Industrial structure and jobless growth in transition economies

Abstract

When does employment growth mirror aggregate growth? Applying a two sector model, where productivity growth differs across sectors of production, this article is concerned with a feature characterising a number of transition economies: a divergence between production and employment growth. In our framework the industrial structure that allows employment growth to mirror output growth is endogenous, and related to a number of industry- and economy-wide characteristics. The article shows how the critical industrial structure necessary for avoiding ‘jobless growth’ is context-specific, questioning a ‘one size fits all’ policy approach when aiming to fulfil the Europe 2020 Strategy.

Keywords:

• Industrial structure
• productivity growth gap
• jobless growth
• transition

JEL classifications:

• O43
• P23
• J64

Notes

1. These impressive rates of aggregate growth and TFP growth, however, started out from very low initial levels. When considering levels of, for example, per capita GDP and TFP, one comes to the sobering conclusion that the countries of CEE continue to significantly lag behind Western European economies, requiring many more years of substantial rates of growth if Western European living standards are to be reached. See, for instance, Marrocu, Paci, and Usai (2013), as well as Burda and Severgnini (2009). Marrocu et al. (2013), for example, show that the group of 12 new EU accession countries achieved, in 1999, only 36% of the total factor productivity (TFP) level of the group consisting of the EU-15, Norway and Switzerland. For 2007 they show that the former group achieved 44% of the TFP level of the latter – an improvement and a sign of catching up for the group of New EU-12. The catching up is expressed more clearly in terms of TFP growth rates. The authors show, for the period 1999–2007, an annual average TFP growth rate of 0.48% for the group of EU-15, Norway and Switzerland, compared to 2.8% for the New EU-12. These numbers, while clearly giving evidence of catching up, also demonstrate that there remains a long way to go before TFP convergence is reached. Further references for convergence (or the lack thereof) are provided by Sala-i-Martin (1996) for β- and σ-convergence, Canova (2004) for convergence clubs, Corrado, Martin, and Weeks (2005) for per capita real income, Ramajo, Marquez, Hewings, and Salinas (2008) focusing on convergence clubs, Carvalho and Harvey (2005) for per capita real income and convergence clubs, Crespo Cuaresma, Ritzberger-Gruenwald, and Silgoner (2008) for β-convergence in per capita real GDP, Cunado and Perez de Gracia (2006) for evidence on real convergence, Cavenaile and Dubois (2011) for β-convergence in per capita real income, Kutan and Yigit (2004, 2005, 2007) as well as Brada, Kutan, and Zhou (2005) for convergence in industrial output, prices, monetary aggregates and nominal and real interest rate differentials, Brada et al. (2005) for monetary and real output convergence, Bartkowska and Riedl (2012) for per capita income convergence, Fritsche and Kuzin (2011) for convergence of productivity, real per capita income, unit labour cost and price level, and recently, Borsi and Metiu (2014) for convergence of real per capita income.

2. See, for example, European Commission (2004), Saget (2000), Schiff, Egoumé-Bossogo, Ihara, Konuki, and Krajnyák (2006) and Torm (2003).

3. Europe 2020 is the European Union’s 10-year growth and jobs strategy. It was launched in 2010, in part as a response to the economic crisis that ensued following the near collapse of the world financial system in 2007. It is a successor strategy to the similarly oriented Lisbon Strategy, whose period of operation was from 2000 to 2010.

4. See, again, Marrocu et al. (2012).

5. The literature provides various explanations for the existence of factor productivity differentials between countries. Prescott (1998) for example, suggests that factor productivity levels may be able to change rapidly in response to policy changes, so that, in principle, productivity catch-up could happen relatively quickly. A different view is taken by, for example, Hall and Jones (1999) as well as Frankel and Romer (1999), who consider geography, legal structure and other fixed or slow-to-change factors to be the principal determinants of factor productivity. This latter view implies a long and arduous, and possibly elusive catch-up path for CEE transition economies.

6. See for example, Bah and Brada (2009), Jazbec (2002), Mas (2010) and Mihaljek (2003) for empirical evidence of this phenomenon. Jazbec (2002) confirms sectoral productivity growth differences, in favour of the tradable sector, for CEE transition economies. The analysis also shows that it is not only early stage transition economies that display this productivity growth gap but that this phenomenon is also found among rather advanced transition economies. More recently Bah and Brada (2009) strengthen this result by showing that the sectoral productivity growth gap has persisted for transition economies well beyond their joining of the European Union. Furthermore Mas (2010) shows that the productivity growth gap is substantially larger in the New EU-12 compared to the ‘old’ EU member states.

7. This is an analysis of the US economy during periods of recovery from recession, and shows that the phenomenon of ‘jobless growth’ is not restricted to transition/developing economies – however, the incidence in the latter is typically found to be more extreme.

8. A definition of aggregate economic growth in terms of productivity growth is congruent with the growth literature of Hall and Jones (1999), Prescott (1998) and dates back to Solow (1957). This literature emphasises that it is increases in factor productivity that largely account for economic growth – more significantly than an increase in physical and human capital. In addition, factor productivity is attributed to be a dominant cause of observed differences in per capita GDP between countries. Further references in support of this thesis are: Caselli (2005), Hendricks (2002), Klenow and Rodriguez-Clare (1997) and Parente and Prescott (1994, 2000).

9. For the purpose of this model we use a rather narrow definition of transition, being well aware that this is only one of a set of characteristics associated with transition economies. Among other characteristics commonly listed in the literature is the conversion ‘from plan to market’. However, this conversion is typically associated with structural change – one of the core concepts of the current article.

10. This is a somewhat extreme assumption that we make strictly for mathematical simplicity. More realistically one could assume that the productivity growth differential for a mature economy is significantly smaller than that of a transition economy (empirically supported by, for example, Mas (2010) and Mihaljek (2003)). But given that this would introduce significant mathematical complication without bringing new insight we resort to the simplifying assumption of sectorally balanced productivity growth for mature economies.

11. Alternatively, the condition could be expressed in terms of growth indicators of the non-tradable sector, as this is a case of perfectly symmetrical productivity and employment growth across sectors.

12. When analysing how the employment–output ratio is affected by an increasing productivity growth gap we assume that the widening of the gap is due to a fall in the non-tradable sector productivity growth rate. Considering expression (1(1) ) we see how the tradable sector productivity growth rate impacts aggregate growth both through its prevailing level and through its deviation from the non-tradable sector. The only impact from the non-tradable sector productivity growth rate however is from its deviation to the tradable sector productivity growth rate, allowing us to use expression (8(8) ) to highlight the impact of a widening gap on the employment–output ratio.

13. This is the space in which the productivity growth differential lives. We notationally suppress the elements pertaining to the labour market as arguments of the function, g, because in the following we focus on the effect of changes in the productivity growth differential on the ratio.

14. See the Appendix for a formal proof of this section.

15. See the Appendix for calculations.