A Theoretical and Growth Accounting Approach of Jobless Growth

Transcription

1 A Theoreical and Growh Accouning Approach of Jobless Growh DOMICIÁN MÁTÉ 31 Deparmen of Markeing and Managemen Faculy of Economics and Business Adminisraion Universiy of Debrecen Kassai ú 26, Debrecen 4028, Hungary I n he mid 1980s during he Grea Moderaion major economic variables such as GDP, monhly payroll employmen and he unemploymen rae ec. began o decline heir volailiy. This sudy focuses on he so-called jobless growh phenomenon, in he long run. In his paper i is also emphasised ha he main heoreical explanaions of his process are labour marke imperfecions, i.e. he secoral-shifs and crowding-ou effecs, he loosening fiscal policy and wage pressure of public employmen. Finally, componens of economic growh in previous decades are esimaed wih a simple growh accouning mehod and he effecs of aciviy, employmen, paricipaion and unemploymen raes are also aken ino accoun. Analysing he daa on OECD counries, his paper concludes ha he link beween labour and oupu has changed. JEL Classificaion: J64, J24, O49. Keywords: Unemploymen, Economic Growh, Growh Accouning 1. Inroducion During he las wo cenuries he developed world experienced seady and relaively sable economic growh, conribuing o a consan improvemen in living sandards. Unemploymen go ino a primary focus of macroeconomics in he early 20 h cenury, parly as a resul of he Grea Depression, and again came o he forefron of research in he 1970s when he economic boom of he 1950s and 60s were replaced by sagflaion. The year 1984 idenified as an imporan year in macroeconomics, as a sar of wha some economiss called he Grea Moderaion (Summers, [2005]). The erm comes from he feaures of U.S. economic aciviy, which suddenly and dramaically became less volaile and his also has persised in oher OECD counries o his day. In he mid 1980s he major economic variables such as GDP, he unemploymen rae, he monhly payroll employmen ec. began o decline heir volailiy (Figure 1.). 31 Domicián Máé is a PhD suden a he Universiy of Debrecen. The auhor wishes o hank his supervisors Péer Földvári, and also Pál Czeglédi, Judi Kapás for heir helpful commens on his paper. PERIODICA OECONOMICA, OCTOBER 2010 (pp ) 67

2 DOMICIÁN MÁTÉ Thanks o he low volailiy and periods of secure economy, mainly households and companies were seen o advance a more sable employmen environmen. Serious debaes have been occurred o explain his phenomenon. Essenially here is no consensus bu generally hree main ypes of heories have been suggesed for his change, i.e. improved macroeconomic policies, he srucural changes and only a good luck (McConnell Perez-Quiroz, [2000]), (Sock Wason, [2002]). 0,06 0,055 0,05 0,045 0,04 0,035 0,03 0,025 0,02 7,5 6,5 5,5 4,5 3,5 2,5 1,5 d_log_gdp_oecd d_log_gdp_eu_15 Mn_ráa_Usa d_log_gdp_usa Mn_ráa_OECD Mn_ráa_EU_15 Source: own calculaion based on daa from GGDC and AMECO Daabases. Noes: we used he logarihm of GDP in 2000 consan prices and he mehod of Exponenial Moving Average (EMA) Figure 1. Changes in economic growh (lef axis) and unemploymen rae, One imporan common focus of hese macroeconomic heories wheher here is a policy ha could achieve long-erm susainable economic growh, while also creae jobs or decrease unemploymen. Unforunaely, recen findings of he mainsream business cycles heories are sill unclear in pracice, and some quesions also remain for decision makers (Mankiw, [1999]). Hence he auhor acceps he fundamenal assumpion of he neo-keynesian economics school, which emphasised ha he neoclassical marke-clearing models could no give unambiguous and complee explanaion for business cycles and changes in employmen. Though, he oher relevan heories and models of Real Business 68 PERIODICA OECONOMICA, OCTOBER 2010 (pp )

