EMPLOYMENT & ECONOMIC GROWTH EMPLOYMENT ELASTICITIES IN THAILAND, BRAZIL, CHILE & ARGENTINA

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1 EMPLOYMENT & ECONOMIC GROWTH EMPLOYMENT ELASTICITIES IN THAILAND, BRAZIL, CHILE & ARGENTINA Maja PLEIC Researcher, University of Toronto Prof Albert BERRY Professor, University of Toronto April 2009

2 centre for poverty employment and growth HSRC Human Sciences Research Council April 2009 Acknowledgements This paper is a contribution to the HSRC employment scenarios and the dti's 'employment in the critical path' programme. This is a collaborative programme which seeks to identify innovative approaches to putting employment centre-stage of development strategy. The papers produced in this series are focused on identifying the pattern of employment creation within the growth/development path. We are grateful for the financial support of the dti. Produced by: Contact: Maja Pleic, Albert Berry Dr Miriam Altman Executive Director, CPEG maltman@hsrc.ac.za Tel:

3 Employment & Economic Growth: A review of employment elasticities Contents 1. Introduction How the concept of Employment Elasticity of Growth helps to diagnose the problem...9 Table 1: Combinations of GDP growth and employment elasticity Relating Evidence from Other Countries Generalizations from the Experience of Other Countries Policy Implications Case Study of Employment Elasticity in Chile, Elasticity at the Take-off ( ) and afterward The Determinants of Employment Growth Working Age Population Unemployment Labour Force Participation Rates Sectoral Employment Growth and Elasticity Employment Growth at the 1-Digit Level during the Boom Period How the Sectoral Composition of New Jobs Changed between the Prior Period of Stagnation and the Boom Period Employment Elasticities by Status Conclusions Case Study: Argentina s Experience with Employment Elasticity, Trends in Employment Elasticities, by Period GDP, Employment and Productivity Elasticity of Formal and Informal Employment Employment Elasticity by Status Employment Elasticity by Sector Conclusions Case Study: Thailand s Experience with Employment Elasticity, Proximate determinants of the downward trend in the employment growth rate and in employment elasticity Short-run movements in employment growth and elasticity The Sectoral Pattern of Growth Conclusions Case Study: Employment Elasticity in Brazil,

4 centre for poverty employment and growth HSRC 5.1. The Record during the Brazilian Miracle and the 1970s Employment Growth and Elasticity Since Employment Elasticity, Period Averages Working Age Population Labour Force Participation Rates Conclusions...46 Appendix One: Table A.1: Chile Determinants of Employment Elasticity Appendix Two: Table A.2: Argentina - Labour Force Participation Rates by Age Group and Gender...2 Appendix Three: Table A.3: Thailand - Labour Force Participation Rates by Age Group and Gender ( )...3 Appendix Four: Table A.4: Brazil -Working Age Population Growth, Labour Force Participation Rate and Unemployment Rate, Period Averages...4 Tables Table 1: Combinations of GDP growth and employment elasticity...11 Table 2: Proximate Determinants of Employment Growth, Chile ( )...16 Table 3: Sectoral Elasticities in Chile, *...19 Table 4: Sectoral composition of net new jobs during stagnation and during acceleration (and )...21 Table 5: The evolution of Chilean employment by sector ( )*...23 Table 6: GDP Growth, Employment Growth and Elasticity in Argentina, Table 7: Formal and Informal Employment Growth and Elasticity...30 Table 8: Employment Elasticity by Status, Table 9: Average Growth Rates and Elasticity by Status and Gender...31 Table 10: Employment Elasticity by Sector in Argentina Table 11: Employment Elasticity in Thailand, Table 12: Thailand -WAP Growth, LFPR, Unemployment Rates, Period Averages...35 Table 13: Employment Growth and Elasticity by Sector, Table 14: Sectoral and gender composition of employment, percentage growth and composition of net new jobs ( )...40 Table 15: Employment Elasticity, GDP Growth and Employment Growth, period averages...43 Table 16: Employment Growth and Elasticity by Sector,

5 Employment & Economic Growth: A review of employment elasticities Table 17: WAP Growth, Labour Force Participation Rate and Unemploymen Rate, Period Averages...44 Table 18 : Labour Force Participation Rates, Period Averages...45 Figures Figure 1: The Cross-country Relationship between Employment Growth and GDP Growth...10 Figure 2: GDP Growth, Employment Growth and Elasticity 5 year moving Average...15 Figure 3: GDP and Employment in Argentina, Annual Growth Rates...26 Figure 4: GDP, Employment and Productivity Growth (%)...28 Figure 5: GDP Growth, Formal and Informal Employment Growth, Argentina ( )...29 Figure 6: GDP and Employment Growth in Thailand, , 5-year Moving Averages...34 Figure 7: Thailand -GDP, Employment Growth by Sector, , 5-year moving averages...38 Figure 8: GDP Growth and Employment Growth, , 5 year moving averages...42 Figure 9: Labour Force Participation Rates in Brazil,

