This paper investigates the presence of a causal relationship between employment levels and key macroeconomic variables in Romania during the period 1990–2005. It shows how macroeconomic policies may be useful in achieving high employment levels, as well as how it might generate adverse outcomes. Starting from a macroeconomic model of labour market I present the effects of the macroeconomic policy measures to the labour market. I think that a low unemployment rate and rapid productivity growth are the hallmarks of a successful economy and thus top priorities of economic policy.macroeconomic policies, employment, economic growth.

Bocean Claudiu

Mimi Petrisan

English

Research Papers in Economics

 
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Management – Marketing - Tourism 
LINKS BETWEEN MACROECONOMIC KEY VARIABLES AND EMPLOYMENT LEVELS IN 
ROMANIA 
Assist. Ph.D Student Bocean Claudiu 
Ph.D Student Mimi Petri an 
University of Craiova 
Faculty of Economics and Business 
Administration 
Craiova, Romania 
 Abstract: This paper investigates the presence of a causal relationship 
between employment levels and key macroeconomic variables in Romania 
during the period 1990–2005. It shows how macroeconomic policies may 
be useful in achieving high employment levels, as well as how it might 
generate adverse outcomes. Starting from a macroeconomic model of 
labour market I present the effects of the macroeconomic policy measures 
to the labour market. I think that a low unemployment rate and rapid 
productivity growth are the hallmarks of a successful economy and thus 
top priorities of economic policy. 
Keywords: macroeconomic policies, employment, economic growth. 
1. Introduction 
Macroeconomic policy making over the past two decades has been 
overwhelmingly guided by the objective of attaining and maintaining macroeconomic 
stability, defined largely by strict adherence to rather conservative levels of inflation, 
budget and current account deficits. The imposition of stabilization programs coincided 
with further policy compulsions toward greater trade liberalization, market deregulation 
and privatization, and a roll-back of the role of the state. 
Bhaduri (2005) posits the need for an “alternative set of macroeconomic 
policies”, in which an appropriately designed and executed employment strategy would 
constitute the core consideration. He argues that such a policy regime would be guided 
by two broad principles: first, relatively higher emphasis needs to be given on 
internal/domestic market; and second, considerations of labour market flexibility and 
growth of labour productivity need to be weighed alongside considerations of the level 
of employment. Higher employment would allow maintaining a relatively higher 
domestic demand, and reducing the need for government interventions in extending 
subsidies, income transfers and unemployment benefits. Within the above 
considerations, the paper provides the basic ingredients of an employment-friendly 
macroeconomic policy framework. 
Blanchard and Wolfers (2000) concentrate on the combined role played by 
institutions and macroeconomic conditions. They identify a set of macroeconomic 
variables that could have played a role in the explanation of European unemployment. 
These are the decline in total factor productivity growth, the real interest rate and the 
adverse shifts in labour demand.  
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In this paper I use macro data from the “Romanian Labour Force Survey” and 
“Employment in Europe 2005 - Recent Trends and Prospects” to analyze the effect of 
macroeconomic policies on the Romanian labour market. 
The paper is set up as follows. Section 2 provides stylized facts about the 
labour market evolution in Romania. Section 3 reports the effects of the 
macroeconomic policy measures to the labour market. Section 4 gives final remarks. 
2. The evolution of labour market in Romania 
Apart from difficulties and delays during the 16 years of transition, Romania 
has, to a large extent, undertaken reform in all spheres: economically, politically, and 
socially. While the first 10 years were characterized by the restructuring of the 
economy (accelerated in 1997-1999), which suffered several crisis periods, a re-
launching process was started in 2000. Macro-economic equilibrium, budget deficit, 
and the level of inflation have all been improved, along with a better coordination of 
