Role of Government

The United States and the European Union have responded to widening wage gaps in very different ways, leading to two different outcomes. The EU has chosen to spend big amounts of public resources to provide generous unemployment benefits. Jobs are also made more stable through legislation which makes firing difficult. Paradoxically, however, making firing more difficult leads firms to be more hesitant about hiring. The U.S., on the other hand, has less strict hire-and-fire rules as well as more flexible wages. The result, it is argued, is a much lower average rate of unemployment. It should be pointed out, however, that a more disaggregated breakdown of unemployment rates by education categories shows that the unemployment rate for the less skilled in the U.S. is much higher than for the skilled, and has been rising since the early 1970s. Moreover, the low wages of the unskilled — relative to the value of leisure and to what could be earned in the underground economy and in illegal activities — makes working not worthwhile so that the “non-employment rate” has been high among the less skilled in the U.S. The challenge for Singapore’s policy-makers is that they must determine what approach to adopt in providing a form of insurance to less-skilled workers in the face of loss of incomes. The nature of the social safety nets that Singapore chooses to develop will be vitally important as the provision of insurance needs to take into account its effect on private incentives and be fiscally sustainable. To continue to be integrated into the global economy requires the means to fight recessions while retaining fiscal sustainability. There is also a role that the government should still play in facilitating innovation even though widespread innovative activities have to come from the grassroots. Since economic restructuring involves many small firms, there are activities that enjoy economies of scale mainly at the industry and national level. Government intervention helps to generate benefits enjoyed by all firms.