The Employment Impact of Differences in Dmand and Production

6 The Sources of Employment Change in the Vertical
Integrated Sector

The analysis in the Sections above centred on estimating the effects on employment of demand,
both level and mix, taking as given the structure of inter-industry relations and the employment
requirements in each sector. In this Section we bring these further aspects explicitly into the
analysis, extending the decomposition of the sources of employment change to identify and
measure the relative contributions of final demand, changes in the inter-industry linkages, and
labour productivity growth.

Returning to the formulation of employment within the VIS in equation [2] above, differencing
allows us to decompose the change in employment between two periods among the growth of
final demand, changes in the inter-industry linkages, and the growth of labour productivity:

. ʌ - ^λ - ^λ
∆N = n B (∆F) + n(∆B ) F + (∆ n) BF                         [6]

where B = (I - A)^-1 , with ∆B measuring structural change in production relations, and ∆n the
change in within-sector labour requirements per unit of gross output i.e. the reciprocal of
labour productivity measured on a gross output basis.¹¹ It should be noted that ∆F subsumes
the effects both of the changing level and the changing mix of final demand, which we will refer
to simply as the change in final demand.

Since equation [6] differences a three-way product six variants, with differing combinations of
initial and end-year values, are all formally correct (see Appendix 4). We follow Dietzenbacher
and Los (1998) in using the average of the two polar variants, involving initial and end-period
values respectively. Dietzenbacher and Los show, in an extended empirical analysis based on
detailed input-output data for the Netherlands, that the average of the two polar

¹¹ For further discussion of the measurement of labour productivity on this basis see ten Raa and Schettkat (2001).

The problems of measurement affecting productivity in the service industries have been widely examined (Triplett
and Bosworth 2001; Gordon, 1996; Griliches, 1992).

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