6 centre for poverty employment and growth HSRC Executive summary In South Africa, the concern has been frequently expressed that the relatively good economic growth achieved during the last few years has not obviously been matched by the performance in employment creation. Although employment elasticity (the ratio of the percent growth in employment to the percent growth in GDP) has been as high as in many other countries, it is clear that South Africa has a serious employment problem and that the economy is not generating the number of jobs that would be desirable. In order to assess this record and judge how much better the country could do it is important to have a benchmark for comparison, based on how well or badly other countries have fared and on the secrets of those that have done well. The two main measures of successful economic performance from workers point of view are growth of employment and growth of wages. In countries where there is extensive underutilization of labour in one form or another it is more important to create jobs fast than to raise wages. In such countries the employment elasticity of growth is a good indicator of the quality of growth. At the other extreme, when everyone who wants to work is fully employed, and the working age population is growing slowly, low employment elasticity is both inevitable and desirable. Most countries fall somewhere between these two extremes. For them, the number of new jobs is important but not the whole story. Two other aspects of performance to be taken into account are the extent to which the new jobs be of at least as good quality as existing ones, and whether the new jobs correspond to (are matched by) falling unemployment, rising participation rates of those in dire need of jobs, or simply increases in the size of the working age population. On average labour market outcomes are better when economic growth is higher, but because this link is only moderately tight, fast economic growth is not the only route to or source of improvements in employment and wages. The other source involves the pattern or quality of growth. Under some circumstances the employment elasticity of growth can be seen as an aspect of the quality of economic growth. South Africa falls among the countries with a large group of workers who do not have good jobs, many of whom are unemployed and others whose jobs are not of good quality. From its perspective it is of interest to consider the experience of countries which are or have recently been in a somewhat comparable situation. For those countries that have grown at 6-7% per year or faster, this growth alone will often generate a satisfactory number of new good jobs. But when growth is moderate, say 3-4% per year, then it cannot be taken for granted that growth alone will suffice, and the employment elasticity of that growth becomes a key factor in whether enough good jobs are created or not. Thus for South Africa, which has not achieved very high GDP growth rates, a relatively high employment elasticity of growth (especially where employment is understood to mean decent jobs) is a key to success. The experience of other countries and the recipes for the successes achieved are a key input into effective policy design to produce the number of good jobs needed. Case studies of such countries are valuable because they provide evidence of the conditions (including policies) under which the best employment-wage combinations are 6

7 Employment & Economic Growth: A review of employment elasticities achieved. Such studies reveal, among other things, that high employment elasticities of 0.5 or more when growth has been in the range 6-7% per year have been reasonably common, indicating that they are frequently attainable under certain circumstances and for periods of a decade or sometimes more. Case studies also point to a natural tendency for the rate of employment growth and the employment elasticity level to fall over time in successfully developing countries due to falling growth of working age population and to the eventual exhaustion of any initial labour supply surplus. The contribution of rising employment to economic growth is gradually taken over by rising labour productivity, which in turn is important for wages to rise. When employment growth and employment elasticity are high, there are often wide differences across sectors in both variables. In other words, certain sectors can disproportionately drive the employment growth. Appropriate policy needs to be framed with these general patterns in mind. 7

8 centre for poverty employment and growth HSRC 1. Introduction In South Africa, the concern has been frequently expressed that employment growth during the post-apartheid period has not been as good as output growth. The relatively good economic growth achieved during the last few years has not obviously been matched by the performance in employment creation. South Africa has seen an average GDP growth of 3.8% per annum since 2000, an improvement on the 2.7% per annum during Meanwhile, average employment growth was 2.7% per annum during the post-1999 period as compared with 2.0% during According to these figures, employment elasticity (the ratio of the percent growth in employment to the percent growth in GDP) has fallen slightly from 0.73 ( ) to 0.70 ( ). It has also been pointed out, however, that employment elasticities in this range are not low by international standards. Yet it is obvious enough from the unemployment figures and other types of evidence that South Africa has a serious employment problem and that the economy is not generating the number of jobs that would be desirable. In order to assess this record and judge how much better the country could do it is important to have a benchmark for comparisons. How well or badly have other countries fared and what have been the secrets of those that have done well? The two main measures of successful economic performance from workers point of view are growth of employment and growth of wages. In some countries it is more important to create jobs fast than to raise wages. This is the case when there is extensive underutilization of labour in the form of unemployment and/or failure to participate in the labour force by those desirous of finding jobs. In such countries the employment elasticity of growth (the ratio of the percent growth in employment to the percent growth in GDP) is a good indicator of the quality of growth. At the other extreme, when everyone who wants to work is fully employed, and the working age population is growing slowly, then a low employment elasticity is both inevitable and desirable. Under these circumstances what one hopes for is that a rising demand for labour will be manifested in improvements in wages and other characteristics of work, such as stability, work conditions, etc. 1 Most countries fall somewhere between these two extremes. For them, the number of new jobs is important but not the whole story. Two other aspects of performance to be taken into account are the extent to which the new jobs be of at least as good quality as existing ones and whether the new jobs correspond to (are matched by) falling unemployment, to rising participation 1 Quality of job creation can be taken into account in various ways. A more refined indicator of performance than employment elasticity of growth (where differences in job quality are not taken into account) would be good employment elasticity of growth ; in the latter case the ratio would relate the rate of creation of good jobs to the rate of GDP growth. This indicator is considerably harder to operationalize since more data are required, along with a practical definition of what a good job consists of. It is, however, the natural final objective of analyses involving employment elasticity. 8

