Introduction
Monetary policy in Singapore operates primarily 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$NEER) framework to maintain price stability and competitiveness. Under normal circumstances MAS adopts a modest and gradual appreciation of the Singapore dollar (SGD) to curb imported, cost-push and demand-pull inflation. In a recession such as the COVID-19 pandemic, a shift in stance, such as a depreciation or a neutral stance on appreciation, may be considered to mitigate rising unemployment. While monetary policy can address cyclical unemployment, it is insufficient against structural unemployment, requiring a mix of fiscal and supply-side policies to fully restore labour-market stability.
How monetary policy can address unemployment
One way monetary policy could reduce unemployment is by adjusting the exchange-rate stance to support recovery. A shift from modest, gradual appreciation to a depreciation of the SGD could be implemented by adjusting the slope of the S$NEER band downward or shifting the mid-point downward. A weaker SGD makes exports cheaper and imports dearer, improving export competitiveness and potentially raising demand for Singapore's goods and services. Given that Singapore's exports are likely price elastic, satisfying the Marshall-Lerner condition, a depreciation would likely improve the trade balance (X-M). As net exports rise, aggregate demand (AD) shifts rightward, lifting real national income and growth, and as firms face stronger demand they hire more factor inputs, including labour, reducing cyclical unemployment.
However, the effectiveness of this channel is limited by Singapore's heavy reliance on imported raw materials and essential goods. A weaker SGD raises the cost of imported goods, causing imported inflation that can raise firms' production costs and erode competitiveness over time. The rise in cost-push inflation may also lower real wages and reduce household purchasing power. Given these constraints, Singapore typically adopts a zero-percent appreciation or neutral stance on the S$NEER during recessions, rather than a depreciation, to balance preventing excessive unemployment with controlling inflation. While this neutral stance prevents a stronger SGD from worsening cyclical unemployment, it does not directly stimulate job creation, making it a moderate, indirect solution rather than a strong tool.
Limitations in addressing other types of unemployment
While a neutral or depreciative stance may prevent cyclical unemployment from worsening, it is ineffective against structural unemployment, a major issue during the pandemic. The pandemic accelerated structural shifts, particularly the decline of face-to-face service industries such as retail, hospitality and traditional F&B, and the rise of digital, e-commerce and technology-based sectors. Workers in declining industries lacked the skills to transition into new jobs, creating structural unemployment from a mismatch between labour supply and demand. Exchange-rate policy does not directly influence workforce skills, so other measures, such as supply-side policies, are needed to retrain and upskill displaced workers.
Alternative and complementary policies
Expansionary fiscal policy to address cyclical unemployment
The government implemented various fiscal stimulus measures during the pandemic, such as the Jobs Support Scheme (JSS), which subsidised wages to encourage firms to retain employees. Other measures, including rental relief, corporate tax rebates and direct cash transfers, helped firms sustain operations and supported consumer spending, preventing a further collapse in demand. Increased government spending (G) on infrastructure and healthcare also sustained employment in essential sectors. Fiscal policy has a more direct and immediate impact on cyclical unemployment than monetary policy, as it supports businesses and households directly rather than relying on exchange-rate adjustments.
Supply-side policies to address structural unemployment
To address structural unemployment, the government expanded retraining programmes such as the SkillsFuture Initiative and the SGUnited Jobs and Skills Package, which subsidised digital and technology-related courses. By equipping workers with relevant skills, supply-side policies help ensure long-term employment in growing industries. Unlike monetary policy, which only affects overall demand conditions, supply-side policies target the root cause by ensuring workers possess the skills required in emerging sectors.
Evaluative conclusion
While monetary policy can moderate cyclical unemployment by preventing excessive appreciation and supporting net exports, it is not a comprehensive solution. Exchange-rate adjustments have limited effect on structural unemployment, the key concern during the pandemic. A mix of expansionary fiscal policy and supply-side measures is needed to directly support businesses, sustain job creation and retrain displaced workers. Given the constraints of Singapore's monetary 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.