3 A Theoreical and Growh Accouning Approach of Jobless Growh Cycle (RBC) School have proven someimes quie accurae in reproducing cycles (Kydland Presco [1982]). The saring poin of his sudy is ha he labour marke imperfecions migh be responsible for low employmen and long-erm unemploymen. Alhough he relaionship beween economic growh and job creaion seems o have loosened during las decades, his canno be considered as a new phenomenon. The U.S. economy s aciviy has been examined by he insiue of he Naional Bureau of Economic Research (NBER) and in he 1970s i was found ha during recoveries, righ afer recessions, unemploymen decreased a lesser exen han one would expec based on he growh of oupu. This phenomenon was deerminae by economis as jobless growh. This obviously conradics he radiional Okunian posulae abou he negaive relaion beween oupu and unemploymen (Okun [1962]). Okun s law has been checked empirically many imes, and his negaive correlaion sill seems o exis. This is also confirmed by Knoek [2007], who esimaes he coefficien beween growh of oupu and unemploymen hrough several decades and finds ha he curren unemploymen raes (from he middle 1980s on) respond less o he changes of oupu han hey did (from he 1960s unil 80s). These findings can be reconciled if we assume ha he correspondence beween hese wo facors have been changing over ime. Thus, he primary aim of his paper is o conribue o beer undersand he jobless growh phenomenon in he long run. In recen decades, apar from he flucuaions, employmen, as well as unemploymen and labour aciviy were seemed o less responsive o economic growh. The paper is organized as follows. In secion 2, we provide he relevan heoreical framework of jobless growh - labour marke imperfecions such as disored governmen policies and oher insiuional ineracions being core elemens of hese explanaions. In Secion 3, we develop a simple growh accouning mehod o facorize he componens of oupu growh based on his concep. 2. Theoreical approaches of jobless growh in he long run The heme of jobless growh is no a purely macroeconomic problem, so i should be examined from an insiuional perspecive as well. Neverheless, according o he radiional neo-keynesian percepion, he differen ypes of marke failures are essenial o undersand labour marke imperfecions. Hence, economic flucuaions do no reflec Pareo-efficien soluions in he choices of consumers and echnology changes, bu hese could be much easier explained by marke failure phenomena (Mankiw [1990]). Following his assumpion, he labour marke imperfecions may be responsible for jobless growh, as well as he operaion of marke barriers migh affec he long-erm economic relaionship beween economic growh and employmen. There are several PERIODICA OECONOMICA, OCTOBER 2010 (pp ) 69

4 DOMICIÁN MÁTÉ assumpions which emphasize he role of he sae in labour marke imperfecions. These are parly based on he radiional Hayekian coercion perspecive (Hayek, [1960]), wherein he general aim of he sae is o survive permanenly. This ineres manifess iself in he mainenance of bureaucracy, which was consequenly refleced by an increasing share of public employmen. Some heories of jobless growh are based on role of sae disorions. So wha are hese relevan approaches? The phenomenon of jobless growh can be caused by loosening fiscal policy in several ways (Boeri Garibaldi [2004]). Firs, higher governmen expendiure leads o he classic crowding-ou effec via increasing real ineres. The high ineres raes will reduce he demand for privae invesmens, also causing less demand for labour. In addiion, fiscal policy changes aler he expecaions of individuals and heir percepion of he governmen s credibiliy. However, in he fuure, a loosening of fiscal policy migh increase he ax burden. In oher words firms perceive his as an ominous sign o reduce heir fuure invesmens and employmen. The second crowding-ou channel has effec on public employmen. Naurally, he main objecives of public and privae employmen are very differen. Whereas privae employmen is aimed o maximize firms profis, he objecives of public employmen are similar o he poliicians (Borland Gregory [1999]). Following his explanaion, only public employmen could provide cerain public goods (i.e. he cour of judicaure, public safey ec.), or insiuions ha privae secor canno afford (unemploymen benefis, healh care and public educaion sysems ec.). Public employmen is ofen considered o crowd ou privae jobs by increasing wage pressures and by compeing for producs which could subsiue hose produced by he privae secor. All in all, he impac of public on privae jobs depends on hree key feaures: (1) The degree of subsiuabiliy beween he producion of he public and privae secor. Obviously, he public goods creaed in secors i.e. police, jusice, army ec. are no subsiuable by privae producion and cause smaller crowding ou effec on privae jobs han ransporaion, educaion and healh care, where privae aciviies can play an imporan role (Algan e al. [2002]). (2) The creaion of public jobs may improve he expeced gains of unemployed workers and also he size of he rens received by employees, which increase wage pressure and decrease privae employmen (Holmlund [1997]). In oher words he higher wages, fringe benefis, job securiy and lower effor han in he privae secor is likely o arac many individuals ino he public secor, and o crowd ou many privae jobs. Bad public jobs wih low wages, high insecuriy and hard working condiions, on he oher hand, are no likely o arac many workers. Neverheless he disproporionae increase in real wages in public secor deerioraes he fiscal balance even more. 70 PERIODICA OECONOMICA, OCTOBER 2010 (pp )

