The puzzle on the causality of the productivity and employment growth: evidence from firm-level data

Abstract

This article analyses the causality between the firm’s employment and productivity growth based on the population of manufacturing firms registered in Slovenia in the 1994–2003 period. By using the system GMM estimator, we show that the employment–productivity growth trade-off does not exist. Moreover, we find significant complementarities between employment and productivity growth, mostly driven by SMEs and firms from high-tech industries. Accordingly, we argue that the job-creation policy and productivity-promoting policy are complementary rather than trade-offs and that policymakers should focus on the optimal policy mix that provides the highest aggregate effect with regard to all growth aspects. Further, significant differences among the factors of employment and productivity growth suggest that job-creation policy measures are most successful when targeted at younger export-oriented firms with high total factor productivity levels and capital-intensive production. Meanwhile, the outcome of policy measures aimed at promoting productivity increases with a firm’s capital intensity and size up to the threshold employment level and with the intensity of market competition.

Keywords:

• firm growth
• TFP
• employment
• causality
• economic policy

JEL Classification:

• D22
• D24
• L20
• C23
• E61

Notes

¹ As age enters our empirical models in a logarithmic form, we start to count age with a value of 1 to prevent observations being dropped in the first year of a firm’s operation, which would generate sample selection bias especially due to the relatively high mortality rates of infant firms.

² The wage variable is only included in the employment growth model specifications because of the strong multicollinearity detected in the TFP growth specifications.

³ The group of high-technology industries is comprised of firms from manufacturing industries coded 24.4, 30, 32, 33 and 35.3, firms from industries coded 23–29, 31, 34 and 35 (excluding 35.3) are included in the group of medium-technology industries and firms from industries coded 15–22, 36 and 37 are classified into the group of low-technology industries.