9 Employment & Economic Growth: A review of employment elasticities rates of those in dire need of jobs, or simply to increases in the size of the working age population; the higher the share that falls in those first two categories the better How the concept of Employment Elasticity of Growth helps to diagnose the problem On average, labour market outcomes are better when economic growth is higher, but this link is only moderately tight. As a result, fast economic growth is not the only route to or source of improvements in employment and wages. The other source may be called the quality of growth where high quality growth means growth that generates as much employment and wage growth as possible given the rate of growth. Low quality growth would be growth which, given its annual rate, does not produce either much employment or significant wage increases. The employment elasticity of growth can be thought of as an aspect of the quality of economic growth. 2 Schematically, the way employment elasticity fits into the picture as far as generation of good jobs is concerned is as follows: the rate of job creation is equal to the rate of economic growth times the employment elasticity of growth. The more interesting but empirically more elusive rate of good job creation is equal to the rate of economic growth times the good employment elasticity of growth. Figure 1 presents a way of portraying the sense in which employment elasticity of growth matters. The rate of growth of GDP is shown on the horizontal axis and the rate of employment growth on the vertical axis. The regression line shows how, on average, these two variables are related to each other in the experience of developing countries. Growth of GDP varies from zero or close to it in the worst of cases to about 10% in the best of cases. Average employment growth is faster the faster is GDP growth, as shown by the upward slope of the regression line. But, for various reasons, a 1% faster GDP growth does not bring anything like a 1% faster rate of employment growth. In fact, when GDP growth is zero, employment does tend to grow at a rate not too far from that of the working age population because many people have recourse to informal sector activities in order to survive. So if working age populations (WAP) is growing at 2% (fairly typical for many countries now) employment might be rising at 1%, as in the case of point (or country) A. 3 Unemployment would also typically be rising and the participation rate falling. At the other extreme of 10% GDP growth, employment may rise at about 4%; as it does so unemployment will be falling and the participation rate rising, since if neither of these variables is changing then employment would rise at the same rate as WAP. The essential reason that employment never rises by much over 4% per year is that for it to do so would require unemployment to fall faster than is likely or the participation rate (PR) to rise faster than cultural and other determinants permit it to. 2 As noted, this elasticity is defined as the ratio between the rate of employment grout and the rate of output growth. Thus if the economy is growing at 4% and employment at 2% this elasticity is There are few countries where employment rise above 3.5% per year or at less than 1% 9

10 centre for poverty employment and growth HSRC Figure 1: The Cross-country Relationship between Employment Growth and GDP Growth Note that as one moves up the regression line from point (country) A to point (country) B the employment elasticity of growth is falling from an extremely high level (technically infinity at point A when employment is growing and GDP is not) to a modest 0.40 at point B where even though employment is rising very fast, its ratio to the exceedingly fast growth of GDP is rather low. Among the options traced out by the regression line, and other things being equal, one naturally prefers the points near B since both GDP and employment are growing faster, even though the employment elasticity of growth is lower. This is the sense in which a higher elasticity is not necessarily a good thing. When growth is very slow, employment elasticity is often high as workers crowd into informal activities and accept low levels of remuneration or earnings. And when growth is high, elasticity is often low, sometimes because the excess labour supply has been exhausted and sometimes simply because business has difficulty absorbing workers at a very fast rate. In what sense is a high employment elasticity of growth good? When one looks at the experience of all countries in terms of GDP and employment growth, they are scattered around the regression line portrayed in the figure, some above it and some below (each point in the figure is a separate country). Although on average employment growth is faster when GDP growth is faster (as summarized by the position of the regression line), the link between these two variables is not perfect. Some countries with slow GDP growth nevertheless have rather high employment growth, e.g. the country represented by point C, whose employment growth is 3% though its GDP growth is just a modest 4%. In contrast, country D achieves an employment growth of just 1% though its GDP growth is the same 4% as country C s. Country C has a high employment elasticity of growth of 0.75 while country D has a low one of So it is when the comparisons is among countries with similar growth performances that a higher employment elasticity is better than a low one and 10

