Effects of Labor Taxes on Hours of Market and Home Work: The Role of International Capital Mobility and Trade

This paper evaluates the Prescott (2004) hypothesis that permanently higher payroll taxes fully explain the decline in number of market hours worked in Europe (relative to America) over three decades. The Prescott model made assumptions that, in steady state, left out any incentive for either international capital mobility or international exchange of goods. We study a one-good model where the imposition of higher payroll taxes in one region leads to higher domestic real interest rate in that region. As a result, there are incentives for international capital outflows into the high payroll tax region with the consequence that number of market hours worked in the low payroll tax region also decline. With identical tastes and rate of time discount across the two regions, we find that the number of hours worked in the market, home work, and leisure are equalized across the two regions. In the multi-good model, when factor price equalization holds so free trade acts as a substitute for factor mobility, we show that there is also equalization of market work, home work, and leisure across the two regions.Payroll taxes, wealth decumulation, capital mobility

Future Job Prospects in Singapore

What forces have shaped our nation’s employment and remuneration record so far? Where is Singapore’s unemployment rate headed? What should policy-makers do about it? These are the questions tackled in this paper. It is shown that based on our historical experience, it would be necessary to achieve an annual real GDP growth rate of 7.1 percent in order to keep the unemployment rate unchanged. Moreover, a one-percentage point shortfall of the real GDP growth rate below 7.1 percent in any given year results in a rise in the unemployment rate of 0.12 percentage points over the previous year. Consequently, if the economy is able to generate at most 5 percent real GDP annual growth rate (the high end of the range of official medium-term projections of our economy’s growth rate, which is 3 to 5 percent), it would seem that the unemployment rate is set to rise from its current level based upon the historical relationship. Is there any reason, however, to believe that the Okun’s Law relationship for a fast-developing country like ours might be expected to change once we have reached the status of a mature economy as we now have become? After all, in a mature economy like the US, the critical real GDP growth rate required to keep the unemployment rate steady is only 3 percent. It is likely that the Okun’s Law relationship would indeed shift as the economy matures. As workers adjust their expectations to the reality that the economy has reached a new lower growth regime and they incorporate their revised growth expectations in their wage bargaining, the unemployment rate can remain steady despite slower growth. This steady structural rate of unemployment is, however, likely to be higher than in the past. In response to the worsened medium to long term outlook for the labor market, one is tempted to ask: Can anything be done by policy-makers to reduce the equilibrium rate of unemployment? I believe that reaching out for a weaker Singapore dollar in order to boost international competitiveness, and so to boost aggregate demand and hence employment, or reaching out for budgetary deficits as a direct means to boost aggregate demand is unlikely to have a lasting effect on the structural rate of unemployment. Instead that it would be better to consider policies aimed directly at influencing equilibrium unemployment. One proposal is to introduce an employment subsidy scheme aimed particularly at low-skilled workers, which has the effect of increasing job creation directly. Increased effort to create a business-friendly environment to encourage new start-ups by ensuring minimal red tape and enabling relatively easy financing for them will also work to increase the pace of job creation. Finally, the work of the Workforce Development Agency aimed at retraining low-skilled and older workers to meet the skills demand of new jobs and then matching them to firms offering the job vacancies should help somewhat in bringing down the structural rate of unemployment as our small geographical area works to our advantage when it comes to job-matching.

Effects of Technological Improvement in the ICT-Producing Sector on Business Activity

It seems to be taken for granted by many commentators that the sharp decline in prices of computers, telecommunications equipment and software resulting from the technological improvements in the information and communications technology (ICT)-producing sector is good for jobs and is a major driving force behind the non-inflationary employment miracle and booming stock market in the latter half of the nineties in the U.S. and their recurrence since 2004. We show that, in our model, a technical improvement in the ICT-producing sector by itself cannot explain a simultaneous increase in employment and a rise in firms valuation (or Tobins Q ratio). There are two cases. If the elasticity of equipment price (pI ) with respect to ICT-producing sectors productivity is less than one, labors value marginal productivity increases thus pulling up the demand wage and expanding employment. However, the increased output by adding to the capital stock and thus driving down future capital rentals causes a decline in firms valuation, q per unit, even though Tobins Q (= q=pI ) is up. If the elasticity is greater than one, equipment prices fall so dramatically that labors value marginal productivity declines, employment in the ICT-using sector expands proportionately more than the increase in capital stock, thus raising future capital rentals, so both firms valuation and Tobins Q rise; but then real demand wage falls and employment contracts. The key to generating a booming stock market alongside employment expansion is to hypothesize that when technical improvement in the ICT-producing sector occurs, the market forms an expectation of future productivity gains to be reaped in the ICT-using sector. Then we can explain not only the stock market boom and associated rise in investment spending and employment in the period 1995-2000 but also the subsequent decline in employment, in Tobins Q and in investment spending in 2001, with consumption holding up well as productivity gains in the ICT-using sector were realized. An anticipation of a future TFP improvement in the ICT-using sector can once more play the role of raising the stock market.Business asset valuation, investment spending, Employment

