Economia Politica. Rivista di teoria e analisi

Non-Technical Summary

Paolo Piacentini and Paolo Pini

Internal Demand and Labour Income: A Note on the Role of "Employment Multiplier" (J.E.L. J23, E12, E24, O33)

in Economia Politica, no.1, 1998


Sommario non tecnico: Paolo Piacentini e Paolo Pini

The persistence of high unemployment levels in the major European countries, and the evidence of a small employment elasticity reflecting in an inadequate reabsorption capacity of the labour supply excess, even in the most favourable phase of the cycle, suggest a reconsideration of the schemes aimed at modelling the determination of aggregate employment balances.

In the eighties, a line of research broadly defined as the one of partial equilibrium analysis in the aggregate labour market has been quite pervasive. We refer, in particular, to schemes which define an equilibrium rate for (un)employment (NAIRU, etc.) through the interactions of "wage equation" and "price equation"emerging on an idealised "real wage-employment" plane, i.e., in a context of partial equilibrium analysis for labour market.

Thus, the approaches which follow are directly inspired by a different sequence where the employment outcomes derive from the dynamic of final demand, its components, productivity growth and income distribution. Indeed, beyond specific hypothesis regarding the microeconomic foundations of labour demand, we believe that these will prove to be of heuristic interest in the rationalisation of the different performances of employment growth in industrialised countries during the recent years.

Specifically, we believe that it is worth resuming and verifying three aspects which should help interpreting the poor employment performance of the European countries:

  • the explicit consideration of the dynamic of demand components, assumed in a Keynesian fashion as the primary source of the determination of employment;

  • the twofold role of wage dynamics, as structural element of the supply costs, on the one hand, and as main factors determining an induced demand component for consumption goods, on the other.

    Thus, we will resume the view according to which the employment is essentially an outcome derived from the final demand and its composition, from the state of technology and from how its changes affect distributive variables through the transfers of productivity gains on real income.

    The approach we follow intends to resume the original version in accordance to which employment essentially derives from final demand, given the state of technology. At the same time final demand itself, through the capability to generate an induced demand out of labour income (given the transferring mechanisms of productivity gains on real wages), interacts with the dynamic of employment level. As in the simple income-expenditure model, in which the exogenous components of demand determine the equilibrium level of income given the multiplier parameters for the induced demand, similarly, it is possible to obtain the employment level "warranted" on the basis of the level and composition of autonomous demand - domestic and external - , and of the technical coefficient of production (summarised by the aggregate product per worker ratio), given real wages and the propensities to consume out of labour income as parameters of the induced component of demand for labour.

    The level of employment warranted in a system is derived from the application of a simple scheme which we have called, following the contributions of Richard Kahn and John Maynard Keynes, the "employment multiplier"Starting from an accounting identity between the values of aggregate supply and demand, a level of warranted employment is derived, given the labour coefficient and the deflated values of final demand. In final demand, autonomous components are distinguished from an induced component, which depends on total labour income. Thus, the variations of aggregate employment for a country can be decomposed into the effects of the contributions of three components:

  • the technological progress as witnessed by the reduction over time of a labour coefficient of output (the inverse of average productivity of labour);

  • growth and composition of autonomous demand;

  • variations of the "multiplier", which summarises the impact of wage share and consumption propensity on induced demand and thus on the level of overall employment.

    On the basis of this framework, we have worked out a quantitative assessment with temporal comparison within a national and international context. The aim has been to rebuild the employment pattern "warranted"on the factors indicated above, with specific timing (cycles and decades) in the period 1960-1996 required in identifying differential behaviours of the relation between employment growth and production growth.

    We present here some of the results obtained for Italy, commenting upon the decomposition of employment pattern for the first part of the nineties, and comparing it with the pattern of the previous decade. Our quantitative approach provides some interesting and original evidence about the effects of the "multiplier"of induced demand on employment dynamics in our country.

    It is worth making clear a background consideration on the basis of the analytical scheme we wanted to keep as elementary as possible. In the interpretation and forecasting of employment patterns, the incidence of the "induced"component of demand, to which the dynamic of real disposable income contributes critically - specifically labour income -, cannot be neglected. Macroeconomic policies and income policies, which, given the necessity to control inflation and to pursue monetary stability and international competitiveness, "freeze" the transfer of productivity gains into disposable income for a major part of the population for a prolonged period, would run the risk of lowering the potential for the demand multiplier, thus dampening the possibility of exploiting the employment elasticity of growth during the recovery. A positive dynamic of autonomous components of demand, in particular of the external demand, does non appear to be capable in itself of supporting the employment level, at least recently, obviously taking into account the labour saving effects provided by productivity increases.

    We think that this message should apply, beyond the specific evidence for the countries examined, to the diagnosis of "employment sclerosis" in the European context and even in a broader scale1. On the basis of the negative evidence for our specific country, the following idea is strongly reinforced: there has been an underestimation of the negative impact of prolonged stagnation in the capability to consume out of labour income for preserving the employment level gained in the past, and in addition an overestimation of the compensation capacity provided by exogenous component of demand, specifically net-exports.


    Note:
    1See Piacentini - Pini (1997), Domanda, produttivitą e dinamica occupazionale: un'analisi per "moltiplicatori" applicata a sette paesi OECD, 1960-1995, in Quaderni del Dipartimento di Scienze Economiche, n.273, N.2, Progetto d'Ateneo, Bologna, Universitą degli Studi di Bologna (available also as pdf file in internet: file pdf).


    PAOLO PIACENTINI is professor of political economy at the Universitą degli Studi di Cagliari, Dipartimento di Ricerche Economiche e Sociali, Viale Fra Ignazio 78, 90123 Cagliari
    piacentini@vaxca1.unica.it

    PAOLO PINI is professor of political economy at the Universitą degli Studi di Ferrara, Facoltą di Economia, e Universitą degli Studi di Bologna, Dipartimento di Scienze Economiche, Strada Maggiore 45, 40125 Bologna
    pini@spbo.unibo.it

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