Annual Forum Papers

Trends in Employment and the Employment Elasticity in Manufacturing 1971-1992: an International Comparison

  • Year: 2000
  • Author(s): Dipak Mazumdar

The growth of employment in the manufacturing sector has been an important issue in development economics for a long time. Employment growth is, of course, limited by output growth in this sector, but the elasticity of employment with respect to output has varied widely in different regions and economies. This paper focuses attention the idea that a major determinant of employment elasticity is the way the fruits of output growth are divided between employment growth and wage growth. The nature of the division in any economy depends on labor market institutions, and in particular the way the interests of the insiders' work out relative to the interest of the ‘outsiders'. But before we are able to determine the quantitative dimension of the trade-off, we have to allow for two other factors which affect the size of the cake available to labor in real terms. These are: the elasticity of the wage bill with respect to output -which determines the trend in the share of labor; and secondly, the price effect, depending partly on the rate of inflation and partly on the movements of producer prices relative to consumer prices. A simple decomposition procedure has been outlined in the paper which allows us to quantify the relative importance of these factors, and hence give a clearer idea of the labor market outcome leaning to one or other of the two interests, employment growth and real wage growth. The empirical analysis for different regions of the world is carried out on time series data for the manufacturing sector collected by UNIDO from the national surveys of member countries for the decades of the seventies and the eighties.

It was found that, after allowing for the value of the of the wage bill elasticity and the price effect, East Asia shared its growth almost equally between real wage and employment increase. Study of the sub-regions of Asia revealed significant difference between S.E. Asia and China on the one hand, and South Asia on the other, particularly in the eighties. The latter had moved away in this period from the others to a labor market outcome which favored real wage growth much more than employment growth. In this respect South Asia approached the experience of EEC and Japan in both periods, and of the United States in the second. At the other extreme we have the experience of SSA which emphasized employment retention at the cost of real wage decline.