# **4. Economic growth and employment growth**

In South Asia, like in the rest of the world, politicians and researchers are concerned about job creation, and the kind of economic growth needed to absorb all the new young labor force entrants brought by the demographic transition. We use our dataset to estimate the short-term and long-term relationship between employment and growth to try to address this concern. In doing so, we note an important trade-off.

In the short term, growth can boost employment rates as greater labor demand pulls people out of unemployment and inactivity. Growth can also lead to better jobs, for example when farm employment is replaced by work in factories and offices. In the long term, on the other hand, growth could reduce employment rates. When comparing employment rates across countries with different levels of income per capita, a U-shaped curve emerges. Many of the poorest countries in the world have very high employment rates. In these countries, people start working young, and do not have the means to be unemployed or retired. Not only adult men, but also women, the young and the elderly are part of the labor force. As countries become richer and living standards improve, families can afford to keep their children in school longer, the ill and the disabled can stay home, old-age pension programs are put in place, and women may withdraw from the labor force. But this downward trend reverses at higher levels of income per capita. In richer countries a growing number of youths reach tertiary education, and they are keen to work in the field of their study (Goldin 1994, Mehrotra and Parida 2017). Higher wages, safer transportation and workplaces, and more easily available childcare also bring large numbers of women back into the labor force (World Bank 2018a). In assessing whether growth is jobless or not, it is therefore important to distinguish between the short- and long-run effect of economic growth on employment growth (World Bank 2018a).

Estimating the short-term relationship between economic growth and employment rates has been the subject of a vast literature in advanced economies. This short-term relationship has often been interpreted in connection with Okun’s Law, which posits that when growth accelerates above potential, the unemployment rate falls below its natural level (Lee 2000, Ball et al. 2017). In advanced economies, the consensus is that rapid economic growth reduces unemployment rates in the short term, while slowdowns are associated with increases in unemployment. The literature is much scanter in developing countries, partly due to data limitations. Ball et al. (2016) conclude that the relationship in developing countries is only half as strong as in advanced countries and varies considerably across countries. The weakness of the relationship in these countries is not surprising as many are too poor to afford being idle and unemployment is hence a poor indicator of the situation in the labor market.

Instead of analyzing unemployment, we correlate quarterly economic growth with quarterly changes in employment. Some sources, such as the Sri Lanka LFS, are explicitly designed to generate quarterly data. For other sources, the month of the interview can be relied upon to disaggregate annual data by quarters. This approach can be used for Bangladesh, India and Pakistan. Combining genuine quarterly employment data with constructed breakdowns by quarter, 123 observations on quarterly changes in employment can be generated. As for GDP data, both India and Sri Lanka publish quarterly series, whereas Bangladesh and Pakistan do not. For the latter two countries we used the Denton method to interpolate annual GDP with quarterly industrial production. The Denton method imposes the constraint that the interpolated series adds up to the annual GDP totals.<sup>5</sup>

> 5  The Denton method aims to achieve consistency between time series related to the same target variables but measured at different frequencies (Scholtus 2014).

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