Labour Inputs in Stages of Economic Development Page 1

Labour Inputs in Stages of Economic Development – Trends Revealed in the Data of

Jorgenson and Vu

By John Ross 22 August 2010

Summary

An earlier article (Ross, 2010 August) analysed trends in the contribution of capital
investment to GDP growth in the database published by Jorgenson and Vu of growth
accounting data for economies compromising more than 95% of world GDP. (Jorgenson &
Vu, 'Information technology and the world growth resurgence - updated tables', 2007b)
Jorgenson and Vu themselves drew attention to two trends:

 Factor inputs of capital and labour greatly predominate over total factor productivity
[TFP] in percentage contribution to international GDP growth.
 The increasing role played by capital investment in information technology (IT).

Analysis of this database by the present author showed another trend. (Ross, 2010 August)

 Developed economies have a capital-intensive path of growth compared to

developing economies – i.e. the percentage contribution of capital investment to
GDP growth is higher in developed than developing economies. The East Asian/Asian
developing economies are an intermediate group - the percentage contribution to
GDP growth of capital investment in these economies is greater than in the majority
of developing economies but less than in developed economies.

This previous article looked only at investment in capital. It did not examine improvements
in labour quality, which typically requires investment in human capital. This was because the
percentage contribution to GDP growth of investment in physical capital in developed
economies considerably exceeds that of improvements in labour quality and, for clarity, it
was therefore helpful to concentrate on the primary trend.

It is, however, also revealing to analyse the combined contribution of physical capital and
improvements in labour quality – in particular given this has direct practical implications.
Investment in physical capital and improvements in labour quality require
expenditure/investment – the latter in education, training etc. Taking capital investment
and improvements in labour quality together, therefore, gives an indicator of the different
patterns of such expenditure and investment in economies at different stages of
development.
 Labour Inputs in Stages of Economic Development Page 2

The present article therefore supplements the previous one by analysing the contribution of
labour inputs in different economy groups.

It should be pointed out that while this paper utilises calculations based on data produced
by Jorgenson and Vu they do not bear responsibility for conclusions drawn in the present
article.

Capital-intensive and labour-intensive patterns of growth

The basic data for the present analysis is set out in Table 1 and Table 2. These show the
percentage contribution to GDP growth of capital, labour and TFP, and of labour hours and
labour quality, in economy groups for the periods 1995-2000, 1995-2000, and 2000-2006 as
calculated from the data set out by Jorgenson and Vu (Jorgenson & Vu, 'Information
technology and the world growth resurgence - updated tables', 2007b). The pattern of the
contribution of capital investment to GDP growth in the different economy groups was
already analysed in the previous article and is therefore merely summarised here.1 If the
non-generally applicable case of East European economies, experiencing transition from
Communism to capitalism, is left aside the patterns of growth of economies fall into two
large groups according to their stage of economic development.

 The first are developed economies – the G7 and the 15 additional non-G7 developed
economies. In the developed economies the percentage contribution to GDP growth
of capital inputs exceeds the contribution of either labour or TFP in all periods – i.e.
developed economies display capital-intensive growth.
 The second group are the majority of developing economies - in Sub-Saharan Africa,
Latin America, the Middle East and North Africa. In these, with only one exception,
Sub-Saharan Africa in 2000-2006, the percentage contribution of labour inputs
exceeded the contribution of either capital or TFP in all periods – i.e. the majority of
developing economies show labour-intensive growth.2

The Asian developing economies, in particular East Asian developing economies, are
‘intermediate’ between the developed and the majority of developing economies.

1
For more detailed analysis reference should be made to the earlier article.
2
In 2000-2006, a period of notable GDP growth acceleration in Sub-Saharan Africa, these economies moved
closer to the pattern of developed economies in that capital inputs became the greatest percentage
contributor to GDP growth.
 Labour Inputs in Stages of Economic Development Page 3

 In the Asian/East Asian economies the percentage contribution of capital inputs to

GDP growth was larger than in the other developing economy groups in all periods.
However in no period was the percentage contribution of capital inputs to GDP
growth in the Asian/East Asian developing economies as high as in the G7. In two
periods out of three the percentage contribution of capital inputs to GDP growth
was lower in the Asian/East Asian developing economies than in the non-G7
developed economies.

