Simultaneous, endogenous, and bi-directional relationship between output, labour productivity, and employment: a 3SLS estimation of the employment version of Okun equation
Abstract
Over the last few decades, the European Union (EU) has made progress in reducing economic disparities between Member States. However, persistent differences in employment rates remain, prompting a concerted effort to foster economic development conducive to job creation. However, the previous research does not address the impact of labour productivity on the output-employment relationship. While they provide insights into the complex interplay between productivity, output, and employment, they do not comprehensively analyse how labour productivity affects the output-employment relationship. Using panel data from 27 EU countries and the UK over 2000–2022, we aim to evaluate whether economic growth led by increased productivity can enlarge employment when the complexity of interrelationships is specified in the model. While initial estimates using pooled OLS and 2SLS methods yield insignificant results, 3SLS estimates reveal a significant mediating effect of productivity on the output-employment nexus. The results imply that raising labour productivity can boost employment prospects during economic expansions. However, the mediating effect weakens during downturns, highlighting the need for multifaceted policy interventions. These findings provide crucial insights for policymakers navigating the complex and challenging dynamics of employment and economic growth in the EU context.
Keyword : labour productivity, dynamic Okun equation, growth-employment relationship, panel data analysis, 3SLS estimator, multiplicative terms
How to Cite
Butkus, M., Dargenytė-Kacilevičienė, L., Matuzevičiūtė, K., Ruplienė, D., & Šeputienė, J. (2024). Simultaneous, endogenous, and bi-directional relationship between output, labour productivity, and employment: a 3SLS estimation of the employment version of Okun equation. Journal of Business Economics and Management, 25(5), 1030–1051. https://doi.org/10.3846/jbem.2024.22425
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Gawrycka, M., Sobiechowska-Ziegert, A., & Szymczak, A. (2012). The impact of technological and structural changes in the national economy on the labour-capital relations. ERN: Institutions & the Labour Market (Topic). https://doi.org/10.5709/ce.1897-9254.31
Görg, H., Hornok, C., Montagna, C., & Onwordi, G. E. (2022). Employment to output elasticities and reforms towards flexicurity: Evidence from EBPO countries. Bulletin of Economic Research, 75(7), 641–670. https://doi.org/10.1111/boer.12375
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Irshad, M., & Qayed, S. H. (2023). Determinants of Employment Intensity of Growth in India: An insight from panel data. Millennial Asia. https://doi.org/10.1177/09763996231175989
Islam, I., & Nazara, S. (2000). Estimating employment elasticity for the Indonesian economy: Technical note on the Indonesian labour market. International Labour Office.
Jung, W., Lee, S., & Kim, H. (2020). Are information and communication technologies (ICTs) displacing workers? The relationship between ICT investment and employment. Information Development, 36, 520–534. https://doi.org/10.1177/0266666919874097
Kapsos, S. (2006). The employment intensity of growth: Trends and macroeconomic determinants. In J. Felipe, & R. Hasan (Eds.), Labour markets in Asia: Issues and perspectives (pp. 143–201). Palgrave Macmillan UK. https://doi.org/10.1057/9780230627383_4
Kumar, J. (2020). Effects of population explosion on Indian economy. International Education and Research Journal, 6.
Lee, C., Liang, W., Lin, F., & Yang, Y. (2016). Applications of simultaneous equations in finance research: Methods and empirical results. Review of Quantitative Finance and Accounting, 47, 943–971. https://doi.org/10.1007/s11156-015-0526-0
Lenkoski, A., Eicher, T., & Raftery, A. (2012). Two-stage Bayesian model averaging in endogenous variable models. Econometric Reviews, 33, 122–151. https://doi.org/10.1080/07474938.2013.807150
Maffezzoli, M. (2004). Convergence across Italian regions and the role of technological catch-up. Topics in Macroeconomics, 6, 1–43. https://doi.org/10.2202/1534-5998.1405
Majid, H., & Siegmann, K. A. (2021). The effects of growth on women’s employment in Pakistan. Feminist Economics, 27(4), 29–61. https://doi.org/10.1080/13545701.2021.1942512
Malik, S., & Mitra, A. (2023). Technology, TFPG and employment: A panel data analysis. Indian Journal of Labour Economics, 66, 155–179. https://doi.org/10.1007/s41027-022-00424-3
Mihajlović, V., & Marjanović, G. (2021). Challenges of the output-employment growth imbalance in transition economies. Naše gospodarstvo/Our economy, 67(2), 1–9. https://doi.org/10.2478/ngoe-2021-0007
Mkhize, N. I. (2019). The sectoral employment intensity of growth in South Africa. Southern African Business Review, 23(1), Article 4343. https://doi.org/10.25159/1998-8125/4343
Mouhammed, A. (2012). Unemployment and productivity in the American economy. The Journal of Applied Business and Economics, 13, 52–58.
