Labour Market and Economic Growth


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According to a statement released by a German Federal Ministry of Finance, the main objective of the economy remain unchanged, which is to improve people’s welfare supported by sustainable growth, well distributed economic development, and macroeconomic and financial stability. Many factors contribute to the growth of an economy, one of the most common and direct measurements of economic growth is output and productivity .

According to economy theory, if production increases then unemployment expected to decrease (Zanin and Mara, 2011) however, does this economic expansion always coupled with jobs creation and improvement in the labour market? Bryjolfsson and McAfee (2014) observed the condition in the U.S. economy and based on their findings, employment and wage growth starts to decouple since the last decade. This indicates that the overall economic growth does not create enough jobs in the labour market. Apparently, not only employment growth tends to diverge from the output and productivity growth, but wage growth shows a sign of decoupling as well.

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Economists Schwellnus et al. (2017) also found that in most of the Organization for Economic Co-operation and Development (OECD) countries wage growth tend to decoupled from productivity over the past two decades, indicating that raising a productivity is not a sufficient way anymore to increase wage and well-being in general. Based on the data from International Labour Organization (ILO), average labour productivity growth outpaced average wage growth by a two-to-one ratio in 36 developed countries (ILO, 2013a). Similarly, researchers have observed the phenomenon in the labour market. Knotek (2007) has documented about the recent changes in the dynamics of the relationship between output and unemployment indicating that Okun’s law has broken down and is not a stable measurement over time.

One of the most discussed phenomenon in the labour market is the growth of non-employment or so-called jobless growth. Though it is still debated , India is a famous example for this phenomenon. Bhalotra (1998) captured this trend in India where employment declined despite acceleration in productivity growth. This leads us to the couple of questions, whether the labour structure has changed and are we transitioning to the new era of a labour market? Brynjolfsson and McAfee (2016) have named it “The Second Machine Age”, where focus on technology is a key factor causing the output growth rate and employment rate to decouple, meaning that jobs are being taken over or have been taken over by robots and machines. Though their observation is concentrated in the U.S. economy, they also find that this phenomenon have spread across other developed countries such as Sweden and Germany. We are interested to find whether this phenomenon is also observable in a developing country. By looking at the data of GDP per capita, GDP per hour worked, employment rate and wage growth, we compare the conditions between Germany and Indonesia, as both countries represent developed and developing economy.

Typically, the decline in economic growth will be followed by the rise of an unemployment. Renowned economist, Arthur Okun documented this negative correlation between GDP and unemployment rate in the early 1960s. Okun suggested that a one-percentage change in the unemployment rate is associated with an approximately three-percentage change in output in the opposite direction (Lee, 2000). However, there have been many exceptions to Okun’s law, for example, Kolesnikova and Liu (2011) reported that after the Great Recession ended in June 2009 and overall economic activity exhibited signs of recovery, labour market conditions still remained disappointing. This phenomenon where countries experience a growing economy without a commensurate growth in employment is called jobless growth.

Another similar phenomenon is a jobless recovery, which usually happens after the recession where the economy shows a sign of recovery but the unemployment level remains high. With the help of Okun’s law, we will run a regression and estimate the relation between unemployment and GDP growth.

According to Khemraj et al. (2006), a weakened Okun’s coefficient is a sign that jobless growth is present. Another issue is that not only employment rate starts to decouple from output and productivity, but wage growth starts to decouple from both variables as well. This is shown by the decline in total-economy labour share and in the ratio of median to average wages, which reflects disproportionate wage growth at the very top of wage distribution (OECD, 2017). Hence, income inequality within the society is spreading. Even though it is not a scope of this thesis to discuss income inequality, it is important to mention income inequality as a direct impact from the issues emerging in the labour market.

Berg (2015) mentioned that, increase in income inequality reflects a bias in the economic professions towards the study of individual labour market earnings. This bias is partly caused by the influence of human capital theory, which emphasizes how a person’s education, experience and characteristic affect their earnings. Berg (2015) also suggested that setting new policies to improve human capital quality, combined with macroeconomic strategy, is crucial to reach equitable societies. Due to the abundant reserve of natural resources as well as large labour force (ADBI Institute, 2017), Indonesia is depicted as one of the fastest growing economies in the world and considered as Asia’s emerging market. Despite the impressive economic growth over the past fifteen years and the doubled GDP according to World Bank, many Indonesians are still living under the poverty line and the unemployment rate is still high. In contrast, Germany’s unemployment rate drops to record low as the economy grows.

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