Productivity and employment growth: an empirical review of long and medium run evidence : background working paper for the world employment report 2004

This study argues that the creation of productive jobs is the key to economic growth, social development and improvements in living standards. The study provides extensive empirical evidence showing that the long run trend has been towards simultaneous growth in per capita income, productivity and employment growth. However, depending on the type of indicator and the time frame adopted, there are legitimate concerns about the distribution of the productivity and welfare gains from growth both within as well as between countries. Following the analysis of the long term growth pattern (Chapter 2), the study investigates under which conditions, in which regions and which industries a trade-off occurs between productivity and employment growth. In Chapter 3 patterns of employment-productivity trade-offs are established across regions and time periods at the macro level. Chapter 4 focuses on sectors of the economy. In Chapter 5 the study discusses the policy areas that will be most conducive to breaking or reducing the trade-off between productivity growth and employment in order to exploit the long run growth potential. We argue that, in addition to sound macroeconomic policies, a sensible role for market forces in allocating resources to their most productive uses is important. However, the key challenge is to create an institutional environment that can alleviate some of the negative effects in the short and medium run while not hampering the realisation of the long run growth potential. Support to the creation of social capabilities and national innovation systems are important policy areas to achieve this goal. While strengthening an economy’s fundamentals in the short and medium run, these also contribute to the virtuous circle of productivity growth, employment creation and poverty alleviation, which is the main theme of the ILO World Employment Report 2004.