Novák, M., & Darmo, Ľ. (2019). Okun’s Law over the business cycle: Does it change in the EU countries after the financial crisis? Prague Economic Papers, 28(2), 235–254. https://doi.org/10.18267/j.pep.694
Novotná, M., Volek, T., Rost, M., & Vrchota, J. (2020). Impact of technology investment on firm’s production efficiency factor in manufacturing. Journal of Business Economics and Management, 22(1). https://doi.org/10.3846/jbem.2020.13635
Pattanaik, F., & Nayak, N. C. (2014). Macroeconomic determinants of employment intensity of growth in India. Margin: The Journal of Applied Economic Research, 8(2), 137–154. https://doi.org/10.1177/0973801013519997
Polák, P. (2017). The productivity paradox: A meta-analysis. Information Economics and Policy, 38, 38–54. https://doi.org/10.1016/j.infoecopol.2016.11.003
Radmehr, R., Henneberry, S., & Shayanmehr, S. (2021). Renewable energy consumption, CO2 emissions, and economic growth nexus: A simultaneity spatial modeling analysis of EU countries. Structural Change and Economic Dynamics, 57, 13–27. https://doi.org/10.1016/j.strueco.2021.01.006
Sass, M., Gál, Z., & Juhász, B. (2018). The impact of FDI on host countries: The analysis of selected service industries in the Visegrad countries. Post-Communist Economies, 30, 652–674. https://doi.org/10.1080/14631377.2018.1445332
Sofi, I., & Sharma, P. (2015). Labour regulations, contractualization and industrial performance. South Asia Economic Journal, 16, 122–144. https://doi.org/10.1177/1391561415575131
Anderson, B. (2016). Do macroeconomic structures and policies shape the employment intensity of growth differently for women and men? Journal of Economic Issues, 50(4), 940–962. https://doi.org/10.1080/00213624.2016.1249744
Anderson, B., & Braunstein, E. (2013). Economic growth and employment from 1990–2010: Explaining elasticities by gender. Review of Radical Political Economics, 45(3), 269–277. https://doi.org/10.1177/0486613413487158
Antonelli, C., & Feder, C. (2020). The new direction of technological change in the global economy. Structural Change and Economic Dynamics, 52, 1–12. https://doi.org/10.1016/j.strueco.2019.09.013
Apte, U., Karmarkar, U., & Nath, H. (2008). Information services in the U.S. economy: Value, jobs, and management implications. California Management Review, 50, 12–30. https://doi.org/10.2307/41166443
Balk, B. (2011). Dissecting aggregate output and labour productivity change. Journal of Productivity Analysis, 42, 35–43. https://doi.org/10.1007/s11123-013-0359-6
Baltagi, B., & Deng, Y. (2015). EC3SLS Estimator for a simultaneous system of spatial autoregressive equations with random effects. Econometric Reviews, 34, 659–694. https://doi.org/10.1080/07474938.2014.956030
Barigozzi, F., Burani, N., & Raggi, D. (2018). Productivity crowding-out in labour markets with motivated workers. Journal of Economic Behavior & Organization, 151, 199–218. https://doi.org/10.1016/j.jebo.2018.03.018
Ben-Salha, O., & Zmami, M. (2021). The effect of economic growth on employment in GCC countries. Scientific Annals of Economics and Business, 68(1), 25–41. https://doi.org/10.47743/saeb-2021-0004
Burggraeve, K., de Walque, G., & Zimmer, H. (2015). The relationship between economic growth and employment. Economic Review, 1, 32–52.
