The Greek Labor Union (GSEE) will announce shortly an econometric study stating that employment in Greece will not return to its pre-crisis levels for at least a decade, even if Greece achieves an annual real GDP growth rate of 3.5%. In this post I ‘d like to perform some basic back-of-the-envelope calculations to confirm the above statement.

Let’s assume a Cobb-Douglas production function:

cobb douglas production function

In Greece, the labor share (wage share) has been rather constant at around 54% while the long-run average for Total Factor Productivity (TFP) has been 1.5% (for a technical yet very detailed examination of the production function components in the context of potential output calculation one can look at this paper from the EC). Assuming a 3.5% real GDP growth rate, a constant TFP growth of 1.5% annually and also that capital and labor maintain their shares (which roughly means that they will have equal growth rates), then the growth in employment will be:

dL = (dY – dTFP) / 2 or close to 1%.

The labor input in the production function is measured in hours worked. The long-run average was more than 2100 hours/year while in 2012 the corresponding figure was 2034. The necessary increase to reach the long-run mean is 3.2%, which means that, at least during the first 3 years, employment growth will be minimal. Based on Ameco data, current employment (in persons) is close to 4000 thousands (compared to more than 4600 in 2008) which means that a 1% will translate to roughly 40,000 persons finding a job (after hours worked have returned close to 2100 per year).

It is clear that some basic accounting confirms the labor union findings. The first 5 years of GDP growth will witness only minimal gains in employment (roughly close to 100,000 persons) while at the end of the 10-year period employment will still be less than 2008 figures. Actual unemployment statistics might change more favorably due to a lower 16-64 population, participation rate changes and net migration.