Tipping Singapore into a recession to ease labour market tightness would be a very bad idea
SINGAPORE’S labour market tightness – and accompanying wage pressures – has been so persistent that some wonder if it can only be cured by the economy entering a recession.
But wishing for a recession is too drastic a response – it is, after all, possible to ease labour demand without going to that extreme.
In a tight labour market, employers typically offer higher wages to attract or retain workers. They may then pass these higher labour costs along to consumers by raising prices. This is known as wage push inflation. Higher wages might then be needed to compensate for the hike in the prices of goods, running the risk of a so-called wage-price spiral.
Yet, a tight labour market simply means there are many job vacancies and the supply of workers is scarce. Relieving this tightness does not require an outright contraction in the economy. Even if supply cannot catch up, all that is needed is for demand to slow sufficiently.
This is precisely what central banks aim for: to keep inflation low without hurting growth and sacrificing jobs. In response to persistent cost pressures, the Monetary Authority of Singapore (MAS) sought to do this by tightening policy as early as last October. MAS has delivered four more rounds of tightening since, including two off-cycle moves.
Indeed, central banks aim to avoid the danger of pumping the brakes too hard and causing too hard of a landing – a problem that the United States and Europe are currently grappling with.
This is also why some economists believe MAS is unlikely to further tighten policy at its next scheduled meeting in April, as the central bank would be cautious about going too far amid weakening global growth and brewing headwinds.
During a briefing on Singapore’s second-quarter labour figures in September, in response to a question about when he expected labour market tightness to ease, Permanent Secretary for Manpower Ng Chee Khern warned of the need to “be careful what we ask for”.
Ng went so far as to say easing labour demand is not entirely a good thing: “It is one of those things where it is tight now, and we do expect some easing... but we hope the easing isn’t too much.”
Some sectors are already seeing the early effects of slowing demand. For instance, hiring activity has started to cool in the once-hot sectors of tech and manufacturing. Major tech layoffs have made headlines.
Manufacturing growth is expected to weaken further in 2023, as external demand continues to deteriorate, said the Ministry of Trade and Industry (MTI) in its release of Q3 figures.
Other externally oriented sectors could soon follow suit. MTI expects growth in sectors such as wholesale trade, water transport, as well as finance and insurance to be dampened next year by the slowdown in major external economies.
In any case, a recession may turn out to be ineffective in cooling labour market demand where it matters.
Singapore is now in a two-speed economy. While externally oriented sectors have been hit by sharp slowdowns in global growth, domestic-facing and tourism-related sectors are still expanding at a healthy pace.
Hiring demand is thus concentrated mostly in the sectors that have benefited from the reopening tailwinds, namely tourism and hospitality-related sectors such as aviation, food and beverage, and retail.
These sectors are expected to remain buoyed next year as air travel continues to recover after the lifting of Covid-19 curbs. If a recession does hit, labour demand in these sectors is unlikely to be the first to soften.
