Mejor, Gerard Bartholomew A. Prof.

George Villasis
3E2

Economic Growth and Employment: How Does it Affect Unemployment?

Summary

“I do not believe we can repair the basic fabric of society until people who are
willing to work have work. Work organizes life. It gives structure and discipline to life”.
This statement by the former President Bill Clinton wants us to realize that employment
is an important factor to boost the growth of the economy. From 1999 up to 2009, the
unemployment rate of the Philippines ranged from 6.3- 13.9 percent. In which the highest
rate took place in on the second quarter of 2002 because the Philippines was still
recovering from the Asian Financial Crisis last 1997 and President Erap’s impeachment
due to the most notably “jueteng scandal”. The results showed that unemployment is
being affected by economic growth and employment in an inverse manner; however, the
increase in economic growth may be due to inflation. The negative relationship of the
economic growth and employment in affecting unemployment only suggests that in order
to realize positive growth rates and full employment, the government should prioritize
more in the education and health system in order to improve the quality of human capital,
promote the emergence of SME’s (Small and Medium Enterprises) in order to create
more work and change the “rusting” system of the government that hampers growth in
order to have an economy that is ready for the take- off stage.

Introduction

Unemployment in the recent years has become a major issue in the Philippine’s
status quo in determining whether or not it has a positive economic growth.
Unemployment, as defined in Economics is the number of people, fifteen years and
above who are looking for a job and readily to have a job in the next four weeks.
Blanchard (2006) stated two conditions in becoming unemployed: 1. He or she doesn’t
have a job and 2. He or she or looking for one. Economic growth is defined as a positive
change in the level of production of goods and services by a country over a certain period
of time. It is commonly measured by the growth of its real capita gross domestic product
(GDP). The objective of this study is to determine whether or not unemployment is being
affected by economic growth and employment here in the Philippines. In a study
conducted by Calmfors and Holmlund (2000) in Sweden concluded that a higher rate of
economic growth is accompanied by a decrease in the unemployment. But this can only
be true in the short run because of the one- time rise in the level of output as resource
utilization increases. The researcher used data of GDP, employment rate and
unemployment rate in quarterly basis from 1999 to 2009 from the National Statistical
Coordination Board in order to gather results and show the relationship of the different
variables.

Analysis

Table 1: Results of the Regression Analysis using Unemployment rate as the dependent
variable, GDP and Employment rate as its explanatory variables.
Dependent Variable: UER
Method: Least Squares
Date: 02/03/10 Time: 15:33
Sample(adjusted): 2000:4 2009:4
Included observations: 37 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C 77.08443 10.62226 7.256874 0.0000
GDP(-1) -0.148812 0.278187 -0.534934 0.5971
ER(-1) -0.627851 0.182003 -3.449665 0.0019
GDP(-2) -0.062242 0.277555 -0.224250 0.8243
ER(-2) -0.104633 0.168205 -0.622058 0.5391
GDP(-3) 0.414628 0.294317 1.408778 0.1703
GDP(-4) 0.079029 0.343817 0.229858 0.8199
GDP(-5) -0.696904 0.343975 -2.026030 0.0527
GDP(-6) -0.243868 0.366373 -0.665629 0.5113
GDP(-7) -0.503457 0.345144 -1.458686 0.1562
R-squared 0.693113 Mean dependent var 9.408108
Adjusted R-squared 0.590817 S.D. dependent var 2.144681
S.E. of regression 1.371896 Akaike info criterion 3.695724
Sum squared resid 50.81666 Schwarz criterion 4.131107
Log likelihood -58.37089 F-statistic 6.775587
Durbin-Watson stat 2.054015 Prob(F-statistic) 0.000049

Findings, Conclusions and Recommendations

Table 1. shows an inverse effect between the dependent variable (unemployment

rate) and the explanatory variables (economic growth measured by real GDP per capita
and the employment rate). The coefficient of determination (R 2) interprets that 69 percent
of the unemployment rate can explain the changes in the economic growth and the
employment rate. The Adjusted R2 on the other hand explains the 59 percent variation of
unemployment can explain the changes in the economic growth and employment rate
given the two explanatory variables and 37 observations.

