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Authors: GOH JI PINN
Issue Date: 1997
Abstract: Whilst the final decades of the twentieth century have seen a trend that does not augur well for the unskilled members of the labour force in the US and the European continent, concomitantly, Singapore has experienced a fall in its natural rate of unemployment and the wage gap between the skilled and unskilled labour has declined. This anomaly thus forces the thesis to focus its attention on trying to comprehend what special forces have been at work in Singapore. With that as the main motivation, we first seek to uncover the relationship between capital, structural unemployment and wage inequality using a model based on one variant of the recent genre of work on "structuralist" models - the labour-turnover theory. We proceed with our analysis in two stages: first without physical capital and later introducing physical capital. We then incorporate a parameter that captures the political risk premium for investment into the model. With a view to interpreting Singapore's experience within our theoretical framework, this thesis endeavours to analyse shocks that have either taken place within her external environment or have been of special relevance to Singapore at a certain stage of her "evolution". First, abstracting from physical capital, the rise in world interest rates; an increase in productivity of the unskilled being faster than that of the skilled; the change in the configuration of the labour force in favour of the skilled; and the fall in the training costs due to higher level of automation are analysed. Then, introducing physical capital, two of the above shocks are repeated and their results are then compared with those obtained in the absence of physical capital. The one shock that warrants particular attention here is that of an increase in skilled labour. Gilles Saint-Paul ( 1994) has obtained the result that an increase in the proportion of skilled workers in the economy (as has happened in Singapore over the past three decades) raises the relative unemployment rate of the unskilled, and widens the wage gap. We show that this result does not obtain in our model economy. Our contention is that though his model, like ours, assumes a non-competitive labour market that allows for equilibrium unemployment, he examines a closed economy, hence omitting the important variable of international capital flow, which characterises an open economy. Reflecting the conditions in Singapore, we have allowed for an internationally mobile capital. We show that foreign capital, taking the form of direct foreign investment, flows into the economy in response to the higher proportion of skilled workers as the marginal return to capital is increased. Consequently, the negative results of Gilles Saint-Paul are avoided. The thesis also carries the reader one step further into the future: it attempts to cast some light on the implications of an industrial policy aimed at promoting the exports of the skill-intensive sector. We show that an export subsidy has the effect of widening the wage gap between the skilled and the unskilled. Due to the constraints of space, a full-blown empirical testing of our model will not be conducted. Instead we use the technique of juxtaposing the general conclusions of our model with the empirical facts. Where there exists any indication of significant conformity, it would imply that our model does generate fairly accurate predictions.
Appears in Collections:Bachelor's Theses

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