Employment-Productivity Trade-off and Labour Composition

This paper formalises the analysis of the employment-productivity trade-off by extending theframework developed by Gordon (1997) to account for labour heterogeneity. The extent of the trade-off isdetermined by the extent of the adjustment of capital to effective labour and by the changes in aggregatelabour quality. The main experiment reported in the paper consists of assessing the labour utilisation andproductivity impacts in OECD countries of aligning group-specific employment rates to the US levels.Matching the US employment performance defined in that sense would enable low-employment OECDcountries to reduce only half of the aggregate employment-rate gap vis-à-vis the United States, the otherhalf being mechanically due to differences in the population structure by age and educational attainment.In this experiment, a 1% gain in employment is associated with a decrease of 0.24% in labour productivityon average across countries, and of 0.35% in low-employment countries.