11 Employment & Economic Growth: A review of employment elasticities one can say that country C has a better quality of growth than country D, at least to the extent that number of jobs created is a good measure of quality. Although it might be best to be like country B, the growth rate of each country is constrained in various ways. If, like South Africa, the record suggests that growth may not exceed 4-5%, then it is important to be as much like country C as possible: though its growth was modest, its job creation performance was quite good. For South Africa, the study of other countries experiences is most useful when they include some like C, which are likely to have lessons as to how they achieved what they did. In some cases the options confronting a country may include a lower growth rate with a high employment elasticity and a higher growth rate with a lower elasticity. In such cases the decision must be made by weighing off the merits of each option and identifying the one which, on balance, provides the best combination of increase in quantity and quality of employment. To exemplify, there are situations in which it is possible to reach faster investment and growth in sectors with relatively low employment elasticities. If the country opts for sectors with higher employment elasticities, total growth will be lower and the quantity cum quality performance on the employment side may as well. Employment elasticity of growth is thus not a policy tool to be used indiscriminately; it must be complemented by other considerations which together allow for an effective weighing of the overall employment merits of different growth scenarios. The following matrix can be used to illustrate some of the combinations of GDP growth and employment elasticity and their implications. Table 1: Combinations of GDP growth and employment elasticity Low GDP Growth High GDP Growth High Employment Elasticity of Growth The high employment elasticity is unlikely to be a good sign, except in the sense that the new jobs are needed to help people survive in a stagnant economy Initial Surplus labour is quickly absorbed. After that this combination is not possible Low Employment Elasticity of Growth There is a balance between economic stagnation and slow employment creation. This may be not be a drastic outcome, as long as those wanting work have it, at reasonable wages. It is bad if the lack of job creation reflects rising unemployment and/or falling participation due to discouraged workers. There are two possible and extremely different situations in this category. This is a very good outcome as long as any initial surplus labour has been absorbed, since what the low elasticity then means is that quality of employment is likely to be rising. However, if there was an initial labour surplus which has not been absorbed, this outcome means that increasing dualism is occurring, growth is jobless and income inequality is likely to be widening. 11

12 centre for poverty employment and growth 1.2. Relating Evidence from Other Countries HSRC South Africa falls among the countries with a large group of workers who do not have good jobs, many of whom are unemployed and others whose jobs are not of good quality. From its perspective it is of interest to consider the experience of countries which are or have recently been in a somewhat comparable situation. For countries growing at say 6-7% per year or faster, this growth alone will often generate a satisfactory number of new good jobs. But when growth is moderate, say 3-4% per year, then the employment elasticity of that growth becomes a key factor in whether enough good jobs are created or not. Thus for South Africa, which has not achieved very high GDP growth rates and will not be achieving them at least until the present world economic crisis has passed, achieving a relatively high employment elasticity of growth (where employment is understood to mean decent jobs) is the key to success. A worrisome feature of post 1995 growth in South Africa has been the rapid increase in the relative share of informal workers, from just 12.5% of the total in 1995 to 30% in The experience of other countries and the recipes for successes achieved are a key input into effective policy design to produce the number of good jobs needed. Case studies of such countries are valuable because they provide evidence of the conditions (including policies) under which the best employment-wage combinations are achieved. They also provide evidence on the sort of trade-offs that may exist between pushing employment hard or pushing wages hard. A country with a high unemployment level needs growth whose pattern is labour absorbing. This means a high employment elasticity of growth. If such a country chooses or gets into the wrong growth path, its employment creation will be low in spite of its growth - a bad outcome. But countries with already tight labour markets need to be moving up the value chain to higher labour productivity industries. The experience of Chile during its acceleration of the latter 1980s and its subsequent fast growth during most of the 1990s highlights several points and suggests a number of policy implications. In the first place the initial five years or so of fast growth beginning in 1984 were accompanied by quite rapid employment growth and a high employment elasticity. Then as fast growth continued, employment growth gradually fell to a relatively low level, and employment elasticity with it. This time pattern appears in retrospect to have been a very good one from a societal point of view. Given the initially high levels of open unemployment and underemployment, fast growth of employment was the most pressing need in order to raise incomes of those towards the bottom of the income hierarchy. After the labour market had tightened up through the absorption of that labour surplus to the point that rising wages were a natural outcome of market forces and not likely to act as a deterrent to further potential employment growth, rising wages did in fact become the principal source of increasing incomes of workers. The sequence of events nicely illustrates how a high employment elasticity can play a positive role under one set of conditions and a much lower one can do so under a different set of conditions. Several other special features of the Chilean experience warrant comment. The growth burst was facilitated by rapid growth and diversification of exports, in turn associated with a sharp exchange rate devaluation. It occurred in a context of relatively unregulated labor markets. And it came on the heels of two major recessions 12