Butkus, M., Dargenytė-Kacilevičienė, L., Matuzevičiūtė, K., Ruplienė, D., & Šeputienė, J. (2024). When and for whom does growth becomes jobless? Economies, 12(1), Article 19. https://doi.org/10.3390/economies12010019
Butkus, M., Dargenytė-Kacilevičienė, L., Matuzevičiūtė, K., Ruplienė, D., & Šeputienė, J. (2022). Do gender and age matter in employment–sectoral growth relationship over the recession and expansion. Ekonomika, 101(2), 38–51. https://doi.org/10.15388/Ekon.2022.101.2.3
Butkus, M., Dargenytė-Kacilevičienė, L., Matuzevičiūtė, K., Šeputienė, J., & Ruplienė, D. (2023). Age-and gender-specific output-employment relationship across economic sectors 1. Ekonomicky Casopis, 71(1), 3–22. https://doi.org/10.31577/ekoncas.2023.01.01
Charles, T., & Lehner, F. (1998). Competitiveness and employment: A strategic dilemma for economic policy. Competition and Change, 3, 207–236. https://doi.org/10.1177/102452949800300108
Coşar, E. E., & Yavuz, A. A. (2019). Is there asymmetry between GDP and labour market variables in Turkey under Okuns Law? (Working Papers 1927). Central Bank of the Republic of Turkey.
Cruz, M. D. (2023). Labor productivity, real wages, and employment in OECD economies. Structural Change and Economic Dynamics, 66, 367–382. https://doi.org/10.1016/j.strueco.2023.05.007
Dargenyte-Kacileviciene, L., Butkus, M., & Matuzeviciute, K. (2022). Gender-, Age-and Educational attainment level-specific output–employment relationship and its dependence on foreign direct investment. Economies, 10(11), Article 265. https://doi.org/10.3390/economies10110265
Dawid, H., Gemkow, S., Harting, P., & Neugart, M. (2012). Labour market integration policies and the convergence of regions: The role of skills and technology diffusion. Journal of Evolutionary Economics, 22, 543–562. https://doi.org/10.1007/978-3-319-01496-8_9
Dekle, R. (2020). Robots and industrial labor: Evidence from Japan. Journal of the Japanese and International Economies, 58, 101–108. https://doi.org/10.1016/j.jjie.2020.101108
Desai, N. (2018). Work and welfare. The Indian Journal of Labour Economics, 61, 43–66. https://doi.org/10.1007/s41027-018-0123-6
Economou, A., & Psarianos, I. (2016). Revisiting Okun’s Law in European Union countries. Journal of Economic Studies, 43, 275–287. https://doi.org/10.1108/JES-05-2013-0063
European Commission. (2022). European Pillar of Social Rights: State of play on the national targets for 2030. https://ec.europa.eu/social/main.jsp?langId=en&catId=89& fur therNews=yes&newsId=10299
Gawrycka, M., Sobiechowska-Ziegert, A., & Szymczak, A. (2012). The impact of technological and structural changes in the national economy on the labour-capital relations. ERN: Institutions & the Labour Market (Topic). https://doi.org/10.5709/ce.1897-9254.31
Görg, H., Hornok, C., Montagna, C., & Onwordi, G. E. (2022). Employment to output elasticities and reforms towards flexicurity: Evidence from EBPO countries. Bulletin of Economic Research, 75(7), 641–670. https://doi.org/10.1111/boer.12375
Guisinger, A., Hernández-Murillo, R., Owyang, M., & Sinclair, T. (2015). A state-level analysis of Okun’s Law (Working Paper 2015-029). Federal Reserve Bank of St. Louis. https://doi.org/10.20955/wp.2015.029
Irshad, M., & Qayed, S. H. (2023). Determinants of Employment Intensity of Growth in India: An insight from panel data. Millennial Asia. https://doi.org/10.1177/09763996231175989
Islam, I., & Nazara, S. (2000). Estimating employment elasticity for the Indonesian economy: Technical note on the Indonesian labour market. International Labour Office.
