The Employment Impact of Differences in Dmand and Production

These three alternative final demand vectors are then combined with the US Leontief inverse
and the US labour coefficient matrix to obtain a counterfactual estimate of the US employment
under the alternative final demand mixes.

We use the transformation of the final demand vector described above for two sets of
exercises. First we investigate how the evolution of demand patterns within each country has
influenced its employment outcomes. The simulations for this involve the introduction, in the
three steps outlined above, of the country’s final demand mix of the late 1970s into its vector of
final demands in the late 1990s. This is carried out, within each country, at both current and
constant prices. The results are reported below. The second set of simulations, reported in the
next Section, exploits the cross-country variation in the final demand mix. Again the final
demand vectors are transformed stepwise, with the country’s own demand pattern replaced by
the successive dimensions of demand in the comparator country. It should be emphasized that in
both sets of exercises only the demand patterns change; the countries’ own production
structures (Leontief inverse) and employment coefficients of the late 1990s are retained
throughout.

Table 5 shows the results of the time-series exercise for each country. The ‘Total’ column of the
left panel in Table 5 can be interpreted as the difference that would have emerged in the
employment level of the late 1990s had the final demand mix remained as it was in the late
1970s. A positive figure implies that employment would have been higher i.e. that changes in the
demand mix have not been employment-friendly. ⁸

See Table 5

For the European economies the changes in the final demand mix over the period have been
employment-friendly (i.e. the demand mix of the late 1970s would give lower employment than

In these and the further counterfactual simulations below it is assumed that the supply of all inputs, capital and all
types of labour is elastic so that any increase in demand can be accommodated by the existing technology. The
presence of bottlenecks and of frictions that could hamper the smooth flow of resources between industries is
also ruled out.

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