13 Employment & Economic Growth: A review of employment elasticities ( and ) that created the large overhang of unemployment and underemployment. South Africa s current context is not one of a recent and serious downturn and its high unemployment is more structural in nature and less cyclical than was Chile s when its growth boom began. Accordingly, it would not be realistic to expect exactly the same pattern of employment growth to occur in South Africa as in Chile, even though some features might well be replicable. In Argentina employment growth was a moderate 2.0% for the period analyzed ( ) for an elasticity of 0.48 while employment growth of females was much faster at 3.13% for an elasticity of A most striking feature of this eventful period was the erratic relationship between employment growth and output growth; it illustrates the extent to which employment elasticity may be affected by the context. Failure of employment to grow during the first years of the biggest economic boom in decades is striking, whereas during the second boom ( ) the increase in employment was enormous. Part of the difference may reflect changes (loosening) of labour market regulations between these two booms. The evidence on informal employment suggests that its growth tends to fluctuate rather much in line with formal employment though there is some tendency for the number of employees (regardless of whether formal or informal sector) to move in a more pro-cyclical way than do employers and own-account workers. Thailand s experience since the 1970s provides evidence on how employment and the employment elasticity of growth may behave in a country - with traditionally low unemployment rates and high female participation rates - achieving quite fast growth sustained over more than 20 years,. Employment grew quite fast during the early part of the high growth phase, but essentially only because WAP was also rising fast. As a result, employment elasticity was reasonably high. But both employment growth and employment elasticity fell over time to reach quite low levels by the 1990s. As with Chile, albeit in a quite different setting, this was a natural and appropriate result of the fact that there was no longer any significant source of additional labour supply. One message from Brazil s record is that its achievement of a high employment elasticity, while a good thing in that it was presumably better to have more jobs created than less, did not imply that all went well, since the high elasticity and the good employment growth occurred in a context of relative macroeconomic stagnation, which means that average labour earnings must have stagnated since average labour productivity did. And this is indeed what the wage data indicate. On the other hand, Brazil s fast employment growth did permit a higher GDP growth than would otherwise have occurred, given the country s relatively low investment rate. That fast growth of employment was based on the combination of a WAP whose growth fell only gradually from 2.7% per year in the early 1980s to about 2% per year by 2000, and an enormous increase in the female participation rate of over 20 percentage points. While this dramatic increase was occurring, female wages were rising relative to those of males, so the high elasticity of female employment with respect to growth was very successful in raising the total earnings of women. 13

14 centre for poverty employment and growth HSRC 1.3. Generalizations from the Experience of Other Countries 1. Rapid employment growth is desirable as long as there is a labour surplus composed of the unemployed or people willing to work but previously discouraged from searching (and hence not part of the labour force). While these conditions hold, such rapid employment growth contributes to fast economic growth, almost always contributes to poverty reduction and is usually also favourable to reducing inequality. Accordingly, a high employment elasticity of growth is also desirable. 2. High employment elasticities of 0.5 or more when growth has been in the range 6-7% per year have been reasonably common, indicating that they are frequently attainable under certain circumstances and for periods of a decade or sometimes more. 3. As growth and development proceed there is a natural tendency for the rate of employment growth and the employment elasticity level to fall, due to two factors. First, the main source of employment growth in the long run, a rising WAP, is reduced because of a decline in the rate of population growth. Second, any initial labour supply surplus tends to be reduced by economic growth. The contribution of rising employment to economic growth is gradually taken over by rising labour productivity, which in turn is important for wages to rise. 4. Together with the secular trend just cited, successfully growing countries also suffer cyclical fluctuations in employment growth. Employment elasticity may be high during the downturns if WAP is still growing fast, but this is not overall a positive phenomenon since it is a product of the slow growth. Employment growth and elasticity are often high during the upswing and this is a positive reflection of the fact that the labour underutilization generated by the prior recession is now being absorbed. 5. When employment growth and employment elasticity are high, there are often wide differences across sectors in both variables. In other words, certain sectors can disproportionately drive the employment growth. Where the economic boom is based on export growth, it is usually the export and related support activities that drive employment growth. In other situations, certain categories like business services and restaurants can play a disproportionate role. 6. When the variables under consideration are good employment growth and good employment elasticity high values are always better than low ones Policy Implications 1) Fast economic growth and fast employment growth should be pursued when there is a significant amount of labour needing to be absorbed, from a pool of unemployed, discouraged workers, underemployed, etc. This means that employment elasticity should be as high as feasible as long as it does not come into conflict with fast growth. If it appears that it will, then a judgment must be made as to what combination of output and employment growth best serves the interests of the society. 14

