Employment rate and economic growth: The case of transition countries

Abstract

This paper investigates the effects of the employment rate on economic growth during the transition process. We start with the mainstream growth econometrics approach that controls for convergence and, in order to control for heterogeneity of countries in our sample, we control our estimates for transition-specific indicators such as initial conditions (pre-transition history), governance quality, privatisation methods as well as various indicators of institutional development. We use a wide range of model specifications using fixed effects as well as Bayesian averaging to address the problem of model uncertainty in 24 countries during the 1995-2019 period. Contrary to the neoclassical growth model assumptions, we find that the employment rate is one of the most important growth factors even after three decades. Results also indicate that convergence (initial level of development) robustly explains a part of cross-country growth rate differentials, while the effects of the initial conditions (pre-transition history) are robust, but fade out after the first decade. We do not find evidence that physical capital and population growth explain the growth in our sample.