Singapore has one of the fastest ageing populations in the world, with an average life expectancy at above 83 years. Economists are of the view that ageing economies tend to lose competitiveness over time.

In light of the challenges caused by an ageing population, discuss the appropriateness of the economic policies implemented to achieve full employment in Singapore.

Introduction:

  • An ageing population presents several challenges in the form of reducing the country’s attractiveness to foreign direct investment due to reasons such as (i) perceived (or actual) lower productivity growth, (ii) lower labour force participation rate when ageing population is happening concurrently with falling fertility rates as well as (iii) slower growth in innovation and R&D efforts.
  • Singapore’s rapidly aging population means that by 2030, the nation will become a “super-aged” country, where one in five people are aged 65 or older.
  • Unemployment refers to the number of people of working age who are willing and able to work but currently not engaged in paid work, despite an active search for work.
  • If the challenges caused by an ageing population are not well addressed, unemployment problems can result and prevent the economy from achieving full unemployment. A country is said to have achieved full employment when its unemployment rate is very close to the nature rate of unemployment, suggesting that a large part of the country’s productive capacity is utilised and not left idle.
  • Facing a rapidly ageing population, the Singapore government should adopt both demand-management policies and supply-side policies to achieve full employment.
  1. Explanation of the unemployment problems caused by an ageing population in Singapore:
  2. With ageing economies being perceived as less competitive, there can be a rise in job redundancies in Singapore, resulting in higher demand-deficient unemployment.
  3. Foreign companies may find it less attractive to set up production bases in Singapore or decide to move their investment from Singapore to other countries that are not facing an ageing population due to the perceived (or actual) lower productivity growth rates in Singapore or due to the perceived less-relevant skills possessed by elderly workers in Singapore.
  4. Note that these are important considerations for firms as their goods and services may end up losing competitiveness (in terms of price and / or quality of goods and services) which will in turn cause their profit margins to decrease, prompting them to withdraw investment from Singapore.
  5. Thus, this potential decrease in Foreign Direct Investment (FDI) can cause Aggregate Demand (AD) to decrease, leading to a decrease in the country’s real national income. The decrease in production of goods and services would then cause workers to be laid off, leading to a rise in demand-deficient unemployment.
  6. Ageing population may also lead to a fall in the consumption expenditure given the reduction in the percentage of the population participating in the labour force as well as the lower purchasing power of the elderly after they retire or transit to take up jobs offering lower wages. This in turn leads to a decrease in AD hence real national income, leading to a rise in demand-deficient unemployment.
  7. The need for the Singapore government to spend on financing the higher social spending associated with an ageing population may require the government to increase taxes such as corporate income taxes or personal income taxes. As these taxes have a contractionary impact on the country’s AD, the decrease in real national income will lead to a further increase in demand-deficient unemployment.
  • Given the challenges caused by an ageing population, the need to press on with economic restructuring may lead to an increase in structural unemployment.
  • Structural unemployment occurs when there is a mismatch between the skills possessed by the workers and those required by the new industries. This means that although there are jobs available, the unemployed do not have the skills required to take up these jobs.
  • Acknowledging that there is a need for the country to increase / regain / maintain its competitiveness in view of the challenges brought by an ageing population, the Singapore government has been doubling down on its national push to upgrade and restructure the economy with firms being increasingly forced to raise productivity through the use of technology and innovation. This is evident from the government’s recent rollout of Industry Transformation Maps intended to integrate productivity improvement, skills development, innovation and internationalization efforts across 23 key industries.
  • As a result, many low-skilled workers and professionals, managers, executives and technicians (PMETs) whose skill sets are no longer relevant to the changing industry needs have been displaced.
  • Structural unemployment thus results from an increase in occupational immobility of workers.
  • Similar to the rise in demand-deficient unemployment, it is important to note that the risk of structural unemployment is not limited to only elderly workers. In fact, as the challenges caused by an ageing population are being experienced by the entire economy, the employment of non-elderly workers can be negatively affected too.
  • Discussion of the economic policies that have been implemented to address unemployment problems caused by an ageing population:
  • To address the increase in demand-deficient unemployment caused by an ageing population, the Singapore government has implemented an expansionary fiscal policy to create jobs.
  • The key to addressing demand-deficient unemployment lies in the creation of jobs by boosting the country’s AD.
  • This can be achieved by the government adopting a budget deficit where government spending is raised and/or taxes are reduced so that government spending is more than the tax revenue collected.
  • An increase in government expenditure can be in the form of the government expanding public sector hiring and bringing forward public infrastructure projects to increase demand for workers e.g. building of new public hospitals which also help to cater to the increase in healthcare needs of the elderly.
  • Conceptually, a decrease in personal or corporate income taxes can help to raise consumption and investment expenditure.
  • However, the Singapore government has not reduced tax rates in recent years (except when economic growth turns sluggish) as it is cautious of the unintended consequences that may follow; such as in the form of a reduction in tax revenue collection which will then limit the government’s ability to finance the higher social spending needs of an ageing population. Thus, the emphasis of expansionary fiscal policy in Singapore is on increasing government expenditure.
  • All in all, the increase in AD would help to raise real national income and reduce demand-deficient unemployment.
  • Evaluation:
