High Low Employment

Studies on employment elasticity are not only useful to understand structure unbalance in China’s economy, for example, under-urbanized and over-industrialized economy, economy growth relying excessively on investment and export, the persistently declining share of labour income in gross income, but also help to explain the misallocation of resources in China.Since its reform and opening-up, China has experienced a remarkably decline of employment elasticity, which is much smaller than other developing countries that are on the same phase with China. Some papers attribute this strange decline to institution transition, changing industry structure and technique progress in China’s economy, but these explanations are not so convincing that we can get a conclusion.In this paper, we attribute the low job creation to government interventions in China’s rapidly growing economy. Based on the city-level data, we find that foreign direct investment can substantially improve the employment elasticity, but the government interventions impair the ability of job creation of FDI. Moreover, employment elasticity would confront a fall of0.089if the ratio between the productive provincial government basic construction expenditure and GDP increase by1%. On condition that the ratio between government expenditure (especially basic construction expenditure) and GDP persistently increase in the future, the employment elasticity would persistently decline.