MAS Annual Report 00/01 - Labour Market and Inflation

Strong Wage Pressures as Labour Market Tightens

The domestic labour market tightened in 2000,in line with the robust economic growth. Employment expanded strongly, reflecting continued employment gains in the services sector, a sharp pick-up in manufacturing employment and a turnaround in construction employment. The unemployment rate declined from an average of 3.5% in 1999 to 3.1% in 2000. On a seasonally-adjusted (SA) basis, the unemployment rate fell further from 2.9% in the fourth quarter of 2000 to 2.4% in the first quarter of 2001. (See Chart 7.)

Growth in average nominal earnings strengthened to almost 9.0% in 2000. However, unit labour cost recorded a slight decline, as the impact of relatively strong productivity gains more than offset the effects of robust wage growth and the restoration in employers’ Central Provident Fund (CPF) contribution rate in April 2000. In the first quarter of 2001, growth of nominal earnings halved from that of the last quarter of 2000 to 5.7%. Despite the slower growth in nominal earnings, unit labour cost rose moderately, reflecting a 4% point restoration in the employers’ contribution rate in January 2001, as well as a slowdown in productivity growth. (See Chart 8.)

Higher Consumer Price Index

Inflationary pressures also started to pick up in the second half of 1999. The Consumer Price Index (CPI) inflation rose steadily to 1.0% in the first half of 2000 and 1.5% in the third quarter of 2000, before reaching a peak of 2.0% in the last quarter of the year. (See Chart 9.) This brought overall inflation to 1.3% for 2000 as a whole, compared with zero in 1999. Underlying price pressures, as measured by the MAS underlying inflation, also trended up in 2000, rising to 1.5%, compared with 0.5% in 1999. However, CPI inflation moderated to 1.7% in the first quarter of 2001, with the MAS underlying inflation also experiencing a corresponding moderation.

One-off Increases in Oil Prices and Administrative Charges

The higher inflation in 2000 largely reflected the effects of the oil price shock, and hikes in several administrative charges that impacted the prices of meat, water and tobacco. These effects were estimated to account for more than three quarters of the increase in CPI for the year. (See Chart 10.) Costs of healthcare, education, accommodation and some retail goods and services also recorded increases in 2000, after declining or remaining stable during the Asian crisis. (See Charts 11, 12 & 13.) Nonetheless, these inflationary pressures were partially mitigated by various structural changes in the economy. Communication costs, for example, have been on a trend decline since the liberalisation of the telecommunications industry in April 2000. In addition, the food industry had also benefited from better cost management by supermarkets recently, such as the direct sourcing of lower-cost supplies from non-traditional markets including Latin America, South Asia and Africa.

Although oil prices have eased, electricity tariffs were raised again in February 2001 as the power company sought to recover earlier losses due to higher operating costs. The impact was offset partly by the decline in the cost of private road transport, as Certificate of Entitlement (COE) premiums and car prices softened amidst the uncertain economic outlook. This contributed to the moderation in inflation to 1.7% in the first quarter of 2001.