budgetary and monetary policies. Restructuring has been gradually broadened to affect 
sensitive sectors and the privatization process accelerated considerably and is now more 
advanced. 
Since 2000, the Gross Domestic Product (GDP) has registered a steady growth: 
2.1% in 2000, 5.7% in 2001, 5% in 2002, 4.9% in 2003, 8.3% in 2004, 4.4% in 2005 
and for 2006 the value envisaged is 4.5%. After being at an excessively high level, 
average inflation has been on a constant downward trend: from 45.7% in 2000 to 8.2% 
in 2005 and for 2006 the value envisaged is 6.5%. Although real wage growth has lately 
become more aligned with productivity gains, the authorities are still struggling to 
control the wage bill of public enterprises. Wage developments and formation do not 
sufficiently reflect productivity differentials by skills, occupations and regions and 
therefore do not provide appropriate signals for skills acquisition or for regional and 
occupational mobility. 
The existence of a dual labour market with a rural labour market concentrating 
more than 30 percent of the labour force and characterized by high participation, 
including in the younger and older age groups and very low unemployment (twice as 
low as in urban areas). Agriculture concentrates nearly half of private employment and 
85% of all self-employed. 
The restructuring of the economy has lead to a strong decline in industrial 
employment. Agriculture played a buffer role in absorbing the employment losses while 
due to the low growth and irregular development of the service sector, job growth has 
been negative and the reallocation of employment towards this sector has been 
marginal. 
However, in last for years the development of the private sector has 
concentrated in industry and services. The new private sector has reached a size 
enabling a sustainable growth of employment and compensating for the job losses in the 
public sector. There is an average development of small enterprises, which are the main 
source of job growth - in particular in services - which points to certain confidence in 
the business environment. The implementation of Law 76/2002 on Unemployment 
Insurance and Employment Stimulation contributed to an improvement of employment 
and business environment.  
 The skill level and structure of the labour force is a concern in an immediate 
and medium-term perspective. While the average educational level remains relatively 
low it increases since the mid 1990s; the qualifications held by many workers will not  
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meet the requirements of the new jobs; the participation rate of young people in the 
education system is low at tertiary level, a certain group does not continue beyond 
compulsory education. All these features represent a major challenge given the 
important restructuring ahead and the need to support economic transformation by a 
stronger development of new sectors. 
Employment policy here is seen as widely defined – encompassing human 
resources policies, wages policy, the system of taxes and benefits, and the public 
employment service and its active labour market programs (ALMPs). 
Although the economic growth was preserved for five consecutive years, it did 
not ensure a satisfying level of employment and new jobs creation. In fact, employment 
rates have been on a constant downward trend among people aged 15-64 years, from 
65.4% in 1997 to 57.7% in 2005 (table no. 1). The decrease in this period affected the 
male population to a greater extent, rural and urban populations being affected in 
approximately equal proportions. In 2005 in Romania the level of the employment rate 
stands below the EU-15 average of 64.7% or the EU-25 average of 63.3% and above 
the new member states average of 56%. 
Table no. 1 Employment rate, labour force participation rate and unemployment 
rate  
 2000  2001  2002  2003  2004  2005 
Employment  rate  63 62.4 57.6 57.6 57.9 57.7 
Labour force participation rate  70.9  68.6  64.1  62.3  62.1  61.3 
Unemployment rate  11.2  9  10.2  7.6  6.8  5.8 
Real wage rate  21.3  5.4  0.0  4.8  6.1  3.8 
Real GDP rate  2.1  5.7  5  4.9  8.3  4.4 
Price  deflator  GDP  44.2  37.4 23.4 19.2 15.8 11.8 
 
Source: European Commission for Employment and Social Affairs ”Employment in 
Europe 2005 - Recent Trends and Prospects” and www.anofm.ro 
 
