional unemployment.
For structural unN< actually should focus on tax reforms (more incentive to work) and a more flexible labour market (minimum wage revision)
Different policies have to target at the different causes of unemployment. Structural unemployment has to be tackled through SS-side policies and even for demand deficient unemployment in Spore, mere government spending would not be enough to stop the increasing unemployment if there is a global recession. Instead policies aiming to improve skills and workers’ productivity are a better solution to prevent increasing unemployment. Such policies also increases the employability of workers in the long term e.g. when there is recovery from global recession.
Econs Tuition teacher’s Remarks: Most students did not get 8 or more marks out of 25m, cos they didn’t highlight impact of weaker S$ on our imports. More on this key point in our Econs revision lessons.)