5 A Theoreical and Growh Accouning Approach of Jobless Growh (3) The cos of public jobs generally implies an increase of public expendiure. I could reduce he profiabiliy of firms afer axaion and also fuure invesmens. In boh cases, he direc effec is negaive on he demand and produciviy of he privae secor (Boeri Garibaldi [2006]). The empirical lieraure confirms unambiguous impac of public employmen on labour marke performance. Algan e al. [2002] esimae ha he creaion of one public job in some OECD counries desroys abou 1.5 jobs and adds 0.3 unemployed. Moreover he crowding ou effec of public jobs does no seem o be a maer of size. I heavily depends on he feaures of public jobs creaed, degree of subsiuabiliy wih privae producion, and he size of rens in he public secor (differences in wages, working condiions, and he exen of misuse) ec. Boeri e al., [2000] examine he correlaion beween non-agriculural and public employmen raes, and esimae ha one public job crowds ou approximaely 0.3 privae jobs. Thus, he lieraure is quie divided abou he role of srucural-shif effecs in jobless growh. Some of hem are fairly scepical (Abraham-Kaz [1984]), while ohers like Sakaa [2002] finds evidence ha shor-erm shifs of employmen in cerain secors affec economic growh. Indeed, Groshen and Poer [2003] emphasize ha afer various major economic crises, during recovery, srucural effecs play increasingly greaer role in economic changes. Ohers, like Loo [1998] es he relevance of differen moneary and fiscal variables o explain changes in unemploymen in he long-run. Onaran [2008] mainly focuses on he new Cenral and Easern European EU-member counries and especially he changes in manufacuring secors using saic and dynamic panel regression models. He concludes ha in a number of counries and indusrial secors he employmen and wage changes are less responsive o he effecs of economic growh. Ohers (Li e al. [2007]) examined he effecs of he so-called Schumpeerian creaive desrucion in he Irish manufacuring secors. In his concep he role of indusry is o generae he maximum possible oupu and wealh in highly producive enerprises, while he main employmen benefis are generaed and capured ouside he manufacuring eniies. The auhor s earlier research (Máé, [2008]) deal wih he effecs of secoral shifs in he sense of produciviy and employmen changes. According o he resuls here are significan srucural employmen shifs in cerain secors, bu hese changes play a decreasing role in some OECD counries 32. In oher words, he srucure of employmen adaps very slowly o changes in produciviy. Furhermore, his sudy was poined ou ha he srucural losses hypohesis of 32 These findings are essenially consisen wih he resuls of Timer and Szirmai [2000], and Fagerberg [2000]. PERIODICA OECONOMICA, OCTOBER 2010 (pp ) 71

6 DOMICIÁN MÁTÉ Baumol (Baumol [1967]) 33 was mainly significan in branches dominaed by less-qualified workforce. Hence, hese facors could affec aggregae produciviy negaively, bu hese secors canno quickly adap o srucural changes. Some heoreical approaches emphasize he indirec effecs of labour marke insiuions and heir ineracions, which migh influence he impac of economic growh on employmen. The quesion is only how insiuions maer. Labour marke insiuions are a sysem of laws, norms, or convenions resuling from a collecive choice and providing consrains or incenives ha aler individual choices over labour (Boeri van Ours [2008]). The perspecive of endogenous growh heories (Barro Sala-i-Marin [1999]) poins ou ha he mos imporan mechanisms by which labour marke insiuions may affec produciviy growh are mainly hrough physical and human capial accumulaion and echnological innovaions. In addiion Layard and Nickel [1999] conclude ha under cerain condiions rade unions, and oher insiuions sysems have a plausible impac on equilibrium unemploymen and on long-erm produciviy as well. 3. Economic growh accouning approach in OECD counries As a resul of physical or human capial accumulaion, or simply echnological changes, he GDP would apparenly grow in he long run. Because of his we have o examine and facorize he componens of GDP growh wih a growh accouning mehod. The resuls reflec ha economic growh canno be only explained by an increase of capial sock, and changes of populaion or labour force raes. I is expeced ha eiher he process of echnological developmen or he differen ineracions of labour marke insiuions could play a key role in economic growh. Le us choose a simple neoclassical aggregae producion funcion: Y = A K L (1) α 1 α where [Y] is he GDP, [K] and [L] are physical and labour capial in he period [], and [A] naurally represens a cach all facor for echnology, role of insiuions and oher relevan forces which measures how producively capial and labour are used in producion. Thus, assume a consan reurn o scale. Denoe he acive o oal populaion rae by [a ] = N /P where [N] and [P] are he acive and oal populaion. Similarly define he employmen raio 34 [e ] = 33 According o he Baumol s heoreical srucural changes hypohesis of produciviy he employee are direced from he mainly progressive indusrial branches o he weaker produciviy service secors, hence he aggregaed produciviy could decrease. 34 Definiion of OECD and EUROSTAT. 72 PERIODICA OECONOMICA, OCTOBER 2010 (pp )