According to the National Accounts data, employment in agriculture, forestry 
and fisheries still represents the bulk of total employment, with 31.2% in 2005, albeit 
falling from its all-transition period peak of 41.4% in 2000. The population employed in 
the tertiary sector (services, trade, banks, insurance, tourism, telecommunications, etc.) 
has been increasing and now accounts for 36.7% of total employment. 
Industrial employment has witnessed its sharpest fall since 2000. In 2005, 
employment in industry and construction represented 32.1% of the total.  
Large areas of subsistence economy still remain and to a certain extent prevail 
throughout the country. High shares of both subsistence agricultural employment and 
dwindling industrial employment point to the fact that further efforts are necessary to 
improve the investment climate, to put in place growth enhancing framework 
conditions, as well as upgrading of skills to match the needs of the labour demand and 
revision of the Labour Code. Thus generating more attractive jobs and driving the 
working age population out of subsistence employment and inactivity (estimates are of  
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1 million people employed by the informal economy, plus 4 million in subsistence 
farming). 
The high rates of idleness in the economically active age category, the great 
number of people working in subsistence farming (estimated at 4 million people) and 
migration of labour (estimated at 2 million people) are occurrences that could account 
for the decrease in the number of people earning wages, without any corresponding 
growth in unemployment rates. A factor partly mitigating the effect of lay-offs from 
state-owned businesses was the development of private sector employment. 
In accordance to the National Accounts data, unemployment rate decreased to 
5.8% in 2005, compared with 6.8% the previous year. As a result, while the official 
unemployment rate will continue to remain low for a while, attention has to be paid to 
increasing the labour force participation rate for the working age population. 
Unemployment has affected first and foremost workers, due to the industrial 
decline, where a large number of people were made redundant following the 
restructuring process, accounting for 73.8% in 2005 of the total number of registered 
unemployed persons. 
Long-term unemployment (one year and over) saw an increase from 3.2% in 
2001 to 4.2% in 2005. While overall unemployment is falling, long-term 
unemployment is constantly rising, thus forming a hard core mass of long-term 
unemployed towards which the ALMPs have to be focused during the coming years.  
The labour force participation rate decreased from 64.8% in 1996 to 57.7% in 
2005. The constant decrease in the relative size of the economically active population 
reflected structural pressure of the economy suffering radical transformations. Strategy 
errors sometimes have been added and played the role of easing this enormous pressure, 
as in the case of the early retirement wave. Despite some indications that early 
retirement may slow down (in 2005 the phenomenon was at 51.4% from its 2001 level) 
at least in certain sectors, the prospects are not clear, and a close monitoring is needed, 
in order to better assess the impact of early retirement on the activity rate and the 
sustainability of the pensions system placed under control only in the last years. 
The ageing of population and increasing inactivity rate generate an increase in 
the economic old age dependency rate. While in 1990 there were 3.4 employees for 1 
pensioner, in 2005 the ratio was 0.7 employees for 1 pensioner. 
The main causes of these evolutions were: the general economic decline with 
the reduction of total output, the failure of macro stabilization policies and the delay of 
privatization, the reduction of investment and the restructuration of nonrentable 
economic agents, the low mobility of labour force in territory, the constraints associated 
with the international environment.  
The evolution of labour resources in Romania were influenced, in the last 
decade, also by demographic and social phenomena such as: the decrease in the fertility 
and a high level of mortality, the growing number of emigrants, the reduction of quality 
of medical services. These lead to increases of the population aging more than 60 and to 
high level of rural dependency, especially in the rural areas. 
3. The impact of key macroeconomic variables on employment level 
In an open economy I consider that key macroeconomic variables may affect 
employment through at least five channels. To catalogue these effects consider a simple 
labour market model with a downward-sloped and an upward-sloped labour demand, 
while labour supply is constant (figure no. 1).  
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Employment 
Real wage 
1 = higher productivity 
rate; 
2 = output demand 
shock; 
3 = output supply 
shock; 
4 = import price shocks 
or tax increases; 
5 = better vacancy/ 
jobseeker matching. 
Labor supply  Labor demand 
1,2,5
3,4
 
