Abstract
This paper aims to look at the long run relationship between economic growth and employment. Recently, experienced by job shortage in many countries, labor economists have come to pay attention to the relationship between job creation and economic growth. One frequently mentioned observation is that the employment does not increase enough even when the economy is growing, which is named “Jobless growth”. Based on this observation, this paper attempts to identify the structural determinants of employment elasticity with respect to capital accumulation. If there exists any structural relationship between employment and capital accumulation, it is presumed that it is determined by preference and technology parameters, mainly the structure of labor market. This paper shows how the employment elasticity with respect to capital is related to the structure of labor market and other characteristics of the economy. The latter are tax system and capital market.
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Notes
- 1.
For example, people begin to question the meaning and effectiveness of college education in getting a job. It turns out that the traditional and social goal of raising critical citizens cannot be supported and may face a difficulty in allocating resources to the college.
- 2.
It is measured as employment growth with respect to output growth, which is called ‘employment elasticity’ or ‘employment intensity’ of growth. In this paper, unless specified otherwise, the former is mainly used.
- 3.
While it is defined in this way, empirically, it is often estimated by regression method because the calculated elasticity is subject to some reliability problem. See Kapos (2005).
- 4.
While the estimated values of employment elasticity depend on country or industry, it would be fair to say that most of them are in the range of (0.2, 0.5).
- 5.
- 6.
Importantly, they argue that long run evolution has to be distinguished by short run correlation; while North America and Europe structurally differ in their job creation capacity in the long run, both of them keep on showing a strong and statistically significant short run correlation between growth and employment.
- 7.
Choi (2006) are studies of dealing with the identification problem of labor supply and demand in understanding labor market structure.
- 8.
So, this employment elasticity is conceptually different from the Okun’s law which is about relationship between short run fluctuations of unemployment and GDP.
- 9.
Technically, since growth of output should be proportional to that of capital, the choice of capital or output would not make a difference in looking at the employment effect of growth Theoretically, however, one may want to distinguish two methods in the sense that employment elasticity of output is defined on flow variable, but employment elasticity of capital (like the inverse of capital intensity) is on stock variable of capital.
- 10.
Hereafter, subscripts denote the derivative of a function.
- 11.
It should be emphasized that what we want to see is ex post relationship between output and employment, but not any causality.
- 12.
It is explained well in many other labor economics literatures For example, see Cahuc and Zylberberg (2004).
- 13.
Superscript ‘s’ denotes labor supply.
- 14.
Based on the fact that typically, interest rate\(\mathrm {\, }\, R(t)\) does not show a trend, it is assumed that \(\frac{\dot{R}}{R} \quad =\) 0.
- 15.
Reservation wage of individual worker is determined by his (her) preference and budget, more specifically by the non-labor income.
- 16.
This assumption is innocuous from the fact that capital-output ratio does not show any trend.
- 17.
They should be equal in a closed economy.
- 18.
Theoretically, it is possible to have the case the second term is greater than the first term, making the employment elasticity negative, which is ignored since so far no country has ever experienced it.
- 19.
While labor taxes affect both extensive and intensive margins of labor supply, it is known that the response along the former is much stronger than along the latter. See Eisa et al. (2006).
- 20.
Note that discussion in this section is for suggestion of future study.
- 21.
It looks better to see this labor supply as one faced by all firms in the economy, explaining an increase in number of total workers for an increase in average wage in the aggregate labor market.
- 22.
See Basu and Kimball (2002).
- 23.
The so called active labor policies aim to increase the labor mobility, increasing the elasticity of aggregate labor supply. Employment service, provision of job training and subsidizing labor mobility are a few examples.
- 24.
One can check the explanation in the labor demand literatures that labor demand tends to be more elastic in service industry than in manufacturing. For example, as well-summarized in most labor economics textbooks, the ratio of labor costs out of total costs tends to be higher, so making wage-elastic labor demand in the service industry.
- 25.
The so-called “NEET” may be related to this effect.
- 26.
This issue has been well summarized in Agell and Sorensen (2006).
- 27.
So, the discussion about optimal tax structure needs to include its job effect.
- 28.
Since tax rates are different for different types of assets. It is not easy to get any evidence of increasing or decreasing trend in it.
References
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Chang Kon, C. (2018). Identifying the Determinants of Employment Elasticity of Economic Growth. In: Hosoe, M., Kim, I., Yabuta, M., Lee, W. (eds) Applied Analysis of Growth, Trade, and Public Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-1876-4_2
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