Like every Friday, from Raj Nallari and Breda Griffith's lecture notes.

Labor Friendly Economic Growth

What does it mean to make growth more labor friendly?  First, there are cases by which growth in output is not translated into growth in employment and unemployment actually increases and/or the informal sector expands.  For example, Pierrre and Scarpetta (2004) note that while many countries in East and South Asia managed to successfully combine strong economic growth with increasing employment, for many other developing regions, especially Sub-Saharan Africa, increases in the working age population outstripped job opportunities in the formal sector with a resultant increase in employment in the informal sector.  Furthermore, strong economic growth in the transition economies in recent years has been accompanied by large and increasing unemployment rates. The unemployment rate in Poland, Slovak Republic and Former Yugoslavia has been close to 20 percent with declining labor force participation rates.  Similar tales abide in Latin America where the unemployment rate doubled to more than 10% in Argentina, Brazil and Chile during the 1990s combined with an expansion of the informal sector “the working poor” and rising wage and income inequality (Pierre and Scarpetta, ibid.)  

Employment and Productivity Intensiveness of Economic Growth 

An examination of employment elasticity sheds some light on what has taken place with regard to the employment intensity of output/growth. The employment elasticity measures the percentage point change in the number of employed persons in a country or region associated with a 1-percentage point change in economic output, measured by GDP.  Employment elasticities, essentially a ratio of the growth in employment (numerator) and growth in output (denominator) vary across countries and across time reflecting changes in the relationship between employment and output.  Research at the ILO showed that growth in labor supply, the size of a country’s service sector, instability, uncertainty and taxes on labor earnings were relevant in explaining a country’s employment intensity of growth (Kapsos, 2005).    

Examining changes in output with changes in the employment elasticity sheds light on whether growth is occurring with gains in employment and labor productivity, or whether it is balanced between the two. Opinion varies on whether employment-led growth or productivity-led growth is more advantageous from a development perspective.  On the other hand, positive economic growth accompanied by an employment elasticity of greater than 1 indicates declining labor productivity and an increase in lower productivity jobs. Globally employment elasticities ranged between 0.3 and 0.38 percentage points during the study period (from Trends in the Employment Intensity of Economic Growth). Thus for every 1 percentage point increase in GDP, employment growth grew by one third and productivity growth by two thirds.

The employment elasticity for individual sectors, where value added in the respective economic sector—agriculture, manufacturing, services—replaces GDP (in the denominator) links employment growth to changes in the sectoral composition of employment.  A low employment elasticity and positive sectoral growth for a given sector suggests productivity growth.  If this scenario continues and is accompanied by reduced employment in the given sector and overall economic growth is positive, then we would expect that structural change is occurring. At early stages of development structural change is indicative of a movement away from agriculture to manufacturing and at later stages of development, low employment elasticities and positive sectoral growth suggests a movement out of manufacturing and into services.  Based on data from 139 countries, the exhibit below shows employment elasticities by sector and value added growth rates in each sector during the period 1991 to 2003. 

Employment Elasticities by Sector

 

The services sector was the fastest growing sector (3%) for the 139 countries as well as the sector that provided the most job-intensive growth (e.g. for every one percentage point of growth in service sector value added, employment increased by 0.57 percentage points).  On the other hand, productivity growth contributed more to the growth in the agricultural and industrial sectors over the period. No doubt structural change, i.e. movement from agriculture and industry to service sectors, played an important role in these divergent results, but nevertheless new jobs were created in both agriculture and industry  and agriculture remains the world’s largest employment sector (1.2 billion workers in 2003) reflecting its importance in developing economies.