Tuesday, 30 November 2004

Structural unemployment in developed economies

The Singapore government recognises that structural unemployment is inevitable in a developed economy.

On 16 November, Manpower Minister Ng Eng Hen told Parliament: "No developed economy in the world has managed to solve fully its structurally unemployed and that is a fact. We will do our very best to mitigate the problem, to reduce it to manageable numbers."

Which makes it somewhat surprising to me that, according to The Straits Times today, he is saying in the ministry's latest annual report that Singapore will not be handing out unemployment benefits to the out-of-work. "We don't want a system where people expect some sort of benefit as long as they are unemployed. I think that creates a wrong mindset," he was reported to be saying.

If structural unemployment is inevitable, placing such a heavy burden on the unemployed to find jobs appears rather harsh to me. While the ministry promises to help with training and job matching, there is a limit to what these can accomplish.

Developed economies are so because the jobs in such economies tend to be specialised. Specialisation allows higher levels of skill and economies of scale. However, it also increases the problem of matching such specialised skills with available jobs. And unlike developing economies with agriculture dominating, an unemployed worker in a developed economy is unlikely to be able to go back to his family's farm to find work -- his family is unlikely to own a farm.

Like many high-return situations, the job market in a developed economy is also a high-risk one. People are more likely to venture into risky but potentially lucrative activities like esoteric specialisations and entrepreneurship when the government mitigates the consequences of failure. Unemployment benefits serve exactly that purpose.

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