1. Unemployment and Economic Growth

The table above showed a negative relationship between the unemployment rate
and the GDP growth. It explains that there would be a .69 decrease in the unemployment
rate for every 1 unit increase in the GDP growth. But it can only be true if the rise of GDP
growth is fast or should be at least two percent or higher or else, unemployment will just
keep on increasing, according to economists like *1Peter Morici (2009) in the Smith
School of Business. This increase in the economic growth may somehow be invalid if the
increase in the real capita GDP is a result of inflation. Inflation as defined by Blanchard
(2006) is the sustained rise in the general price level in the economy, its rate of increase is
the inflation rate. For example, the first quarter GDP per capita in 2001 is at -0.6 percent
at its second quarter it rose to 1.4 percent (a 43% increase), but its unemployment rate
rose from 11.3 to 13.3 (a whopping 85% increase), if the general price level increased
let’s say from 10 pesos to 15 pesos, it can be concluded that the result of the economic
growth is because of the inflation.
In order to slowly diminish this phenomena, one way is by promoting the
existence of the Small and Medium Enterprises (SME’s). Leano(2006) noted that SME’s
play an important role to the economic growth here in the Philippines. She said that 99.6
1*
Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former Chief
Economist at the United States International Trade Commission.
percent of the businesses registered in the country are SMEs and they employ 69.9
percent of the total labor force and, most importantly, SMEs account for the 32 percent of
the gross domestic product of the country. Plantersbank chairman and 2009 Entrepreneur
of the Year Ambassador Jesus P. Tambunting quoted “Our recovery should not be
dependent on markets abroad and foreign investments…” Ambassador Tambunting is
trying to point out to us especially to the government that because the country has already
a huge population, it can already be a huge market for employment. Some examples of
SMEs are the Northlandia Enterprises, a wood furniture manufacturer in Isabela and the
CARCAR United Footwear’s Manufacturers’ Association (CUFMAI). Northlandia,
which was managed by Paulino Tan started out at 100,000 pesos to be established in
1990, now, its assets are about 17, 000,000 pesos and currently employing 150 workers.
CUFMAI, on the other hand, has been awarded by President Arroyo’s “One Town, One
Product. One Million Peso” program which gave them the opportunity to have a technical
assistance, marketing assistance, training and entrepreneurship programmes as well as
additional financial assistance. Out of these examples, it is clearly evident the emergence
of SMEs had been a huge help in the growth of the economy, not only that, it also
diminished the unemployment rate in the Philippines in which many had been benefited.

2. Unemployment and Employment

It is clearly evident that there is also a negative relationship between

unemployment and employment. By adjusting the number of observations for the
employment rate, results show that there is a .63 decrease in unemployment rate for every
1 percent increase in the employment rate holding GDP as constant. However, as shown
in the table, it is not automatic that unemployment rate will decrease as employment
increase in the same level. How is it so? In the study made by Walterskirchen (1999) in
Vienna, he found out that this is not possible because as employment increases it will not
only attract domestic labor but foreign labor as well; hence, the rate of change in the
unemployment is different than that of the employment. However in the Philippines, as
unemployment increases, workers are forced to migrate in other countries as overseas
workers in order to have a job. This change in employment increase will not be reflected
in the GDP growth rate instead it will be reflected in the gross national product (GNP).
In order to minimize this dilemma, it is a must that the government should
prioritize more in the betterment of the education and health system here in the
Philippines. Ogena (2008) said that as the population increase of the Philippines
worsens, it would be crucial to sustain the production of “quality” human capital to be
made available for work. Additional conducive classrooms, more useful books and ample
supply of teachers, these are just some of what the education sector had been clamoring
in order to improve the education system. The health system on the other hand needs
sufficient budget in order to have new and advanced facilities to be made use by
government hospitals in treating diseases. It is just too bad that we’ve been hearing issues
about some educational tools being left unused or even medicines getting spoiled and
medical breakthroughs unfinished because the government didn’t supported the project
whole- heartedly. It is very important that these claims should be given an appropriate
resolution in order to strengthen and to improve the production of “quality” human
capital in our country.

Bibliography:
Blanchard. O. (2006). “Introduction to Macroeconomics” (4th Ed.). Singapore: Pearson
Education South Asia Pte Ltd.
Ogena, N. (2008). “Human Capital Projections for the Philippines: Issues and Challenges
for the 21st Century”. Philippine Population Review, Vol. 7, no. 1.
Leano, R. (2006). “ SMEs in the Philippines”. Confederation of Asia- Pacific Chambers
of Commerce and Industry Journal, Vol. 1.
Calmfors, L. and Holmlund, B. (2000). “Unemployment and Economic Growth: a partial
survey.” Swedish Economic Policy Review, Vol. 7, pp. 107- 153.
Walterskirchen, E. (1999). “The Relationship between Growth, Employment and
Unemployment in the EU”, Austrian Institute of Economic Research.
http://useconomy.about.com/od/supply/f/unemploy_define.htm, Retrieved January 31,
2010
http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis, Retrieved January 31, 2010.
http://blogs.reuters.com/great-debate/2009/12/03/unemployment-to-stay-above-10-
percent-in-2010/, Retrieved February 3, 2010.

Data Source:
National Statistical Coordination Board