The effect of the wage productivity gap on unemployment in emerging economies

Abstract

The divergent trend in wage and productivity growth is a major factor in the large disparity between these two, which affects the unemployment rate. In rising economies with large informal sectors, the labour market diversity adds to the widening wage-productivity gap, which over time affects the unemployment rate and the labour supply. In addition, earlier research on the relationship between unemployment and the wage-productivity gap typically focused on the causation of the variables rather than establishing the threshold at which the gap would start to affect the unemployment rate. The present study constructs the wage-productivity gap index which will be used to investigate its threshold effect on unemployment in emerging economies. The analysis involved the cross-section threshold regression method among 47 emerging economies from 2016 to 2018, where the Total Factor Productivity (TFP)/productivity is derived using the DEA Malmquist Productivity Index to generate the wage-productivity gap. The results demonstrate that as the wage-productivity gap widens and exceeds the negative threshold level with stronger productivity growth compared to wage growth, the unemployment rate rises. These results show that to keep the unemployment rate at the most manageable level, emerging economies must reduce the wage-productivity gap within the ideal range or threshold level.