Measuring local employment multipliers and informal employment: a stochastic frontier approach

ABSTRACT

This paper offers policymakers a novel tool for calculating employment multipliers. A theoretical model incorporating a non-tradeable employment function is combined with a stochastic frontier methodology to estimate an accurate multiplier. The advantage of this model is that it allows a consideration of unobserved informal employment when estimating the multiplier. We find an employment multiplier effect of 1.2 jobs in the non-tradeable sector for one job in the tradeable sector. Also, the greater the number of skilled consumers, the higher the multiplier indices and the lower the level of informal employment. Moreover, specialised sectors requiring skilled workers also present less informal employment. We use provincial data for Spain over the period 1995–2013.

KEYWORDS:

• employment multipliers
• tradeable and non-tradeable sectors
• stochastic frontier analysis
• informal employment
• place-based policies
• Spanish regions

JEL:

• C23
• C26
• J21
• R11

ACKNOWLEDGEMENTS

The authors thank Dr Manuel Hernández Muñiz for help with the development of the database.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1. Kline and Moretti (2014) discuss the issues of efficiency, social welfare and employment in relation to place-based policies.

2. On the basis of this definition, several types of workers are identified: own-account workers and employers of informal firms, contributing family workers, informal employees (of formal and informal firms), and members of informal producers’ cooperatives (Hussmanns, 2004).

3. See Thulin (2015) for a revision of this literature.

4. $K=K^{NT}+K^T$ is assumed in the empirical model because, due to data restrictions, it is not possible to obtain more disaggregated data. Note also that relative prices do not appear in equation (10) due to the model assumptions.

5. Spain’s 50 provinces make up Spain’s 17 autonomous communities. Given the complexity of the empirical model, the estimation gives rise to convergence issues if the frontier estimated includes 50 provincial dummies.

6. The Bartik instrument, although widely used in the multiplier literature, has not yet been implemented in the case of SFA models.

7. As Amsler et al. (2016) point out, in this two-step procedure the standard errors from step 2 need to be adjusted. Following Wooldridge (2010), we construct the standardised residual as: ${\hat{\eta }}_{it}^{\ast }={\hat{\eta }}_{it}/{\hat{\sigma }}_{\eta }$.

8. The capital variable has been lagged one year (predetermined variable). Hence, N^NT in a given year should not affect capital in a preceding year. We thank a referee for suggesting this lag for the capital variable.

9. Until the year 2000 (base, 2000) there were five sectors (agriculture, energy, industry, construction and services (with disclosure of non-market services)).

10. For a detailed analysis, see Isserman (1977).

11. Morrissey (2016) uses a location quotient approach to estimate regional production multipliers for Ireland.

12. El stock y los servicios del capital en España y su distribución territorial (1964–2015), October 2018. FBBVA-IVIE (www.fbbva.es, 2018).

13. This variable was obtained from the Fundación Bancaja e IVIE (http://www.ivie.es/es/banco/caphum/series.php).

14. Where the variable (COS) represents the coefficient of specialisation (as defined by Hoover & Giarratani, 1984). For details, see Table 1.

15. Test de Wald, Stoc. frontier normal versus half-normal model, Wald chi²(37) = 6.47e+09; Prob > chi² = 0.0000.

16. Average multipliers by provinces are shown in Appendix B in the supplemental data online.

17. Julià et al. (2014) estimate informal employment of 15.8% using a broader definition that includes all employees without contracts or those who do not know if they have one. They also consider both non-tradeable and tradeable informal jobs. Although, as already seen, the relevance of informal employment in the tradeable sector is much less relevant, the existence of the latter would imply a higher level of non-tradeable informal employment than estimated.

18. With respect to heteroskedasticity in the random error term (equation 19), Appendix C in the supplemental data online shows the results.

Additional information

Funding

This work was supported by the Ministerio de Ciencia e Innovación [grant number PID2020-115183RB-C21 funded by MCIN/AEI//10.13039].