Explain how the above factors may result in an increase in the unemployment rate in Singapore.
In its December 2019 Recent Economic Developments Statement, the Monetary Authority of Singapore noted that unemployment was set to rise. This was mainly due to factors such as weaknesses in external demand and the acceleration in developing and deploying artificial intelligence (AI) solutions in Singapore.
Adapted from: Recent Economic Developments in Singapore, MAS, 6 Dec 2019
a. Explain how the above factors may result in an increase in the unemployment rate in Singapore. [10]
Introduction
Unemployment refers to the situation where individuals who are willing and able to work at the prevailing wage rate are unable to find employment. The rise in unemployment in Singapore, as noted by the Monetary Authority of Singapore (MAS) in December 2019, was attributed to weaknesses in external demand and the acceleration in the development and deployment of artificial intelligence (AI) solutions. Weaknesses in external demand reduce firms’ need for labour as exports decline, leading to cyclical unemployment. Meanwhile, AI-driven technological advancements can displace workers, particularly in traditional industries, resulting in structural unemployment. These factors collectively contribute to a higher overall unemployment rate in Singapore.
Weaknesses in External Demand
One of the key factors behind the rise in unemployment in Singapore was weaknesses in external demand, particularly due to the ongoing US-China trade war in 2019. The imposition of multiple rounds of tariffs by both the United States and China on each other’s goods led to a decline in trade volumes and a reduction in income levels for businesses and consumers in both economies. As the United States and China are two of Singapore’s major trading partners, a slowdown in their economies directly affects Singapore’s export sector.
A fall in export demand reduces Singapore’s net exports (X-M), leading to lower aggregate demand (AD). Additionally, heightened global economic uncertainty may dampen investor confidence, resulting in a decline in foreign direct investment (FDI) and lower levels of private investment (I). The combined decrease in investment and net exports leads to a contraction in aggregate demand, reducing real national income (NY) from Y₀ to Y₁, as illustrated in Figure 1.
As economic growth slows, firms respond by cutting costs, often by reducing their demand for factor inputs, including labour. Consequently, firms may lay off workers or reduce hiring, leading to an increase in cyclical unemployment—unemployment caused by insufficient aggregate demand. This results in a rise in the overall unemployment rate in Singapore.
Acceleration in the Development and Deployment of Artificial Intelligence (AI) Solutions
The rapid advancement and implementation of AI technologies in Singapore have also contributed to rising unemployment, particularly by displacing workers in certain industries. Automation and AI-driven solutions increase productivity and efficiency, but they also reduce the need for human labour in routine and repetitive tasks.
For example, the introduction of autonomous vehicles could gradually replace jobs traditionally held by bus drivers and truck drivers. Trials of self-driving buses and taxis have already been conducted in university campuses and certain districts in Singapore. Similarly, AI-driven solutions in industries such as manufacturing, retail, and financial services may lead to job losses in roles that can be easily automated, such as customer service, data entry, and logistics.
While AI adoption creates new job opportunities in fields such as engineering, programming, and data science, many displaced workers may lack the necessary skills to transition into these roles. This results in structural unemployment, where workers face long-term job displacement due to a mismatch between their existing skills and the skills required in emerging industries. Without adequate retraining and reskilling programs, the unemployment rate may continue to rise as technology advances.
Conclusion
Both weaknesses in external demand and the acceleration in AI development have contributed to a rise in unemployment in Singapore. A decline in global demand, particularly due to the US-China trade war, reduces export revenues and investment, leading to lower aggregate demand and increased cyclical unemployment. At the same time, AI-driven automation displaces workers in traditional industries, leading to structural unemployment when displaced workers lack the skills to transition into new roles. While economic growth and technological advancements are necessary for long-term progress, policies such as job retraining and labour market adjustments are crucial to mitigating unemployment and ensuring that workers can adapt to changing economic conditions.
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