15 Employment & Economic Growth: A review of employment elasticities 2) After most excess labour has been absorbed it is neither desirable nor feasible to achieve fast employment growth or high employment elasticity of economic growth. This phase of growth should be characterized by rapid increase in labour productivity and in wages. 3) Because actual and potential workers have widely varying characteristics and different economic activities also require widely varying skills, it is in practice a challenge to match the characteristics and skills of those seeking employment with the activities the economy is in a position to generate. Some unemployed or underemployed people cannot easily be employed in available jobs, at least not without retraining. Selecting the optimal combination of employment increase and labour productivity increase requires a high degree of information about both the details of labour supply and the details of available activities, and ones that can be nurtured into competitiveness. 2. Case Study of Employment Elasticity in Chile, Chile is an upper middle-income country with a current population of 16.5 million. Alongside Argentina and Brazil, it is one of the economic powerhouses of Latin America, and has experienced economic growth above the Latin American average since The political and economic instability, spurred by a military coup in 1973 and extraordinarily high inflation rates, caused a sharp recession from A second, shorter but also severe recession, followed in in which GDP fell by almost 15%. After this, Chile entered a period of high, sustained growth averaging 7.2% over the period , followed by a period of more moderate growth averaging 3.55% over Over the fast growth period, employment grew at an average of 3.6%, for an employment elasticity of 0.5. The time paths of GDP growth, employment growth and employment elasticity (five-year moving averages) are shown in Figure 2. Several points of note emerge from this Chilean experience of sustained high growth. The quick and steep ascent out of recession was associated with a quick and steep rise in employment growth and elasticity. Employment elasticity was highest in the first four years of accelerated output growth, and then declined for the rest of the period of high growth. This suggests that employment was most sensitive to output growth right at the point of take-off and the sensitivity then waned even as output growth picked up pace. Such a pattern is especially likely in a case like Chile, where the previous recessions had left high levels of unemployment and underemployment and very low real wages, and where the labour market had been flexibilized such that employers did not have to worry much about later firing workers that they hired. The labour market was probably functioning on something close to purely demand and supply terms. In the early years of the boom this overhang of surplus labour was absorbed relatively quickly. Subsequently the supply became somewhat tighter, after unemployment had fallen and participation rates of both men and women had risen. Figure 2: GDP Growth, Employment Growth and Elasticity 5 year moving Average 15

16 centre for poverty employment and growth HSRC GDP, Employment Growth (%) Elasticity at the Take-off ( ) and afterward Over the crisis years , GDP fell at an average of 7.1% per year and employment declined marginally; the net result of a dramatic 10% drop in 1982 and a 9.26% recovery in 1983, with unemployment remaining high at an average of 17%. The sharp take-off into sustained growth was then accompanied by a rapid expansion of employment. Over (inclusive) output growth averaged 7.54% and employment growth 4.93 for an elasticity of Under the circumstances of a large pool of unemployed and underemployed, it was desirable that a short period of rapid and intense employment growth precede any strong trend towards labour productivity growth. The timing of the take-off (after a severe recession) was no doubt an important factor in the sharp upswing of employment growth and the high elasticity; this pattern allowed the initially large unemployed population to be fairly quickly absorbed back into employment. In the following 5 years of sustained high growth ( ) output maintained its momentum at an average growth rate of 7.33%, but the employment elasticity fell sharply to 0.33, with average employment growth of 2.45%. The tapering off of employment growth even as output growth stayed quite high reflects the fact that after an excess supply of labour is absorbed, and given the relatively slow growth of working age population, it is inevitable that employment elasticity eventually become low. Under such circumstances a low elasticity is not a problem, but rather a sign that growth has already performed its task of creating jobs and incorporating people into the productive labour force. Table 2: Proximate Determinants of Employment Growth, Chile ( ) 16

