Employment and Productivity: Exploring the Trade-off

The prospect of a trade-off between employment growth and productivity growth may create uncertainty among policy makers who strive to create jobs, and at the same time, seek to improve productivity. This article re-visits the issue. It shows that employment growth may be negatively correlated with productivity growth at the industry level. But this is not a trade-off. It is an outcome of market forces in reallocating production resources to rebalance changes in demand and supply conditions of different industries within an economy. At the aggregate level, employment growth may also be negatively correlated with labour productivity growth through its negative influence on capital intensity and labour quality. But, after controlling for those input factors, this article finds that employment growth does not negatively affect multifactor productivity growth.