The Employment Impact of Differences in Dmand and Production

decompositions appears to be remarkably close to the average of the full set of decompositions.
In the present case a further significant advantage of using the polar variants is that it allows us
to obtain the decomposition without having to deflate the input-output tables.

As with equation [2], each term in equation [6] is measured in units of FTE employment. The
direct route to implementing the decomposition would be to express each of the contributing
elements of F, B and n in ‘real’ (constant price) terms. We propose a novel strategy to achieve
the same result without explicit deflation. We first note that the employment generated in
equation [2] is not affected by the price basis used in measuring F and X; as a ‘real’ outcome
employment is determined by ‘real’ final and intermediate demands (see Appendix 3). This can
be extended to the polar decompositions of equation [6]. The characteristic of the polar
decompositions is that two of the three terms within each variant contain only a single price
unit. In polar variants [A] and [B] in Appendix 4 these are the first and third terms. In [A] in the
first term B and F are both in 1990 prices while in the third term B and n are both in 1970
prices. By measuring ∆n in 1990 prices and ∆F in 1970 prices we obtain measures of their
contribution to employment change in [A] which are independent of the price base. Since ∆N
on the left-hand side is also in FTE units and the decomposition is exact the problematic term in
∆B can be derived as residual. The decomposition is now effectively at constant prices (price-
free) and can be used to quantify the relative contributions of demand, production structures
and labour productivity to employment growth.

The sources of employment change in each of the six economies over the period from the late
1970s to later 1990s as revealed through these decompositions are shown in Figure 10a in
terms of employment FTEs, and as percentage contributions in Figure 10b. The backdrop is the
diverse record of employment growth across the six countries - an average annual increase of
2.03% in the US, the Netherlands as the best of the European economies at 1.3%, the UK and
Spain with positive but rather small growth rates of 0.13% and 0.61% respectively, while in
France employment declined by 0.14% per year on average; the increase in Germany, equivalent
to an average annual growth rate of 2.53%, combines employment growth in the old West with
the inclusion of the former East Germany, which added around 10% to total employment in the
1990s.

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