Trade, Jobs and Wages

Trade, Jobs and Wages

Hian Teck Hoon

The world’s increasing integration through trade and the persistence of high unemployment in Europe, and other areas of the world, highlight the need to understand the implications of free trade for unemployment. Trade, Jobs and Wages analyses how employment levels and real wages are affected by international trade. Popular trade theory disregards the impact of free trade on the rate of unemployment, since it assumes full employment at the outset. By focusing on the determinants of the natural rate of unemployment, Professor Hoon places an emphasis on real, as opposed to monetary, factors in accounting for long term trends in wages and unemployment.

Chapter 2: Factors Shaping Singapore’s Wages and Unemployment

Hian Teck Hoon

Subjects: business and management, international business, economics and finance, international economics, labour economics


INTRODUCTION 2.1 Against a near three-fold increase in the level of unemployment in much of Western Europe in the past three decades, the decline in Singapore’s unemployment rate from an estimated 13.5 per cent in 1960 to an average of just over 2.5 per cent in the 1990s must be regarded as nothing short of dramatic.1 Moreover, this downward trend in the movement of the unemployment rate has been accompanied by low inflation rates during the past four decades (except for the episodes of the two oil shocks). Price stability is to a great extent the result of a monetary policy that is centred on maintaining an exchange rate target.2 Being a highly open economy that takes world prices as given, external conditions have a large influence on domestic prices. According to the estimates of two Singapore central bankers, Teh and Shanmugaratnam (1992), for every 1 per cent increase in import prices, consumer prices will increase by about 0.7 per cent. This means that a 5 per cent rate of import price inflation translates into a 3.5 per cent rate of CPI inflation, in the absence of any independent domestic source of inflation. Via a deliberate policy choice of allowing a gradual appreciation of the Singapore dollar, Singapore’s domestic inflation has been kept below foreign inflation. With an exchange-rate-based monetary policy, Singapore has been able to maintain a stable and low rate of inflation. Since monetary policy has not been used to...

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