Comments on “Economies with a Large Labor Force”

Ann HarrisonUC Berkeley, IGC, and NBERSeptember 27, 2011

Remarkable Fact: Jobless Growth

Documenting the facts for the USA, Britain, Canada, Europe

One missing explanationExample: USAExample: China

Documenting the Facts

U.S. Private Sector Employment Relative to Business Cycle Peak; Establishment Survey

Inde

x (P

eak=

100)

Months After Employment Peaked

U.S. – Household SurveyIn

dex

(Pea

k=10

0)

Months After Employment Peaked

Longer Term – Something went wrong in 2000s

6

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1989-1999 1999-2009 1999-2007 2007-2009

Change in Employment Population Ratios, 1989-2009percentage points

* Data not available for Eurozone 1989-1999. Eurozone data available only through 2009Q3

U.S.

Canada

UnitedKingdom

Eurozone

One Missing Explanation

Policies have systematically lowered the cost of capital relative to (unskilled) labor

Extremely low cost of capital Eroding of union power Declining price of investment goods, in US

driven by falling computer prices Policies that systematically favor capital

relative to labor (China VAT reform)

Example: USA

Harrison and McMillan (2011), RESTAT, show that 12 percentage points out of the 17 percentage point decline in US manufacturing employment at home can be attributed to the low cost of capital

Greater import penetration only accounts for 2 percent Lower and falling real wages in low income countries

where US companies expanded their offshore operations only account for 2.4 percentage points reduction in US manufacturing employment.

Example: China

Cai and Harrison 2011 (Policy Research Working Paper 5788 The Value-Added Tax Reform Puzzle) explore the impact of a tax reform in China that eliminated the VAT on productive investment.

Impact: big decline in employment, by 8 percentage points. Policy extended to all of China.

Consistent with A.K. Ghose’s excellent presentation indicating subsidization of skilled relative to unskilled workers in India.

Summary

Many policies have inadvertently encouraged firms to adopt labor-saving technical change.

China’s VAT reform is one such example To reverse jobless growth, more efforts are needed

to encourage the use of workers relative to capital, particularly unskilled workers who are substitutes for capital and not complementary inputs.

Structural changes in economies to encourage employment growth—such as promoting labor-intensive manufacturing in resource rich economies-- are also necessary.