It is notable that neither in the developed economies groups nor in the majority of
developing economies was TFP growth the main percentage contributor to GDP growth.3
This trend in developed and developing economies is of course in line with the overall
conclusion of Jorgenson and Vu: ‘‘We allocate the growth of world output, as measured in
the World Bank’s International Comparison Program, between input growth and
productivity. We find… that input growth greatly predominates. ‘ (Jorgenson & Vu, 2009)

Trends in labour inputs will be analysed in conjunction with this overall framework.

Trends in labour inputs

First labour inputs in the developed economies will be considered in Jorgenson and Vu’s
data and then those in differing groups of developing economies.

i. The Developed Economies

As already noted, both the G7 and the non-G7 groups of developed economies follow a
pattern of capital-intensive growth – i.e. in all periods the contribution of capital inputs to
GDP growth exceeds the contribution of either labour or TFP. However, G7 and non-G7
economies differ in the role played by different forms of labour inputs.

The contribution of increases in labour hours in all periods is smaller in the G7 than in the
non-G7 economies.

In the G7 economies, in two periods out of three, the percentage contribution of labour
quality to GDP growth exceeds that of increase in labour hours, whereas in two periods out
of three in non-G7 developed economies the contribution of labour hours exceed the
contribution of labour quality. That is, the bias in G7 economies within labour inputs is
towards a higher percentage contribution of labour quality than labour hours, whereas in

3
The exception to this, the East European countries undergoing transition from Communism to capitalism, is
analysed in (Ross, 2010 August)
 Labour Inputs in Stages of Economic Development Page 4

the non-G7 economies the bias is towards a higher contribution of labour hours than labour
quality.

There is also a difference between forms of labour input and TFP growth in the G7 and non-
G7 developed economies. In the G7 economies, in two out of three periods, the percentage
contribution of TFP exceeds the total contribution of labour inputs, and in all periods the
percentage contribution of TFP to GDP growth exceeds the contribution of either labour
hours or labour quality considered individually. In contrast, in all periods, in the non-G7
developed economies the contribution of labour inputs exceeds the contribution of TFP
growth.

In short, in both G7 and non-G7 developed economies the predominant contribution to GDP
growth comes from capital inputs. But the pattern of growth in the G7 economies is
predominantly based on ‘capital investment, plus increases in TFP and labour quality’,
whereas in the non-G7 developed economies the pattern of growth is predominantly based
on ‘capital investment, plus increases in labour inputs - in particular increases in labour
hours’.

The dominance of capital inputs and labour quality in the G7 economies may be seen clearly
in Table 1. The combination of capital inputs plus labour quality inputs plays an
overwhelmingly dominant role in the contribution to GDP growth in the G7 economies –
accounting in successive periods for 74.9%, 61.6% and 68.5% of GDP growth.

ii. Developing economies in Sub-Saharan Africa, Latin America, and the Middle East and North
Africa

The dominant role played by labour inputs in GDP growth in the developing economies of
Sub-Saharan Africa, Latin America, and the Middle East and North Africa is shown in that in
all groups and periods except one, Sub-Saharan in 2000-2006, labour inputs exceeds either
the input of capital or the input of TFP to GDP growth.

The contribution of labour inputs to GDP growth exceeds the contribution of TFP in all these
economy groups in all periods .

Within this framework the dominance of increases in labour hours over increases in labour
quality is clear. The percentage contribution of increases in labour hours exceeds the
percentage contribution of increases in labour quality in all three economy groups in all
three periods.
 Labour Inputs in Stages of Economic Development Page 5

The pattern of growth of the majority of developing economies is therefore not only labour-
intensive, but within that framework it is dominated by increases in labour hours rather
than increases in labour quality.

iii. Developing Asian economies

In the developing Asian economies the percentage contribution of capital to GDP growth
exceeds the contribution of labour in all periods. The percentage contribution of TFP also
exceeds that of labour in all periods. In this overall pattern of higher inputs of capital and
TFP than of labour inputs Asian developing economies are closest to the G7 group.

However, the pattern of labour inputs in the developing Asian economies differs markedly
from the G7 economies. In all periods in the developing Asian economies, the percentage
contribution of labour hours exceeds the percentage contribution of labour quality.

