Discuss whether monetary policy by itself is sufficient to tackle COVID-19-related unemployment in Singapore
The COVID-19 pandemic led to an unprecedented decline in employment in Singapore. In addition to weak external demand, a sharp drop in international tourist arrivals, and reduced domestic consumption, job losses were also driven by a rapid structural shift away from certain face-to-face service industries.
b. Discuss whether monetary policy by itself is sufficient to tackle COVID-19-related unemployment in Singapore. [15]
Introduction
Monetary policy in Singapore primarily operates through exchange rate management rather than interest rate adjustments, as the Monetary Authority of Singapore (MAS) uses the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) framework to maintain price stability and economic competitiveness. Under normal circumstances, MAS adopts a modest and gradual appreciation of the Singapore dollar (SGD) to curb imported inflation, cost-push inflation, and demand-pull inflation. However, in times of economic recession, such as during the COVID-19 pandemic, a shift in monetary policy stance—such as a depreciation or a neutral stance on exchange rate appreciation—may be considered to mitigate rising unemployment. While monetary policy can play a role in addressing cyclical unemployment, it is insufficient in tackling structural unemployment, necessitating a mix of fiscal and supply-side policies to fully restore labour market stability.
How Monetary Policy Can Address Unemployment
One way in which monetary policy could help reduce unemployment is by adjusting the exchange rate policy to support economic recovery.
A shift from a modest and gradual appreciation to a depreciation of the SGD could be implemented by adjusting the slope of the S$NEER band downward or shifting the mid-point of the band downward.
A weaker SGD makes exports cheaper and imports more expensive, improving export competitiveness and potentially leading to higher demand for Singapore’s goods and services.
Given that Singapore’s exports are likely price elastic, satisfying the Marshall-Lerner condition, a depreciation of the SGD would likely result in an improvement in the trade balance (X-M).
As net exports (X-M) increase, aggregate demand (AD) shifts rightward, leading to higher real national income and economic growth.
As firms experience increased demand, they hire more factor inputs, including labour, reducing cyclical unemployment.
However, the effectiveness of monetary policy in reducing unemployment through currency depreciation is limited due to Singapore’s heavy reliance on imported raw materials and essential goods.
A weaker SGD raises the cost of imported goods, leading to imported inflation, which can increase firms' production costs and reduce export competitiveness over time.
The rise in cost-push inflation may also lower real wages and reduce household purchasing power, making necessities more expensive for citizens.
Given these constraints, Singapore typically adopts a ‘zero percent appreciation’ or ‘neutral stance’ on the S$NEER during recessions, rather than a depreciation, to strike a balance between preventing excessive unemployment and controlling inflation.
While this neutral stance prevents a stronger SGD from further worsening cyclical unemployment, it does not directly stimulate job creation, making it a moderate and indirect solution rather than a strong policy tool for reducing unemployment.
Limitations of Monetary Policy in Addressing Other Types of Unemployment
While a neutral or depreciative exchange rate stance may prevent cyclical unemployment from worsening, it is ineffective in addressing structural unemployment, which was a major issue during the COVID-19 pandemic.
The pandemic accelerated structural shifts in the economy, particularly the decline of face-to-face service industries (e.g., retail, hospitality, and traditional F&B businesses) and the rise of digital, e-commerce, and technology-based sectors.
Workers in declining industries lacked the necessary skills to transition into new jobs, leading to structural unemployment caused by a mismatch between labour supply and demand.
Exchange rate policy does not directly influence workforce skills, meaning that other measures, such as supply-side policies, are needed to retrain and upskill displaced workers.
Since monetary policy does not resolve skill mismatches, addressing structural unemployment requires a comprehensive set of supply-side policies aimed at workforce transformation.
Alternative and Complementary Policies to Monetary Policy
Given the limitations of monetary policy, a combination of discretionary expansionary fiscal policy and supply-side measures would be more effective in addressing unemployment.
1. Expansionary Fiscal Policy to Address Cyclical Unemployment
The Singapore government implemented various fiscal stimulus measures during the COVID-19 pandemic, such as the Jobs Support Scheme (JSS), which subsidised wages to encourage businesses to retain employees.
Other measures, including rental relief, corporate tax rebates, and direct cash transfers, helped businesses sustain operations and supported consumer spending, preventing a further collapse in demand.
Increased government spending (G) on infrastructure and healthcare also helped sustain employment in essential sectors.
Expansionary fiscal policy has a more direct and immediate impact on reducing cyclical unemployment than monetary policy, as it directly supports businesses and households rather than relying on exchange rate adjustments.
2. Supply-Side Policies to Address Structural Unemployment
To address structural unemployment, the Singapore government expanded workforce retraining programs, such as the SkillsFuture Initiative and the SGUnited Jobs and Skills Package, which provided subsidies for digital and technology-related courses.
By equipping workers with relevant skills, supply-side policies help ensure long-term employment opportunities in growing industries.
Unlike monetary policy, which only affects overall demand conditions, supply-side policies target the root cause of unemployment by ensuring that workers possess the skills required in emerging sectors.
Conclusion
While monetary policy can moderate cyclical unemployment by preventing excessive currency appreciation and supporting net exports, it is not a comprehensive solution for reducing overall unemployment. Exchange rate adjustments have limited effectiveness in addressing structural unemployment, which was a key concern during the pandemic. Instead, a mix of expansionary fiscal policies and supply-side measures is needed to directly support businesses, sustain job creation, and retrain displaced workers. Given the constraints of Singapore’s monetary policy framework and economic structure, relying solely on monetary policy would be insufficient, making fiscal stimulus and supply-side reforms essential for a full labour market recovery.
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