Deep Dive: Job Creation, Economic Growth, and Policy Reforms: An Empirical Reassessment

By Marcello Estevão, Jorge Thompson Araujo and Daniel Dao

A key element of economic development is the ability of an economy to produce increasing numbers of better and more jobs. This ability likely varies according to country-specific institutions and characteristics. This paper takes a broad view of the determinants of changes in unemployment rate and job creation given changes in aggregate production for a panel of 185 countries from 1990 to 2022. We find that the sensitivity of unemployment to cyclical output variations rises with country income levels. The behavior of labor force participation and informality are shown to be important reasons for such a pattern. Long-run employment growth seems also to be less sensitive to output growth in lower-income countries. Finally, we show that long-run job creation elasticities rise significantly in the presence of more openness to external trade, less restrictive regulations for the (domestic and external) financial sector, greater product market competition, and (less robustly) labor market flexibility. The policy reform agenda for the future is clear.