The pattern of growth of the Asian developing economies is therefore primarily based on
inputs of capital, TFP and labour hours with a smaller percentage contribution from
improvements in labour quality. If the developing Asian economies resemble the developed
economies in the dominance of capital inputs over labour inputs, nevertheless within labour
inputs the Asian economies resemble developing economies in that increases in labour
hours predominate over increases in labour quality.

The Asian developing economies may therefore be taken as being ‘intermediate’ between
the developing and developed economies in a dual sense.

 In terms of the contribution of capital inputs to GDP growth the Asian developing
economies have clearly moved out of the ranks of developing economies closer to
the capital-intensive pattern of growth in the developed economies - although the
contribution of capital investment to growth in the developing Asian economies has
still not yet reached the level of the developed economies.
 The developing Asian economies, unlike in particular the G7 economies, however
continue to have a pattern of development similar to the majority of developing
economies whereby inputs of labour hours are greater contribution to labour inputs
than increases in labour quality.

Conclusion

These trends may now be summarised.

 Labour Inputs in Stages of Economic Development Page 6

 The fundamental pattern of development whereby developed economies follow a

pattern of capital-intensive growth and developing economies one of labour-
intensive growth has already been noted. (Ross, 2010 August)
 Developing Asian/East Asian economies may be understood as occupying a position
of transition from developing to developed status, with a capital-intensity of
development that is higher than the other groups of developing economies but not
as high as that of the developed economies.

In may, however, be seen from the present analysis that a second trend also occurs within
labour inputs.

 The pattern of GDP growth of the developing economies is not only labour-intensive
but, within that framework, is primarily dominated by increases in labour hours
rather than by increases in labour quality.
 In the G7 group, in contrast, increases in labour inputs are somewhat more
determined by increases in labour quality than by increases in labour hours.
 In the percentage contribution within labour inputs, the Asian/East Asian developing
economies remain closer to developing economies than to the G7 in that the
contribution of labour hours is greater than the contribution of labour quality.
 In terms of labour inputs, the Asian/East Asian developing economies are closer to
the non-G7 developed economies than the G7, in that, unlike the G7, both groups
tend to remain far more dependent on increases in labour hours than increases in
labour quality for labour inputs.

There therefore appears to be a progressive development pattern, in terms of labour inputs,

whereby most developing economies, including in this case Asia, have a larger contribution
of labour hours than labour quality, the non-G7 developing economies retain this
characteristic on a lesser scale, and the G7 economies have the greatest percentage
contribution of increases in labour quality compared to increases in labour hours.

The pattern of economic development shown in the data of Jorgenson and Vu is therefore
of an increase in the percentage contribution of capital to GDP growth compared to labour,
and of an increase of improvements in labour quality compared to labour hours.

* * *

Since this analysis was carried out Jorgenson and Vu have extended their data to 2008.
(Jorgenson & Vu, 2010) The new data does not alter the main trends analysed above. A
detailed analysis from the angle of approach in this article will be published.
 Labour Inputs in Stages of Economic Development Page 7

Bibliography

Jorgenson, D. W., & Vu, K. M. (2009). ‘Growth accounting within the International
Comparison Programme’. The ICP Bulletin , 6 (1).

Jorgenson, D. W., & Vu, K. M. (2007b). 'Information technology and the world growth
resurgence - updated tables'. Retrieved from Dale Jorgenson:
http://www.economics.harvard.edu/faculty/jorgenson/recent_work_jorgenson

Jorgenson, D. W., & Vu, K. M. (2010). Potential growth of the world economy. Journal of
Policy Modeling (doi:10.1016/j.polmod.2010.07.011).

Ross, J. (2010 August, August). 'The Transition From Labour-Intensive to Capital-Intensive

Growth During Economic Development – Trends Revealed in the Data of Jorgenson and Vu'.
Retrieved from Key Trends in Globalisation.
 Labour Inputs in Stages of Economic Development Page 8