Figure no. 1 The labour demand effects 
 
First, a rise in productivity trend entails a fall off in employment on short-term. 
But it is not possible to detect an effect of productivity growth on aggregate 
employment in long-term data. Old jobs lost in declining industries (because of 
productivity growth) are compensated with new jobs which are created in the 
expanding sectors of the economy. In their study Barnes, Johnson, Kulys and Hook 
show that productivity growth does not appear to be associated with a fall in 
employment at the aggregate level, and can contribute to employment growth. 
Productivity growth can mean doing more with fewer people in some industries, but 
growth in output and incomes made possible by productivity improvements creates jobs 
throughout the economy. 
Second, an “output demand shock”, associated with a rise in money stock, will 
shift output demand curve outwards and thus raise both inflation and employment.  
Third, by contrast, an “output supply shock”, associated with a rise in 
unemployment, will also raise inflation but will reduce employment. 
Fourth, when external shocks like import price shocks or tax increases reduce the 
feasible growth of real consumption wages; this generates more wage pressure, which 
requires more unemployment to offset it.  
Fifth, a more efficient matching between job vacancies and unemployed 
workers (labour market institutions effects) generates a rise in employment.  The 
resulting smaller ratio between vacancies and unemployment reduces wage pressure, 
which, because vacancies are costly to employers, provides an outward shift in labour 
demand. (Estevão, 2003). 
4. Conclusion 
Romania is characterized by the existence of a dual labour market with 
agriculture and migration playing a buffer role for the employment losses in the 
restructuring process of the industry. During 2000-2005, Romanian labour market had a 
contradictory evolution. Occupied population (labour market demand) and labour force 
(labour market supply) have been decreasing in recent years indicating that economic  
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growth did not yet have positive effects on employment. However the unemployment 
rate decreased to 5.8% in 2005 thanks to a positive equilibrium between labour market 
demand and supply. Temporary and permanent migration is another element to take 
into account. Labour productivity exceeded real wage trend generating a plus of labour 
demand. ALMPs exerted a positive effect to labour market demand concurring to 
unemployment fall. 
This paper emphasizes the effects of key macroeconomic variables on 
employment levels and unemployment dynamics, unifying framework and seeks to 
understand which policies drive to a general welfare state. Domestic demand-led 
expansion is the cornerstone of the employment strategy. This means placing due 
emphasis on the domestic market, instead of being too preoccupied with 
competitiveness in the external market. A crucial component of this approach is not to 
separate the objectives of growth in productivity, and in employment. This separation 
typically happens, because productivity growth is considered only as an instrument for 
enhancing competitiveness, while it is forgotten that higher productivity together with 
higher employment makes more goods and services available for the domestic market.  
Increasing the labour productivity can be achieved by the following measures: 
acting against the black labour market, initiation of some actions that will lead to a 
reduction of new jobs creation; trying to equalize the offer and the demand on the 
labour market by stimulating the in-training formation, taking into account the effects 
of the information society, stimulating the companies to apply the new technologies and 
new forms of management. 
Neglecting the links between employment, productivity and output growth 
within the Romanian economy can lead to fail to deal effectively with unemployment, 
low productivity and income inequality, and so will preserve the poverty for a large part 
of population. 
REFERENCES  
1.  Barnes, P. 
Johnson, R 
Kulys, A. 
Hook, S. 
Productivity and the Structure of Employment, Productivity 
Commission Staff Research Paper, AusInfo, Canberra, 1999 
2.  Bhaduri, A.  Macroeconomic policies for higher employment, in the era 
of globalization, Employment Strategy Papers, 11,   
Employment Strategy Department, World Bank, 2005 
3.  Blanchard, O.   
Wolfers, J. 
The Role of Shocks and Institutions in the Rise of European 
Unemployment: the Aggregate Evidence, The Economic 
Journal, 462, 2000 
4.  Estevão, M.  Do Active Labour Market Policies Increase Employment?, 
IMF Working Paper, 03/234, 2003 
5.  Landmann, O  Employment, productivity and output growth, Employment 
Strategy Papers, 17, Washington DC, The World Bank, 
2004 
 

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