Chapter 2: Factors Shaping Singapore’s Wages and Unemployment
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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