Logistics

Singapore’s faced a recession in 2009 as America faced a sub-prime mortgage crisis due to Singapore’s reliance on export in its AD schedule and hence is vulnerable to the global business crisis. Additionally, Singapore mainly exports high-end manufactured goods, whose demand is income elastic. When the global income fell due to the subprime crisis in 2008 and 2009, the demand for exports from Singapore fell more than proportionately, causing AD to contract. As AD fell, actual sales were lower than expected sales and firms experienced an unplanned increase in stocks. This caused them to cut back on production as actual stock levels exceeded desired levels. In doing so, firms would hire fewer workers and hence cyclical unemployment raised. This essay will discuss the effectiveness of increased government spending in unemployment reduction using AD-AS framework.

To reduce unemployment, the Singapore government employs expansionary fiscal policy by increasing its spending to help business and households. The government spends part of its budget on infrastructure and innovative technologies to help businesses.  For instance, the government increases its spending to connect the island with an advanced and comprehensive road network and to increase energy efficiency for industries. Such measures allow companies to operate more efficiently with lower unit cost of production and thus maintain their profits. To help households, the government provided the Workfare Income Supplement (WIS) Special Payment and 20% personal income tax rebate (capped at 2000) to increase households’ disposable income. As a result, their purchasing power and consumption(C) levels rise, contributing to the rise in AD. The rise in AD will lead to an unplanned decrease in stocks. To increase their stocks to desired levels, firms increase production by hiring more workers, reducing cyclical unemployment.

The increase in government spending will also cause a multiple increase in AD, assuming that there is still spare capacity in the economy. As firms increase their stocks back to desired levels, they hire more workers. This generates additional income for households employed by those firms. The household will spend a proportion of the additional income on consumption goods, depending on MPC. The increase in C causes AD to rise again. This leads to another round of unplanned decrease in stock and gives firms incentives to employ more workers to increase their production, reducing unemployment further. The increase in AD and decrease in unemployment will continue until the increase in income become negligible. The final increase in AD will be several (k) times of the initial increase in the government spending and cyclical unemployment will fall significantly.

Also, the government, by spending on capital goods and retraining, under Skills Programme for Upgrading and Resilience (SPUR) to pay for their courses as well as for company absentee payrolls while the workers are retraining, not only seeks to allow workers to retain their jobs and reduce cyclical unemployment caused by the fall in AD, but also alleviate structural unemployment by giving them new skills so that their skills are up to date and reduce the possibility of a mismatch between the worker’s skills and new job requirements when the economy recovers. Skills retraining also improve their productivity by teaching them more efficient production methods so that output per unit labour increases. As such, the productive capacity of the workers improves and more units of suitable labour are available for production. This shifts the vertical and intermediate range of the AS to the right. The resulting shift in AS to the right from AS0 to AS1 and the resulting shift in AD to the right from AD0 to AD1 will in turn increase real national income from Y0 to Y1, as from Figure 1 below while the general price level is indeterminate. As real national income increases in the long run, unemployment also decreases.

[pic 1]

[pic 2][pic 3][pic 4][pic 5]

[pic 6][pic 7][pic 8]

[pic 9]

[pic 10][pic 11]

[pic 12][pic 13][pic 14]

[pic 15][pic 16]

[pic 17]

[pic 18][pic 19]

However the policy may also be not very effective in reducing unemployment in Singapore. This is because the effectiveness of the fiscal policy depends on the MPS, MPM and MPT of the country. The higher values of MPS, MPM and MPT, the smaller the multiplier effect hence the less effective the fiscal policy. Unfortunately Singapore has high MPS. This is because of the national saving scheme whereby all working individuals have to make compulsory monthly contributions to the CPF of around 30%. This compulsory aspect of savings, together with the prudent attitude, results in Singapore having one of the highest saving rates in the world. In addition, Singapore being an open economy has high MPM too. Singapore does not have natural resources and this result in the dependency on imported raw materials for production and consumption. This means that with the additional income received, bulk of it will be spent on buying imports. As Singapore has high MPS and MPM, the marginal propensity to withdrawal will be very high, and since the multiplier effect k=1/(MPW), the increase in government expenditure in AD will have a small multiplier effect. This meant that when the Singapore government increased its spending, the change in national income will not be that big. Since the national income does not increase by much, not many jobs will be created and thus it is not very effective in reducing employment.