Saturday, November 15, 2008

How technical change affects the employment levels

This posting is triggered by Ape’s posting. Increasing minimum wages (MW) is considered as the main factor of slowing formal employment growth. But is it true? I’m a bit skeptical to this argument. I do not undermine the impact of MW on formal sector employment, but just question its magnitude. Based on my research on textile industry (labor-intensive industry), I found how technical change also contributes to decelerating employment growth in the formal sector. Here is the excerpt

…fiber industry and spinning industry are characterized as relatively capital-intensive industry. On the other hand, the apparel industry and footwear industry are classified as labor-intensive industry. This category is reflected by the figure X. The capital intensity of textiles industry (left-axis) is far above the capital intensity of apparel and footwear industry (right-axis). However, several trends are worth pointing. First the 1998 economic crisis has brought a significant change in the factor intensity. In three sub sectors, the capital intensity increased dramatically in the crisis period. The main driver was because the crisis led to a surging capital price and massive-scale of job dismissal (i.e. compositional change).

Figure x. Capital Intensity in Textile, Apparel and Footwear industrycalculated from statistical industry
green: textile; red:apparel and black: footwear

..Nevertheless the capital intensity of textile industry returned back to the pre-crisis level with the economic recovery. This trend, surprisingly, did not occurred in apparel and footwear industry. The capital intensity in apparel and footwear industry continued to grow. It is obvious that apparel and footwear industry would not change dramatically into capital-intensive industry. Yet the increase brings a notable consequence to job creation. Moreover, the increase in the capital intensity of apparel and footwear industry has decelerated employment creation in these sectors. In sum, a rising capital intensity occurring in 1995 has been followed by slowing employment growth in the apparel and footwear industry (discussed in the Chapter on Labour). This suggests that there has been a strong substitute from labor to capital in the TCF industry…”

In other words, slowing employment growth in textile industry already took place before the crisis and, surely, before the rapid increase in MW. I’m thinking that perhaps other labour regulations affecting much employment growth instead of MW.


5 comments:

Assume Nothing - Question Everything said...

It is possible that there is no conflict between yours and AP view. Both increase in productivity and increase in wage reduced L demand.

Let consider CES Labor demand:

L=[(1-a)^s]/[A^(1-s)]*(p/w)^s*Q
in growth term
Lg=-(1-s)*Ag+s*pg-s*wg+Qg

suppose before the crisis wg~0, then negative Lg is explained by Ag, more than by wg

suppose that during and after the crisis wg>>0, and Ag is smaller then the negative Lg is explained more by wg rather then Ag.

It is an empirical question. But my intuition sides with AP's view. No new capital investment in textile after the crisis, then Ag~0, while wg increased considerably.

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