7 A Theoreical and Growh Accouning Approach of Jobless Growh L /N. These allow us o express labour as follows: [L ] = e *N = e *a *P. Hence, he producion funcion yields: α 1 α α 1 α Y = A K L = A K ( ea P ) (2) Taking boh sides of equaion heir logarihm leads o he following loglinear form: lny = ln A + α ln K + (1 α )ln e + (1 α )ln a + (1 α ) ln P (3) Inroduce unemploymen o he equaion as follows. Le us denoe he unemploymen rae as [u] where [u ] = U /LF. Thus, he labour force [LF] equals o he sum of labour [L] and unemployed [U], so [LF ] = U +L. Hence [L ] = [LF ] u *[LF ] = [LF ]*(1 u ). We also know ha he economic aciviy (paricipaion) rae [p] is esimaed as [p ] = LF /N. Hence he equaion of labour can be subsiued as [L ] = p *a *P *(1 u ). Since he rae of unemploymen is generally no very high (8.6 percen in OECD average), use he approximaion ha [ln(1 u )] u. Hence, replace he labour by he acive o oal populaion rae, he economic aciviy and unemploymen rae as he previous (3) equaion. lny = ln A + α ln K + (1 α)ln p + (1 α)lna + (1 α)ln P (1 α) u (4) The differeniaion of equaions (3) and (4) wih respec o ime express he growh rae of GDP as a funcion of he growh rae of is componens (physical capial, aciviy, employmen and unemploymen raes). The residual, ha is he par no explained by hese facors, is labelled he Toal Facor Produciviy or TFP, denoed by A. Using he ime series ( ) of some OECD counries from Groningen Universiy s Growh Accouning Daabase [GGDC] and European Commission s Annual Macroeconomic Daabase [AMECO], he accouning resuls are repored in Table 1. The resuls are in accordance wih he expecaions; economic growh afer he millennium reduced, he effecs of physical capial have been seady a 0.6 and 0.9 per annum. Thus physical capial could have a coninually greaer weigh in equaions. Meanwhile he role of he unemploymen rae, wih he excepion of he period , had a marginal effec. Changes in he employmen rae or equivalenly ha of he paricipaion rae conribued o economic growh wih a magniude similar o ha of physical capial accumulaion. The sign is however no always posiive (or negaive) in case of he unemploymen rae, which resuled in quie significan slowdown of economic growh. Hence, some labour componens, according o he heory, played a key and lesser role in economic growh besides he echnological shocks (TFP). PERIODICA OECONOMICA, OCTOBER 2010 (pp ) 73

