The relationship between total factor productivity growth and employment: some evidence from a sample of European Regions

Abstract

This paper provides a structural estimation of an equilibrium matching model with exogenous productivity growth on a sample of European Regions for the period 1976–2000. Using a three-stage least squares procedure, I estimate a simultaneous equation model for employment, wages and capital stock. The importance of the study of the relationship between growth and employment is due to the fact that the sign of this connection is not clear-cut. Theoretical models imply that the impact of productivity on employment is ambiguous. Furthermore, the empirical contributions are still not so many to reach a strong conclusion on the sign of the relationship above. This paper finds that the impact of productivity growth on employment is negative in the short-run and this effect remains negative even in the long-run. The implication of my results is that all new technology is embodied in new jobs and job creation plays no role in the employment dynamics of the sample I have considered.