THE conventional economic wisdom sees a causal relationship between economic growth and employment generation. Economic growth drives up the aggregate demand for goods and services. The businesses respond by hiring additional labour.
On the other hand, in periods of economic downturn, the aggregate demand falls and jobs are lost as happened in 2009 worldwide.
While the growth-employment relationship generally holds true, it is by no means universal. As contemporary economic data amply bears out, there may be cases in which either economic growth does not drive down unemployment or the increase in employment lags considerably behind that of the output. The resultant phenomenon is called jobless growth.
The term ‘jobless growth’ gained currency in 1990s. One of its early uses was made by the UNDP in its 1993 Human Development Report, according to which, “Many parts of the world are witnessing a new phenomenon—jobless growth. Even when output increases, increase in employment lags way behind.” The disconnect between output and job expansion shows that while economic growth may be a necessary condition for employment creation, it is not a sufficient condition.
The jobless growth phenomenon can be explained by the following factors:
An economy faces a choice between maximising output and job creation. Capital intensive or labour saving techniques may increase output but may also increase unemployment and thus poverty. Labour intensive techniques, by contrast, may increase employment but may have a limited effect on increasing output. Economies in the course of their development may witness a sharp shift from labour intensive to capital intensive techniques or activities resulting into structural unemployment.
During last a few decades, capital intensive techniques, particularly the use of automation, have replaced labour intensive techniques at a fast pace. Technology generates as well as sheds jobs. For instance in developed economies, technological changes have displaced jobs in manufacturing and created jobs in the services sector and the share of services in total employment has substantially gone up while that of manufacturing has gone down. If technology-induced job loss is greater than job creation, economic expansion will be accompanied by the contraction of the job market.
Several developing countries, including Pakistan, have undergone transition from import substitution to export-led growth strategy. While this transition may have boosted their exports and thus created jobs in exporting sectors, it has also exposed their domestic industry to foreign competition. As a result, inefficient enterprises experienced job losses. If the import competing enterprises are more labour intensive than the exporting enterprises, the number of jobs lost is higher than the number of jobs created.
Economic and trade liberalisation has accentuated balance of payment (BoP) problems for countries across the globe.Macroeconomic stabilisation policies are generally regarded as the panacea for the BoP problems. Macroeconomic stabilisation, as in case of Pakistan, generally takes the form of a restrictive fiscal policy. Since in most of the countries the government is the largest source of employment, fall in public spending reduces employment opportunities. While the economy may register a modest growth, unemployment will increase.
If the government adopts a trickle down approach, growth will not be inclusive. As a result, economic growth will be accompanied by the widening of income disparities. Absolute poverty may fall but relative poverty will increase. Such a situation does not bode well for job creation, as there is meagre investment in human capital development and thus labour skills and productivity do not increase commensurate with the requirements of the industry.
In the wake of globalisation outsourcing, particularly oversees, has increased immensely. In order to be price competitive, businesses tend to procure goods and services from places where they are produced at the least real cost. The outsourcing, with all its benefits, results in loss of jobs and to another country if the work is outsourced across the borders.
The government may provide subsidies to capital intensive sectors with a view to maximising output. While the incentives will encourage the growth of capital intensive sectors, it may discourage the growth of labour incentive sectors. The result will be jobless growth.
Job creation depends on increase in investment, which itself is contingent upon business expectations. Despite signs of economic recovery, firms may be reluctant to step up investment, either because they deem the recovery to be fragile or because of a volatile political environment, they are not willing to undertake productive investment and instead invest their capital in the stock market. As productive investment does not go up, job creation is halted and the economy faces jobless growth.
The jobless growth phenomenon is supported by the following data, which are taken from the Global Employment Trends 2011, an ILO publication.
The global economy grew by 5.3 in 2007, 2.8 in 2008, contracted by 0.6 in 2009 and then rebound to grow by 4.8 per cent in 2010. However, employment grew by 1.8 in 2007, 1.5 in 2008, 0.7 in 2009 and 1.3 per cent in 2010. During these four years, the global unemployment rate was 5.6, 5.7, 6.3 and 6.2 per cent.
This shows the growth of employment has positively responded while the unemployment rate has responded negatively to economic growth or contraction. However, the employment growth has significantly lagged behind the economic growth. In particular, in 2010 the world real GDP grew by 4.8 but the employment grew only by 1.3 per cent. Similarly, despite a healthy economic growth in 2010, the unemployment rate came down by only one percentage point.
Global employment-population ratio has also responded to the GDP growth. For instance, the ratio declined from 61.7 in 2007 to 61.6 in 2008 and to 61.2 per cent in 2009 in keeping with the economic slowdown. However, in 2010, the ratio continued to fall despite 4.8 per cent economic growth. Similarly, the number of unemployed persons went up from 177.3 million in 2007 to 182.9 million in 2008. In 2009, the number of unemployed persons sharply hiked to 205.2 million reflection economic contraction in the same year. However, in 2010, the number of the unemployed only marginally decreased to 205 milliondespite significant economic growth.
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