8 DOMICIÁN MÁTÉ Table 1 Resuls from growh accouning componens, Average years ΔY/Y ΔA/A α ΔK /K (1-α) Δa/a (1-α) Δe/e (1-α) Δp/p -(1-α) Δu (1-α) ΔP/P (1-α) ,61 1,17 0,72 0,24 0,24 0,25 0, ,75 1,37 0,68 0,01 0,22 0,47 0, ,51 0,83 0,83 0,01 0,43 0,41 0, ,61 0,91 0,72 0,24 0,58-0,09 0,25 0, ,75 1,37 0,68 0,01 0,23-0,01 0,47 0, ,51 0,84 0,83 0,01 0,40 0,02 0,41 0,66 Source: own calculaion based on daa from GGDC and AMECO Daabases. Noes: we used he Gross Fixed Capial Sock (GFCS) and GDP in consan prices. Apar from hese links wih he cycles, i is worh menioning ha he decline in produciviy growh as observed in some OECD counries coness he longrun susainabiliy of high employmen growh (EC, [2005]). These doubs are reinforced by possible risks of a decline in labour supply. Indeed, lower labour supply wih an increase in labour demand may cause labour shorage sooner han oherwise, implying ha he recovery will be jobless or job-low growh. A possible inerpreaion is ha companies will no hire new employees in periods of recoveries bu raher op for differen sraegies o improve heir produciviy. 3. Conclusion This paper was concerned wih he phenomenon of jobless growh. I concludes ha he relaionship beween economic growh and changes in labour marke ransformed rough he las few decades. The auhor was poined ou ha he heme is no a purely macroeconomic problem. Hence, his paper was shed ligh on he main approaches of jobless growh heories. The role of srucuralshifs, he crowding-ou effecs of loosening fiscal policy and public employmen, he ineracions of labour marke insiuions were seemed o be essenial o undersand his phenomenon. According o he growh accouning resuls, he employmen and paricipaion raes played key role in economic growh beside he TFP, wih a 74 PERIODICA OECONOMICA, OCTOBER 2010 (pp )

9 A Theoreical and Growh Accouning Approach of Jobless Growh change of magniude similar o ha of physical capial accumulaion. Neverheless, some oher i.e. unemploymen raes less influenced economic growh. Hence, furher and more relevan research should aim o reveal he main feaures and effecs of jobless growh phenomenon. References ALGAN, Y. CAHUC, P. ZYBERBERG, A. [2002]: Public Employmen and Labour Marke Performances. Economic Policy, pp BARRO, R. J. SALA-i-MARTIN, X. [2003]: Economic Growh. The MIT Press, 2nd Ediion London. BAUMOL, W. J. [1967]: Macroeconomics of Unbalanced Growh: The Anaomy of Urban Crisis. The American Economic Review, Vol. 57., pp BOERI, T. GARIBALDI, P. [2004]: Labour Marke Performance in Transiion Economies: A Macroeconomic Perspecive, Background Paper for Enhancing Job Opporuniies: Easern Europe and he Former Sovie Union. World Bank, Washingon, DC. BOERI, T. GARIBALDI, P. [2006]: Are Labour Markes in he New Member Saes Sufficienly Flexible for EMU? Journal of Banking & Finance. BOERI, T. van OURS, J. [2008]: The Economics of Imperfec Labour Markes. Princeon Universiy Press. New Jersey. BORLAND, J. GREGORY, R. [1999]: Recen Developmens in Public Secor Labor Markes. in Handbook of Labor Economics, Vol 3c, Chap 48, pp Elsevier. EC (European Commission) [2005]: Labour Marke and Wage Developmens in 2oo4, wih Special Focus on he Risk of Jobless Growh. Special Repor No. 3. Brussel. EC [2009]: AMECO (Annual Macro-economic) Daabase, las download: hp://ec.europa.eu/economy_finance/indicaors/annual_macro_economic_daabas e/ameco0.zip FAGERBERG, J. [2000]: Technological Progress, Srucural Change and Produciviy Growh: a Comparaive Sudy. Srucural Change and Economic Dynamics, Vol. 4., pp GROSHEN, E. L. POTTER, S. [2003]: Has Srucural Change Conribued o a Jobless Recovery? Curren Issues in Economics and Finance, Vol. 9, No 8., FRB of New York. HAYEK, F. A. [1960] The Consiuion of Libery: in Chaper 9: Coercion and he Sae. Chicago: The Universiy of Chicago Press. pp HOLMLUND, B. [1997]: Macroeconomic Implicaions of Cash Limis in he Public Secor. Economica, Vol. 64, pp KNOTEK, E. S. [2007]: How Useful is Okun's Law, Economic Review. FRB of Kansas Ciy, pp KYDLAND, F. N. PRESCOTT, E. C. [1982]: Time o Build and Aggregae Flucuaions. Economerica, Vol. 50, No. 6, pp PERIODICA OECONOMICA, OCTOBER 2010 (pp ) 75

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