    • Implementing an expansionary fiscal policy can trigger unintended consequences such as in the form of demand-pull inflation given that Singapore is already producing near its maximum productive capacity.
    • The ability of the Singapore government to run budget deficits is very much dependent on the presence of government reserves accumulated from past budget surpluses which can eventually run out if the creation of jobs has to be continuously driven by government spending. To avoid incurring large and persistent budget deficits, the Singapore government should also consider using another policy at boosting job creation such as allowing the currency to appreciate.
    • As Singapore has a small multiplier size, the final multiplied value of an increase in government expenditure on real national income will be smaller than countries with a larger multiplier size. This makes it necessary for the government to spend more to increase the economy’s job creation rate. 
    • Although an increase in government expenditure is able to directly add new jobs to the labour market, the reduction in unemployment rate may be limited if the workers do not have the relevant skills required to take up these jobs. Thus, expansionary fiscal policy alone is not sufficient to achieve full employment in Singapore. The use of supply-side policies such as skills training is required.
  • To maintain the competitiveness of the economy and in turn achieve full employment amid the challenges posed by an ageing population, the Singapore government has largely adopted a modest and gradual appreciation of the currency.
  • Recognising that an ageing population can slow economic growth and create unemployment problems, the Monetary Authority of Singapore (MAS) has shown a strong preference for the currency to appreciate. Uniquely to Singapore, the achievement of price stability will then help to keep the economy competitive and sustain the country’s economic growth which is necessary in boosting job creation rate. That said, the exception for the MAS to move away from the modest and gradual appreciation path can occur during times of recession / sluggish growth or when risks of deflation are present.
  • Singapore imports a large part of its raw materials and essential goods and services, including oil, commodities, food and water. Therefore, appreciation lowers import prices in S$, hence keeping imported inflation at bay and helps in lowering firms’ cost of production. By controlling cost-push inflation via appreciation, Singapore is able to sustain price competitiveness of exports and business profitability for investment demand.
  • With healthy exports and investment demand, it is easier for Singapore to sustain economic growth, by increasing both the AD and the LRAS in the future, in turn helping to promote the creation of jobs.
  • Evaluation:
    • While the policy can help to maintain Singapore’s competitiveness, the cost savings enjoyed from mitigating imported inflation are not reaped by firms that are more labour intensive in nature such as those in services industries. With an ageing population resulting in lower productivity growth rates, these firms may still choose to move their investment out of Singapore if profit margins are severely reduced.
    • Similar to expansionary fiscal policy, the use of supply-side policies such as skills training is required as a modest and gradual appreciation of the Singapore dollar does not address the issue of skills mismatch.
  • To reduce and prevent a further increase in structural unemployment, the Singapore government has been providing supply-side policies such as providing skills training subsidies to improve workers’ employability and mobility across industries.
  • To effectively address structural unemployment, building a labour culture anchored on lifelong learning and skills training is critical. 
  • In Singapore, a key skills training initiative is Skills FutureCredit where $500 training credits is automatically given to every Singaporean aged 25 years and above to enroll in government-approved courses. In recent years, additional training credits have also been given to encourage more mid-career workers to upgrade their skills given that they are more at risk of experiencing skills mismatch.
  • With these subsidies, workers are more willing to undergo training or skills upgrading, in turn making themselves more employable to the industries they are currently working in or intending to move into. Skills mismatch is thus addressed, hence reducing structural unemployment.
  • Education policies are also constantly being reviewed to cater to the changing needs of the jobs available in the economy. This helps to better align the current school curriculum with the ongoing economic shifts taking place as a result of economic restructuring.
  • Note that other supply-side policies have also be implemented such as subsidies given to encourage firms to engage in innovation and R&D. These policies help to boost the country’s competitiveness hence creating new export and foreign investment demand, bringing about economic growth and jobs creation, thus helping to address demand-deficient unemployment caused by an ageing population.
  • Evaluation:
    • However, supply-side policies such as skills training require time for them to be effective. Thus, in the short run, achieving full employment with the use of only supply-side policies may appear less effective.  Compared to the use of an expansionary fiscal policy, supply-side policies are usually considered an ongoing long-term approach to achieve full employment in any country.
    • If workers are not receptive to the concept of undergoing training and skills upgrading, not many will eventually attend the courses despite the subsidies provided by the government. Some may also argue that the current subsidies given are not sufficient, in view of the need for workers to still pay the balance after utilizing the full amount of the subsidies.
    • For workers to attend these courses, firms must be agreeable to giving workers time off. However, not many firms in Singapore might be willing to do so, given that this will mean slowing down production.
  • Synthesis: Providing an overall well-reasoned judgement that answers the question
  • An ageing population does pose several challenges to Singapore’s ability in achieving full employment. However, the government has been actively putting in place policies to address unemployment challenges that have surfaced as a result of an ageing population.
  • Overall, the policies implemented over the years are largely appropriate in both creating more jobs in the economy as well as reducing the skills mismatch that is increasingly becoming a concern among workers.
  • Although there have been concerns pertaining to the use of some of these policies, the combination of these policies has helped to improve the overall effectiveness and appropriateness of the government’s approach in achieving full employment in Singapore.

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