Trade, Capital Accumulation and Structural Unemployment: An Empirical Study of the Singapore Economy

36 Pages Posted: 10 Feb 2004

See all articles by Hiau Looi Kee

Hiau Looi Kee

World Bank - Development Research Group (DECRG)

Hian Teck Hoon

Singapore Management University

Lin Yeok Tan

National University of Singapore (NUS)

Date Written: April 8, 2004

Abstract

The past three and a half decades witnessed a distinctly declining trend in Singapore's unemployment rate, which dropped from an average annual rate of 7.85 percent in 1966-70 to 2.74 percent in 1991-2000. Kee and Hoon seek to identify and empirically examine the factors that have influenced Singapore's unemployment rate in an environment of low and stable inflation. They incorporate a union bargaining framework into a standard-factors trade model, in which an increase in the relative price or capital stock in the export sector raises the demand wage that firms can afford to pay relative to workers' fall-back income, and consequently lowers equilibrium unemployment. The magnitude of the effects depends on the fall-back income, the weight unions attach to employment, and the elasticity of labor demand, which the authors estimate using data on Singapore. The results show that labor unions in Singapore care more about employment than wages. Together with a small fall-back income and elastic labor demand, the authors show that given the same percentage change in relative export prices and capital accumulation in the export sector, the effect on unemployment is larger for the former. However, the empirical importance of capital accumulation in the export sector dominates increases in relative export prices in reducing unemployment since the manufacturing sector experienced a tremendous increase in capital inputs throughout the sample period, whereas the relative price of exports experienced a far smaller increase and only in the early part of the sample period. The authors conclude that through a very open trading regime, the tremendous increase in capital stock of the exporting sector has been the main reason behind Singapore's declining unemployment rate.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to study the effect of trade on growth.

Keywords: Endogenous natural rate of unemployment, wage bargaining, specific-factors model, Stolper-Samuelson effect, Rybczynski effect.

JEL Classification: E24, F12, J51

Suggested Citation

Kee, Hiau Looi and Hoon, Hian Teck and Tan, Lin Yeok, Trade, Capital Accumulation and Structural Unemployment: An Empirical Study of the Singapore Economy (April 8, 2004). World Bank Policy Research Working Paper No. 3272. Available at SSRN: https://ssrn.com/abstract=498082

Hiau Looi Kee (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-4155 (Phone)
202-522-1159 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/hkee

Hian Teck Hoon

Singapore Management University ( email )

School of Economics
90, Stamford Road
Singapore, 178903
Singapore
65 6828-0248 (Phone)
65 6828-0833 (Fax)

Lin Yeok Tan

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Register to save articles to
your library

Register

Paper statistics

Downloads
182
Abstract Views
1,795
rank
168,136
PlumX Metrics