Examining the Relationship between Employment and Economic Growth in the Ten Largest States

In this paper, we examine the relationship between economic growth, as measured by both real GDP and the output gap, and employment in the ten largest states from 1990 to 2003. Models are developed to estimate the employment intensity of economic growth as well as the timing of the relationship between employment and economic growth. Employment intensity is estimated to range from 0.31 to 0.61 in specific states with an estimate of 0.47 for the US as a whole. Also, results indicate that though economic growth has some immediate impact on employment, its effects continue for several quarters in most of the states considered. INTRODUCTION During the early stages of the most recent economic recovery, there has been much discussion regarding the relationship between economic growth and employment. Though the unemployment rate is considered by many to be a lagging indicator, there is some disagreement as to whether employment itself is a coincident or lagging economic indicator. For example, in the early 1990s, the unemployment rate increased for about a year following the end of the previous recession. Coming out of a recession, companies are thought to be reluctant to hire many more workers until they are convinced about the sustainability of a new economic recovery while people who had left the labor force during the recession return to seek to find jobs. According to the National Bureau of Economic Research, the US economy began its current economic recovery in December 2001. However, rather than experiencing employment growth, not only did the unemployment rate increase but the number of new jobs created in the economy actually declined significantly during the first year of the recovery. A variety of explanations are possible. Perhaps the recovery was uneven and the growing sectors of the economy increased labor utilization rather than increase the number of jobs. Another possibility is that companies employed new technologies, resulting in increased productivity instead of job creation. In this paper, we examine the relationship between economic growth, as measured by both real GDP and the output gap, and employment in the ten largest states. A review of the existing literature on the topic is undertaken to provide both the underpinnings of the relationship as well as the context for the current research. Both the employment intensity of economic growth and the persistence of employment growth are estimated. Next, the timing of the relationship is assessed – Southwestern Economic Review 14 in other words, is there a lag between economic growth and employment growth and, if so, how long is the lag? The period of this study begins at the start of the last recession in 1990 and ends in the second quarter of 2003. The statistical properties of each variable (employment and GDP growth) are examined. Next, empirical models are developed to estimate the employment intensity of economic growth as well as the timing of the relationship between employment and economic growth. Both models are estimated employing SUR (for the state-specific models) and fixed-effects techniques (for the pooled regression). Employment intensity (the elasticity of employment with respect to real GDP) is estimated to range from 0.31 to 0.61 in specific states while the results from the pooled regression yielded an estimate of 0.47. Also, results indicate that though economic growth has some immediate impact on employment, there is a lag with the effects taking several quarters to be fully felt in most of the states considered. REVIEW OF THE LITERATURE Several authors have estimated employment elasticities (a measure of the relationship between employment and economic growth) for a variety of nations. Boltho and Glyn (1995) found elasticities of employment with respect to output growth in the order of 0.5 to 0.6 for a set of OECD countries. An International Labour Organization Report (1996) concluded that the responsiveness of employment growth to GDP growth has not declined in industrialized countries as a whole. However, a country-by-country analysis revealed mixed results with little relationship found in Germany, Italy and the UK in the 1990s, thus implying a jobless recovery. Padalino and Vivarelli (1997) found significant differences in employment elasticities between different countries, with an elasticity of approximately 0.5 for the United States and Canada while elasticities for Japan, France, Germany, Italy and the UK were close to zero. Pini (1997) estimated that the employment elasticities in Germany and Japan rose between the period 1979-95 compared to 1960-79 while it declined in France and Sweden and showed little change in Italy, UK and US. He also detected negative employment elasticities in Italy and Sweden for the period 1990-95. Pianta, Evangelista and Perani (1996) discovered evidence suggesting that restructuring of major economic sectors reduce the relationship between economic growth and employment. Among the G7 countries studied (Canada was excluded), a positive and significant relationship between growth in value added and employment was found only in Germany and the US. Walterskirchen (1999) found employment elasticities for the EU of 0.65 when employing a cross-country analysis of EU countries from 1988-98. Using data from 1970-98 for 7 countries plus the EU as a whole, employment elasticities ranged from 0.24 for Austria to 0.76 for Spain (the elasticitity for the US was 0.53). Though some work has been conducted applying this technique to multinational studies, it has yet to be utilized in the examination of state-level data. Results of such an analysis should provide insight into the differences in the behavior of state labor markets as well as increased understanding as to why employment in diverse states may respond differently to changes in economic growth. Examining the Relationship Between Employment and Economic Growth in the Ten Largest States 15 DESCRIPTIVE STATISTICS Seasonally-adjusted, quarterly state employment data were obtained from the Bureau of Labor Statistics while data on quarterly real GDP were obtained from the Bureau of Economic Analysis. As can be seen in table 1, the nation and respective states exhibited different patterns of employment growth during the study period. The US had a mean quarterly employment growth rate of 0.33% with a median somewhat higher at 0.46%. States with average employment growth rates exceeding the nation include Florida, Georgia and Texas while the other states experienced sub par employment growth (NY’s employment growth rate averaged close to zero). Most of the states had higher standard deviations of employment growth than that of the nation with the exception of Pennsylvania. This was likely due to the national economy being more diversified than that of the respective states. Georgia and Michigan had the highest standard deviations, in excess of 0.6% per quarter. Both the mean and median economic growth rates were 0.68% while the change in the output gap (percent difference between real GDP and potential real GDP) averaged out to be small and negative. TABLE 1 DESCRIPTIVE STATISTICS Mean Median Standard Deviation Economic growth 0.68 0.68 0.57 Change in output gap -0.06 -0.10 0.51 Employment Growth: California 0.28 0.37 0.53 Florida 0.57 0.66 0.51 Georgia 0.51 0.68 0.62 Illinois 0.19 0.32 0.46 Michigan 0.22 0.38 0.65 New Jersey 0.16 0.25 0.56 New York 0.03 0.10 0.54