Growth and Employment in Developing Countries: Where Do We Stand?
Enzo Grilli and Giovanni Zanalda
Demand for labour is derived demand. It depends on output. Economic growth, intended simply as the growth of output over time, should increase the demand for labour and thus positively affect employment. Demand for labour should also be affected by movements in factor prices, by technological change, and by the composition of output. There are good reasons to believe that this relationship may vary over time and that, at a certain point in time, it may be considerably different from one country to another, depending on their respective stages of development. The composition of national output does in fact change with the stage of growth of a country, and employment elasticities are quite different from one sector to another. There are also good reasons to believe that the employment-output nexus can be affected by policies having to do with factor growth, and more generally by the incentives that they provide to firms to use more capital or labour in their production choices. The existence of this relationship has a firm basis in microeconomic theory and is confirmed by broad historical experience in industrial countries.
However, doubts about the capacity of economic growth (or of the process of industrialization within it) to generate employment (or improvements in its quality) have existed and remained widespread. They pertain not only to capital-abundant industrial countries, but also to labour-abundant developing countries ( Friedman and Sullivan 1974; Farooq and Ofosu 1992) where, in the absence of gross distortions in factor prices and of large anti-labour biases in production technology, output growth should normally be strongly employment-generating, particularly in the early stages of economic development.
In this paper we review the growth-employment relationship from the standpoint of economic theory and history. In particular, we analyse and compare the changes that have occurred over the long term in employment____________________