17 Employment & Economic Growth: A review of employment elasticities Change in period (%) Total Men Women Total Men Women Total Men Women WAP ('000) LF Employed Unemployed LFPR UE Rate The Determinants of Employment Growth Over the whole period of fast growth ( ), output increased by 148.3%, the labour force by 44.3% and employment by 62%, while unemployment fell by 22.5%. What lay behind the growth of employment during these years? The three proximate determinants of employment growth are changes in the working age population (WAP), changes in the labour force participation rate (LFPR), and changes in the unemployment rate (UE). Though output growth can increase employment growth through any or all of these three channels, its effects are mainly felt through the latter two. Fast growth is generally expected to lower unemployment, making this a possibly important source of employment growth. It can also affect both the number of youth who enter the labour force (as opposed to staying in the educational system or simply not seeking work) and the number of seniors who decide not to leave it. In times of economic hardship, seniors who would otherwise leave the workforce may decide to keep working, or others who have already left may be forced to re-enter the labour force to supplement a fall in family income Working Age Population In the short run, economic growth does not have a significant effect on the working age population. However, in the long run, economic development accompanied by social progress tends to decrease the fertility rate as more women go to school or join the labour force, thereby decreasing the growth of working age population in the future. Although Chile is a middle income country, the long run effects of economic development can still be detected in the falling WAP growth from 2.42 % in 1981 to 1.83% in 2006 (Appendix One: Table A.1). This decline played a role, albeit a fairly minor one, in the downward trend in employment growth and in employment elasticity. The main factors at work were falling unemployment and rising participation rates (Table A.1) Unemployment The period of high employment elasticity in the first five years was associated with sharp declines in both adult and youth unemployment rates. In the take-off years, the unemployment rate dropped sharply from 13.9% in 1984 (already well below the recessionary peak of 19.6% in 1982) to 8.7% in 1986, and then entered a period of slower but steady decline (Table A.7). Adult unemployment fell from 8.9% to 6.3% between the same two years, while youth unemployment fell from 22.7% to 17.3%. 17

18 centre for poverty employment and growth HSRC Over the first five years of accelerated growth, the unemployment rate fell by almost 50%, from an average of 16.0% in to an average of 8.1% in It then declined further, although at a slower pace, to an average of 5.2 in , and finally began to rise, reaching an average of 6.2 over Both adult and youth unemployment declined steadily after the initial take-off period, and reached their lows in the early 1990s, averaging 3.6 and 12.2 respectively, in the period Although both adult and youth unemployment experienced a significant drop in the take-off period, unemployed youth as a share of the total unemployed increased in the take-off period from 44% to 49.1% suggesting that unemployed adults are the first to be incorporated back into employment. This may be due to the fact that a greater share of adult unemployment is structural - related to prior layoffs - and more easily re-absorbed, while a greater share of youth unemployment is frictional, involving the process of getting onto the job ladder for the first time. After the first five-year period, unemployed youth as a percentage of total unemployment began to steadily decline, dropping to 40.3% by Interestingly, although the youth unemployment rate began to bounce back up in the period to an average of 14.9, the youth share of total unemployment continued to fall to 33% by the end of the growth period in 1998, and then hovered around 32% in Female unemployment rates have been higher than male unemployment rates for both youth and adults across all periods Labour Force Participation Rates Participation rates show the opposite pattern over time to those of unemployment rates, with a slow increase in the first five year period of accelerated growth and then a more rapid one in the early 1990 s, as unemployment reached its low of 5.2 (Table A.1). Participation rates began a steady incline from a low of 49.7 at the height of the crisis in 1982, to a peak of 56.6 in 1993/94 (Table A.1). Male rates rose from a low of 73.1 in 1982 to their peak in 1993/94 at 78.4%. As is to be expected in a developing country, female participation rates rose continuously both over this period of growth and afterwards, though their increase was more rapid during the high growth period. Thus, female employment elasticities are higher than those of males over all periods Sectoral Employment Growth and Elasticity Employment growth in the first five years of the boom is concentrated in the industrial and agricultural sectors. The sectoral elasticity for both agriculture and industry are very high, above unity for industry in the first five year period, and then drop sharply in the next period. 4 The services sector sees smaller, more gradual growth that increases after the first five year period. Both industry and agriculture experience much higher employment elasticities than the service sector in the first five 4 Sectoral elasticities are here defined as the ratio between the rate of employment growth in the sector in question and the rate of overall GDP growth. An alternative way to define such elasticities would be the ratio of the rate of sectoral employment growth to the rate of output growth in that same sector. 18