Future Job Prospects in Singapore

What forces have shaped our nations employment and remuneration record so far? Where is Singapores unemployment rate headed? What should policy-makers do about it? These are the questions tackled in this paper. It is shown that based on our historical experience, it would be necessary to achieve an annual real GDP growth rate of 7.1 percent in order to keep the unemployment rate unchanged. Moreover, a one-percentage point shortfall of the real GDP growth rate below 7.1 percent in any given year results in a rise in the unemployment rate of 0.12 percentage points over the previous year. Consequently, if the economy is able to generate at most 5 percent real GDP annual growth rate (the high end of the range of official medium-term projections of our economys growth rate, which is 3 to 5 percent), it would seem that the unemployment rate is set to rise from its current level based upon the historical relationship. Is there any reason, however, to believe that the Okuns Law relationship for a fast-developing country like ours might be expected to change once we have reached the status of a mature economy as we now have become? After all, in a mature economy like the US, the critical real GDP growth rate required to keep the unemployment rate steady is only 3 percent. It is likely that the Okuns Law relationship would indeed shift as the economy matures. As workers adjust their expectations to the reality that the economy has reached a new lower growth regime and they incorporate their revised growth expectations in their wage bargaining, the unemployment rate can remain steady despite slower growth. This steady structural rate of unemployment is, however, likely to be higher than in the past. In response to the worsened medium to long term outlook for the labor market, one is tempted to ask : Can anything be done by policy-makers to reduce the equilibrium rate of unemployment? I believe that reaching out for a weaker Singapore dollar in order to boost international competitiveness, and so to boost aggregate demand and hence employment, or reaching out for budgetary deficits as a direct means to boost aggregate demand is unlikely to have a lasting effect on the structural rate of unemployment. Instead that it would be better to consider policies aimed directly at influencing equilibrium unemployment. One proposal is to introduce an employment subsidy scheme aimed particularly at low-skilled workers, which has the effect of increasing job creation directly. Increased effort to create a business-friendly environment to encourage new start-ups by ensuring minimal red tape and enabling relatively easy financing for them will also work to increase the pace of job creation. Finally, the work of the Workforce Development Agency aimed at retraining low-skilled and older workers to meet the skills demand of new jobs and then matching them to firms offering the job vacancies should help somewhat in bringing down the structural rate of unemployment as our small geographical area works to our advantage when it comes to job-matching.Singapore, Employment, GDP

Macroeconomic Effects of Over-investment in Housing in an Aggregative Model of Economic Activity

Is there a theoretical basis for the view that the end of a period of over-investment necessarily leads to a period of below-normal employment as the excess capital stock is run down? We study the repercussions of a false boom in housing driven by prior expectations of future housing prices not justified by fundamentals. When these expectations are corrected, the result is a precipitous drop in housing prices and, on that account alone, some drop in employment. There is also a bulge in the housing stock. In the closed economy case, the downward shift of the term structure of interest rates due to the excess housing stock props up housing prices above the normal steady-state level, so the drop of housing prices “undershoots.” Although this transient elevation of housing prices has a positive demand-wage effect on employment, we show that the wealth effect from owning a higher housing stock and a negative Hicks-Lucas-Rapping effect of lower interest rates dominate, so employment drops initially to a below-normal level. The slump gradually subsides as the housing overhang wears off. In the case of a small open economy that faces a world of perfect capital mobility and takes as given the world interest rate, there are two possibilities. If housing services are instantaneously tradeable and perfect substitutes for foreign ones, so purchasing power parity holds, the end of the bubble causes housing prices to drop precisely to the steady-state level. Since there is no undershooting, the wealth effect of the housing overhang is unopposed and the slump is deeper. If domestic and foreign housing services are imperfect substitutes, the country will suffer a period with a weak real exchange rate, thus to a drop of housing prices that “overshoots” the normal level. Here the slump in employment is worsened by the exaggerated fall in housing prices below the steady-state level.Housing stock, housing prices, over-investment, employment

Effects of labour taxes on hours of market and home work: The role of international capital mobility and trade

Ministry of Education, Singapore under its Academic Research Funding Tier

Service Links and Wage Inequality

In our general equilibrium model, the variety of specialized service links affects international production fragmentation in manufacturing. Decreases in cost of education or fixed cost of service links raise the relative supply of skilled workers, increase service specialization, and decrease the price of aggregate services. Consequently, the market for service- and skill-intensive component manufacturing enlarges, raising relative demand for skilled workers. Empirically, endogenous change in international outsourcing rather than skill-biased technological progress is the main reason for a modest decline in wage gap despite the rapid rise in relative supply of skilled workers in Singapore from 1978 to 2000.Production Fragmentation; Service Links; Wage Inequality; Singapore; Technological Progress