Relationship Between Gross Domestic Product and Employment

Economic activity in Singapore has slowed since the second quarter of 2022, and the labour market has also shown signs of cooling in recent quarters. Historically, labour market conditions tend to lag changes in economic activity. This box article examines the relationship between economic activity and labour market conditions, specifically that between real Gross Domestic Product (GDP) growth and employment growth, in Singapore.

Economic Activity and its Impact on the Labour Market

The academic literature postulates several reasons why a change in economic activity may affect the labour market with a lag. First, adherence to hiring practices could delay employment responses to changes in economic activity (Australian Bureau of Statistics, 2006; Edwards & Gustafsson, 2013). For example, the hiring process may take up to several months as employers have to advertise a job posting before evaluating suitable candidates. Employment contracts may also stipulate notice periods of a few months before an employee can leave.

Second, faced with hiring rigidities, firms may choose to temporarily increase production without hiring more workers by maximising the utilisation of existing resources when economic activity picks up (Reserve Bank of Australia, 2014). Conversely, during a downturn, firms may hold on to their workforce and delay retrenchments, possibly because of minimum staffing requirements or employment contracts and/or to avoid losing the human capital that they have invested in, even as they cut production (Kuan, 2022).

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