A STUDY OF EQUILIBRIUM UNEMPLOYMENT IN SINGAPORE

Abstract

The recent surge in unemployment in Europe has sparked much interest in this subject. In contrast, the robust downward trend of unemployment in Singapore, occurring concurrently with the rapid growth rate and relatively stable inflation rates, begs questions of equilibrium unemployment rate endogeneity. In the domestic economy, characterized by the lack of militant unionism and high wage-induced involuntary unemployment, we model the general equilibrium unemployment rate as one arising out of stochastic turnover. In this formulation, an increased rate of structural change, occurring between the late 70s and early 80s, is found to raise the equilibrium unemployment rate. The worldwide rise in interest rates in the early 80s has a similar effect, though weak because of sound economy fundamentals. Two relatively stronger effects, ie. the increased rate of labour­augmenting technical progress and the massive inflow of FDI, work to produce an overall steady decline in equilibrium unemployment. These events taken together also yield a rise in equilibrium vacancies, consistent with the Singapore story. An increase in total factor productivity is found to lower the equilibrium rate of unemployment. This, together with further increases in the rate of technical progress and robust FDI inflows, is expected to be a future source of defence against unemployment. Factors attracting FDI flows as analyzed in Dunning's eclectic theory of FDI boil down to location-specific factors which must be carefully controlled for a favourable outcome. The rate of Harrod-neutral technical progress, linked to human capital accumulation, is endogenised to arise from the fraction of time in an individual's schooling period spent on education and training. This, and in turn the rate of technical progress, can be made to rise by increasing an individual's school life or by enhancing training technology. A closed economy extension is obtained by allowing interest rates to be endogenously determined from the rates of time preference and population growth. Important insights emerge as a result of the enhanced scope of application. First, technical progress lowers unemployment for a small open economy but not for the world as a whole. Second, relatively large and closed economies do not reap the benefits of technical progress because this raises the interest rate endogenously. Singapore's total labour force participation rate has risen. This is shown to stem endogenously from a rise in labour market tightness, or vacancies relative to unemployment. In another model extension, the decline in total weekly hours worked until 1985 is again attributed to rising labour market tightness. Hours of work fall because the differential between the marginal product of labour and the equilibrium wage rate is altered. Finally, the theoretical model is put to the test by attempting an econometric estimation. The results confirm the existence of a matching function assumed to have a basic Cobb-Douglas formulation. In addition, the curves that pin down equilibrium unemployment and vacancies are estimated through the use of two stage least squares. Parameter estimates largely conform to theoretical predictions, although many coefficients are only weakly significant. This may be attributed to limitations in the data. Model diagnostics point to autocorrelation as a problem, so that future studies will do well to correct for non-stationarity in the time series used.