TRADE AND UNEMPLOYMENT : AN EMPIRICAL STUDY OF THE SINGAPORE ECONOMY

Abstract

The globally rising trend of unemployment rates in the past two decades or so has caused economists to question the assumption of the Keynesian/Monetarist/New Keynesian frameworks that the natural rate of unemployment is exogenous. The newly-emerging modern-equilibrium school views the unemployment rate as an equilibrium phenomenon that is due to the structural inefficiency of the economy, and therefore can be affected by shifts in the structure of demand. A number of empirical studies have focused on the job replacement effect of trade. Nevertheless, it is at least plausible, judging from the experience of the East Asian economies, that trade has a salutary effect on employment. This thesis aims to test empirically the relationship between trade and the natural rate of unemployment for the Singapore economy. For this purpose, a theoretical model generating an endogenous natural rate is developed. More specifically, a union bargaining mechanism has been incorporated into the traditional specific factors model to produce endogenously the natural rate of unemployment. Both trade and capital accumulation are introduced to the model as exogenous shocks that affect the unemployment rate. The hypothesis that trade and capital accumulation reduced the unemployment rate of Singapore can not be statistically rejected. In addition, trade is also proved to be a more significant factor than capital accumulation for the declining unemployment rate.

A data preview of the manufacturing sector shows that the sector has been becoming more capital intensive; nevertheless, the rankings of all the industry groups according to their capital-labor ratios have remained largely unchanged. Production and exports of the manufacturing sector have been found to move from the most labor intensive industry to the moderately labor intensive industry. The role of technology is only gradually becoming important since the late 1980s. Further findings, policy implications and areas for further research are discussed in the concluding chapter.