Jung, W., Lee, S., & Kim, H. (2020). Are information and communication technologies (ICTs) displacing workers? The relationship between ICT investment and employment. Information Development, 36, 520–534. https://doi.org/10.1177/0266666919874097
Kapsos, S. (2006). The employment intensity of growth: Trends and macroeconomic determinants. In J. Felipe, & R. Hasan (Eds.), Labour markets in Asia: Issues and perspectives (pp. 143–201). Palgrave Macmillan UK. https://doi.org/10.1057/9780230627383_4
Kumar, J. (2020). Effects of population explosion on Indian economy. International Education and Research Journal, 6.
Lee, C., Liang, W., Lin, F., & Yang, Y. (2016). Applications of simultaneous equations in finance research: Methods and empirical results. Review of Quantitative Finance and Accounting, 47, 943–971. https://doi.org/10.1007/s11156-015-0526-0
Lenkoski, A., Eicher, T., & Raftery, A. (2012). Two-stage Bayesian model averaging in endogenous variable models. Econometric Reviews, 33, 122–151. https://doi.org/10.1080/07474938.2013.807150
Maffezzoli, M. (2004). Convergence across Italian regions and the role of technological catch-up. Topics in Macroeconomics, 6, 1–43. https://doi.org/10.2202/1534-5998.1405
Majid, H., & Siegmann, K. A. (2021). The effects of growth on women’s employment in Pakistan. Feminist Economics, 27(4), 29–61. https://doi.org/10.1080/13545701.2021.1942512
Malik, S., & Mitra, A. (2023). Technology, TFPG and employment: A panel data analysis. Indian Journal of Labour Economics, 66, 155–179. https://doi.org/10.1007/s41027-022-00424-3
Mihajlović, V., & Marjanović, G. (2021). Challenges of the output-employment growth imbalance in transition economies. Naše gospodarstvo/Our economy, 67(2), 1–9. https://doi.org/10.2478/ngoe-2021-0007
Mkhize, N. I. (2019). The sectoral employment intensity of growth in South Africa. Southern African Business Review, 23(1), Article 4343. https://doi.org/10.25159/1998-8125/4343
Mouhammed, A. (2012). Unemployment and productivity in the American economy. The Journal of Applied Business and Economics, 13, 52–58.
Novák, M., & Darmo, Ľ. (2019). Okun’s Law over the business cycle: Does it change in the EU countries after the financial crisis? Prague Economic Papers, 28(2), 235–254. https://doi.org/10.18267/j.pep.694
Novotná, M., Volek, T., Rost, M., & Vrchota, J. (2020). Impact of technology investment on firm’s production efficiency factor in manufacturing. Journal of Business Economics and Management, 22(1). https://doi.org/10.3846/jbem.2020.13635
Pattanaik, F., & Nayak, N. C. (2014). Macroeconomic determinants of employment intensity of growth in India. Margin: The Journal of Applied Economic Research, 8(2), 137–154. https://doi.org/10.1177/0973801013519997
Polák, P. (2017). The productivity paradox: A meta-analysis. Information Economics and Policy, 38, 38–54. https://doi.org/10.1016/j.infoecopol.2016.11.003
Radmehr, R., Henneberry, S., & Shayanmehr, S. (2021). Renewable energy consumption, CO2 emissions, and economic growth nexus: A simultaneity spatial modeling analysis of EU countries. Structural Change and Economic Dynamics, 57, 13–27. https://doi.org/10.1016/j.strueco.2021.01.006
Sass, M., Gál, Z., & Juhász, B. (2018). The impact of FDI on host countries: The analysis of selected service industries in the Visegrad countries. Post-Communist Economies, 30, 652–674. https://doi.org/10.1080/14631377.2018.1445332
Sofi, I., & Sharma, P. (2015). Labour regulations, contractualization and industrial performance. South Asia Economic Journal, 16, 122–144. https://doi.org/10.1177/1391561415575131