Appropriateness of Policies to Achieve Full Employment Given an Ageing Population

Answer

An economy achieves full employment when its unemployment rate sits close to the natural rate, with productive capacity largely utilised. An ageing population threatens this on two fronts — it can raise both demand-deficient and structural unemployment — so no single instrument suffices. The thesis is that Singapore’s response, a combination of expansionary fiscal policy, a managed-appreciation exchange-rate policy and sustained supply-side measures, is on balance appropriate: each instrument is matched to a distinct source of unemployment, and the policies are complementary rather than substitutes. The qualification is that the demand-side instruments address symptoms while only the supply-side measures address the underlying loss of competitiveness, so the long-run weight rightly falls on the latter.

Challenge 1 — demand-deficient unemployment. An ageing population erodes competitiveness and aggregate demand through several channels. Perceived or actual lower productivity growth, and skills seen as less relevant, make Singapore a less attractive base for foreign direct investment; falling investment lowers aggregate demand. A shrinking labour-force participation rate and the lower purchasing power of retirees depress consumption. And the higher social spending an ageing society demands may force higher taxes, which are contractionary. Lower AD reduces real national income, and since labour is a derived demand, demand-deficient unemployment rises.

Challenge 2 — structural unemployment. To restore competitiveness, Singapore presses on with economic restructuring, forcing firms to raise productivity through technology and innovation (the Industry Transformation Maps). This displaces low-skilled workers and PMETs whose skills no longer match new industry needs, raising structural unemployment through occupational immobility. Crucially, both unemployment problems strike the whole workforce, not only the elderly.

Policy 1 — expansionary fiscal policy for demand-deficient unemployment. Job creation requires boosting AD. A budget deficit — raised government expenditure, e.g. expanded public-sector hiring and brought-forward infrastructure such as new hospitals (which also serve the elderly) — directly raises demand for labour and, through the multiplier, real national income. Tax cuts could in principle raise consumption and investment, but Singapore largely avoids them to protect the revenue it needs for social spending, so the emphasis is on expenditure.

Evaluation. Near full capacity, fiscal expansion risks demand-pull inflation. Singapore’s small multiplier — high import and saving leakages — blunts the income effect, so more spending is needed per job created. And the capacity to run deficits depends on past reserves, which are finite if job creation must be permanently government-driven. Most fundamentally, fiscal expansion adds jobs but cannot fill them if displaced workers lack the requisite skills — so it is necessary but not sufficient.

Policy 2 — managed appreciation of the exchange rate. The Monetary Authority of Singapore favours a modest, gradual appreciation of the trade-weighted dollar (departing from it only in recession or deflation). Because Singapore imports most of its raw materials, food and energy, appreciation lowers the S$ price of imports, containing imported cost-push inflation and firms’ input costs. Sustained price stability preserves the price-competitiveness of exports and the profitability that underpins investment, supporting AD now and productive capacity later — hence job creation.

Evaluation. The cost savings accrue mainly to import-intensive firms; labour-intensive services firms, squeezed by the lower productivity growth an ageing workforce brings, may still relocate. And appreciation does nothing for skills mismatch, so it too must be paired with supply-side policy.

Policy 3 — supply-side policy for structural unemployment. The direct remedy for structural unemployment is to raise workers’ employability and mobility. Skills-training subsidies — SkillsFuture credits, with extra top-ups for mid-career workers most exposed to mismatch — make retraining attractive, closing the skills gap and lowering structural unemployment; education reform keeps curricula aligned with shifting demand. Innovation and R&D subsidies raise competitiveness, generating new export and investment demand and so also relieving demand-deficient unemployment.

Evaluation. Supply-side measures act only with a long lag, so they cannot relieve unemployment quickly — they are an ongoing long-run approach, complementary to the faster-acting fiscal instrument. Their effectiveness also depends on worker receptiveness, the adequacy of subsidies (workers still pay a balance) and firms’ willingness to release staff for training.

Judgement. An ageing population genuinely threatens full employment in Singapore, but the implemented policy mix is, on balance, appropriate. The appropriateness rests on three points. First, the instruments are matched to distinct problems: fiscal expansion and exchange-rate management sustain AD against demand-deficient unemployment, while supply-side training targets structural unemployment directly. Second, they are complementary — fiscal policy creates jobs that supply-side policy equips workers to fill, and exchange-rate stability protects the competitiveness on which both AD and capacity depend. Third, and decisively, the long-run burden falls correctly on the supply side: the root challenge is a loss of competitiveness and productivity, which only skills, innovation and capacity-building can durably reverse — demand-side instruments buy time but cannot substitute for this. The residual concerns — inflation risk, a small multiplier, finite reserves, training lags and take-up — are reasons to calibrate the mix carefully, not to abandon any element. So designed, Singapore’s combination of demand-management and supply-side policy is an appropriate response to the employment challenges of an ageing population.