19 Employment & Economic Growth: A review of employment elasticities years of the boom. Industry grows by an average 12.74% per year, rendering an elasticity of 1.84 while agriculture grows by an average of 4.94%, with an elasticity of Agriculture experiences high employment growth and elasticity in the first period of the boom , with average employment growth of 4.94% and a sectoral elasticity of 0.71 (Table 3). Elasticity then drops drastically to in the next phase of the boom ( ) and never recovers as agricultural employment actually begins to decline in absolute numbers after the upswing in the take-off period of growth. Industry experiences a similarly high employment growth and elasticity in the first period ( ). After an average employment growth of in the crisis period ( ), industry employment growth sky rockets to an average of in , with a sectoral elasticity averaging Like agriculture, the sectoral elasticity falls sharply after the first five year period, to 0.62 in , and further to 0.08 in the last period of the boom Services experience the opposite pattern of agriculture and industry. In the first five years, there is moderate growth and elasticity; however it increases in the middle and latter parts of the growth period. Services average employment growth of 1.99% in , with a sectoral elasticity of only 0.29, which increases to 0.45 in and then 0.47 in (Table 3). Table 3: Sectoral Elasticities in Chile, * GDP Total Employment Agriculture Industry Services Growth Growth Elasticity Growth Elasticity Growth Elasticity Services Elasticity Note: Due to an apparent change of definition of employment in agriculture between 1984 and 1985 (when reported sectoral employment jumps by 40%, with reported total employment jumping by 11%--the same amount in absolute terms) the data for agricultural employment growth in 1985 has been omitted and is not calculated in the average for the period Employment Growth at the 1-Digit Level during the Boom Period At the 1-digit level, there is no one sector driving employment growth; rather the traditional sectors - agriculture; manufacturing and trade; and hotels and restaurants - experience high employment growth and roughly maintain their shares of total employment, while traditionally smaller sectors - construction; finance, insurance, real estate and business services; and transport, storage and communications - experience 19

20 intense and accelerated employment growth. centre for poverty employment and growth HSRC The agricultural sector remains an important part of the Chilean economy. Employment in the agricultural sector, the third largest sector in 1984 grew by 38.2% over the period , with its share of total employment falling only slightly from 15.1 to 14.4%. Manufacturing employment grew by 51.6% over the period, with its share of total employment increasing slightly from 14.3 in 1984 to 15.1% in The largest contributor to employment growth was the trade, restaurants and hotels sector, responsible for 18.5% of total employment growth over the period, and representing 18.5% of total employment. The finance, insurance, real estate and business services sector, whose employment grew by 226.4% over the period, represented 16.9% of total employment growth. The sector s share of total employment increased dramatically from only 3.3% in 1984 to 7.5% by Construction employment grew by 158.8% in the period, increasing its share of total employment from 4.6 in 1984 to 8.3 in At the other extreme, a main structural change over the period was the declining share of total employment - in the community, social and personal services sector, whose absolute employment level increased by only 6.8% over the whole period - leading to a fall in its share of total employment from 35.2% in 1984 to 26.1% in How the Sectoral Composition of New Jobs Changed between the Prior Period of Stagnation and the Boom Period The sectoral composition of new jobs differed enormously in Chile between the prior stagnation period and the fast growth period In the former period, with total employment climbing at 2.3% per year, essentially all the new jobs were in the tertiary sector: over a third were in commerce, restaurants and hotels and over two-thirds were in services (Table 4). Manufacturing and construction employment was virtually constant, while that in agriculture fell by over 8%, in line with the historical trend. The reversal that came with the take-off was dramatic. Employment growth accelerated to 3.8% per year over and unemployment fell, albeit with a lag. Manufacturing and construction now accounted for almost half of all new employment; the transport, storage and communications share rose to 11%; and both commerce, restaurants and hotels and (especially) services now played much smaller roles. This pattern is consistent with the idea that during the crisis many jobs were created in easy-entry, low productivity types of work, and that as growth took off people moved from these to more remunerative activities where demand was now buoyant. Since part of the fast growth in manufacturing and construction was due to the recovery from the previous trough, such rates could not be expected to continue, and they did not. 20

21 Employment & Economic Growth: A review of employment elasticities Table 4: Sectoral composition of net new jobs during stagnation and during acceleration (and ) Sector Employment 1975 (000) Per cent of net employme nt increase ( ) Employment 1984 (000) Per cent of net employme nt increase ( ) Employ-ment 1993 (000) Agriculturea Mining Manufacturing Construction Utilities Commerce, restaurants and hotels Transport, storage and communications Services Total a) Includes hunting, forestry and fishing. Source: ILO, Laborsta.ilo.org/cgi-bin/brokerv8.exe (26/02/2008) Note: Due to an apparent change of definition of employment in agriculture between 1984 and 1985 (when reported sectoral employment jumps by 40%, with reported total employment jumping by 11% - the same amount in absolute terms) it has been arbitrarily assumed that agricultural employment stayed almost constant over This probably leaves the figures for the other sectors approximately accurate, while that for agriculture is presumably somewhat in error. By the early 1990s, Chile s growth was well established under a near free trade regime. The detailed patterns of labour reallocation during this rapid export-based growth are of special interest because one can reasonably assume that this reallocation was almost wholly a response to market forces under rising labour demand. The export boom came mainly from natural resources and, although output in manufacturing rose at about the same rate as GDP, labour productivity was rising even faster, so this sector was now shedding jobs (see Table 5 for the period In a temporary reversal of the long-run pattern, agriculture gained a few jobs, but with mining also shedding, these three sectors together had a negative balance of jobs created. Virtually all of the new jobs were therefore in the tertiary sector. 21