Table 1

Annual GDP Growth and % Contribution to GDP Growth

% Contribution to GDP Growth
Annual %
GDP Labour Labour Total
Growth Hours TFP Capital Quality Investment*
Period 1989-1995
G7 2.1 4.3% 20.8% 60.0% 14.9% 74.9%
Non-G7 2.1 9.0% 22.9% 49.9% 18.2% 68.1%
World (122 Economies) 2.3 13.5% 16.3% 54.1% 16.0% 70.2%
Developing Asia 7.5 15.3% 45.1% 32.7% 6.9% 39.6%
Sub-Saharan Africa 1.7 105.5% -69.2% 28.8% 34.9% 63.7%
Latin America 2.8 40.8% 24.5% 20.3% 14.4% 34.7%
N. Africa & M. East 4.0 39.8% 20.3% 24.2% 15.7% 40.0%
Eastern Europe** -6.6 21.3% 78.6% 2.0% -1.9% 0.1%
Period 1995-2000
G7 3.1 18.3% 20.2% 53.4% 8.2% 61.6%
Non-G7 3.6 35.8% 10.6% 46.4% 7.3% 53.7%
World (122 Economies) 3.6 22.0% 23.2% 46.4% 8.4% 54.7%
Developing Asia 5.7 16.4% 27.0% 48.9% 7.7% 56.6%
Sub-Saharan Africa 3.5 44.5% 10.9% 31.0% 13.6% 44.5%
Latin America 3.0 46.6% -0.3% 41.4% 12.3% 53.7%
N. Africa & M. East 4.0 51.8% 2.3% 32.1% 13.8% 45.8%
Eastern Europe 2.1 -16.6% 136.1% -22.0% 2.6% -19.4%
Period 2000-2006
G7 2.1 7.5% 24.0% 56.3% 12.1% 68.5%
Non-G7 2.6 30.4% 1.5% 55.8% 12.3% 68.1%
World (122 Economies) 3.7 16.1% 35.7% 40.7% 7.6% 48.2%
Developing Asia 7.1 14.1% 40.6% 40.0% 5.3% 45.3%
Sub-Saharan Africa 4.6 28.1% 28.8% 37.1% 5.9% 43.1%
Latin America 3.0 47.8% 14.8% 31.1% 6.3% 37.4%
N. Africa & M. East 4.7 40.8% 27.6% 29.4% 2.1% 31.6%
Eastern Europe 5.8 1.4% 88.9% 4.5% 5.2% 9.7%
* Total Investment = capital plus labour quality.
** GDP growth in Eastern Europe in 1989-1995 was negative. The percentages for
capital, labour and TFP in this period therefore express the percentage contributions
to the fall in GDP.
Source: Calculated from Jorgenson and Vu ‘'Information technology and the world
growth resurgence - updated tables'
 Labour Inputs in Stages of Economic Development Page 9

Table 2

GDP Growth and % Contributions to GDP Growth for the Periods 1989-1995, 1995-2000 and 2000-2006
1989-1995 1995-2000 2000-2006
% Contribution to GDP % Contribution to GDP % Contribution to GDP
Growth Growth Growth
GDP GDP GDP
Growth Capital Labour TFP Growth Capital Labour TFP Growth Capital Labour TFP
G7 2.1 60.0% 19.2% 20.8% 3.1 53.4% 26.4% 20.2% 2.1 56.3% 19.7% 24.0%
Non-G7 2.1 49.9% 27.2% 22.9% 3.6 46.4% 43.1% 10.6% 2.6 55.8% 42.7% 1.5%
World (122
Economies) 2.3 54.1% 29.6% 16.3% 3.6 46.4% 30.4% 23.2% 3.7 40.7% 23.6% 35.7%
Developing Asia 7.5 32.7% 22.2% 45.1% 5.7 48.9% 24.1% 27.0% 7.1 40.0% 19.4% 40.6%
Sub-Saharan Africa 1.7 28.8% 140.4% -69.2% 3.5 31.0% 58.1% 10.9% 4.6 37.1% 34.1% 28.8%
Latin America 2.8 20.3% 55.2% 24.5% 3.0 41.4% 58.9% -0.3% 3.0 31.1% 54.1% 14.8%
N. Africa & M. East 4.0 24.2% 55.5% 20.3% 4.0 32.1% 65.6% 2.3% 4.7 29.4% 42.9% 27.6%
Eastern Europe* -6.6 -2.0% -19.4% -78.6% 2.1 -22.0% -14.0% 136.1% 5.8 4.5% 6.6% 88.9%
* GDP growth in Eastern Europe in 1989-1995 was negative. The percentages for capital, labour and TFP in this period therefore
express the percentage contributions to the fall in GDP.
Source: Calculated from (Jorgenson & Vu, 2007b)