The impact of an economic crisis on labor markets can be transmitted through the decline in GDP (Betcherman and Islam, 2001). It may be the same case for this recent global economic slowdown. One way of measuring this impact is through the use of elasticity of employment with respect to output, or as Kapsos (2006) labels it, the "employment intensity to growth." It is simply a measure of how employment varies with economic output—how much employment growth is associated with each percentage point of economic growth. The measure is normally used to analyze how the growths in economic output and in employment move together through time. In our present case, we can use the employment elasticities to calculate how much employment will change for each country in the next two years given projections in national output.
We can complement this analysis by also making use of an alternative employment elasticity—this time, with respect to exports. Asian Development Bank (2009) reports that the global recession has been transmitted to Asia primarily through the trade channel. The drop in G3 income has led to a reduction in G3 import demand. This resulted in a sharp contraction in developing Asia's exports. Now, the contraction in the demand for Asian exports has caused numerous factory closures, and layoffs have been reported across the region, particularly in electronics and in the most labor-intensive industries such as toys. Thus the economic slowdown has also affected employment through exports. It may then also be useful to calculate the "employment intensity to exports"—how much employment growth is associated for each percentage point of export growth—to find out the magnitude of the impact of exports' decline on employment.
Methodology and data used
Following Kapsos (2006), the empirical relationship between employment and GDP was estimated using a multivariate log-linear regression model:
lnEi = a + b1*lnYi + b2*(lnYi*Di) + b3*Di + ui
where Ei is total employment in country i, Yi is GDP, and Di are the country dummy variables. From the equation, the elasticity of employment with respect to GDP in country i is given as b1 + b2. The elasticity represents the change in employment associated with a differential change in output. b2 varies for each country.
Employment elasticities to exports were also calculated using the same specification:
lnEi = s + b1*lnXi + b2*(lnXi*Di) + b3*Di + ui
Ei again represents employment in country i and Xi represents total merchandise exports. Thus, two types of elasticities are calculated: the elasticity of employment with respect to total output, and secondly, with respect to exports.
The regression is estimated for the most recent years (2003 to 2007) using data from 8 countries from East Asia (China, Hong Kong, and Korea) and Southeast Asia (Indonesia, Malaysia, Philippines, Singapore, Thailand).
Data on employment, GDP and exports were taken from World Bank's World Development Indicators Online (WDI). Total employment per se is not available in WDI, but was instead derived using data on total labor force and total unemployment rate:
Employment = labor force * (1 – unemployment rate)
GDP values are measured in constant 2000 US dollars, but exports are in current US dollars. Official foreign exchange rates were also downloaded from the WDI to convert exports to constant 2000 US dollars.
Once elasticities were calculated for each country, they were then used to estimate the changes in total employment in 2008, 2009, and 2010 based on projected GDP changes and export changes. The calculation for each country is simply:
% change in Ei = % change in Yi * (b1 + b2)
GDP and export growth projections are provided in the statistical index of Asian Development Bank (2009).
Employment estimates
East Asian countries were found to have the lowest employment elasticities with respect to GDP, whereas countries in South Asia have the highest. In terms of elasticities with respect to exports, Philippines has the highest employment elasticity at 0.84. Other countries have elasticities between 0.20 and 0.30, except for China, Hong Kong, and Thailand, which have elasticities less than 0.10.
With respect to GDP all countries will experience lower employment growth in 2008. The change is lower still in 2009 compared to 2008, with the more industrialized countries experiencing negative employment growth. The growth will rebound in 2010 for all countries, with few countries back at their respective 2008 levels.
With respect to exports, some countries are expected to have lower employment growths in 2008, with Sri Lanka and Philippines already in negative values. The negative growth of these two countries will continue in 2009, together with the rest of the countries (except for India, which has no available export projections). The countries are expected go back to positive employment growth in 2010, with only Hong Kong back at its 2008 levels.
Concluding remarks
The use of elasticities is a simple yet economically intuitive way of estimating the impact of the recent global economic slowdown on employment levels. Provided that the elasticities are stable over time, we can use the elasticities calculated from previous years' data to determine how much growth in employment is expected in the future given a projection of growth in GDP. Kapsos (2006), however, pointed out one shortcoming on the use of employment elasticities. The methodology utilized here only takes into account information on employment, output, and exports. It is likely that the estimated employment elasticities will suffer from omitted variable bias. Other variables may influence either employment performance, economic performance, or exports, but they are not controlled for in the model. Nevertheless, the elasticities presented here provide an estimate of the relationship between employment and output (or exports). These estimates may likely as well provide an indication of what will happen to employment in the next two years.
References
Asian Development Bank. 2009. Asian Development Outlook 2009. Manila.
Betcherman, G and R. Islam. 2001. "East Asian labor markets and the economic crisis: An overview." in G. Betcherman and R. Islam (eds.) East Asian Labor Markets and the Economic Crisis: Impacts, Responses, and Lessons. Washington, D.C.: The World Bank and The International Labour Office.
Kapsos, S. 2006. "The employment intensity of growth: Trends and macroeconomic determinants." in J. Felipe and R. Hasan (eds.) Labor Markets in Asia: Issues and Perspectives. New York: Palgrave Macmillan for Asian Development Bank.
World Bank. World Development Indicators Online. Downloaded 20 May 2009.