Government Intervention, Capital Deepening And Employment Elasticity:Theory And Empirical Evidence

Since the1990s, China’s GDP has maintained high growth with about8%, but the employment growth has not been driven which making the employment elasticity falling dramatically. The study on employment elasticity shows employment elasticity is lower compared with other Asian countries. Especially in the21st century, the downward trend is more obvious.To explain the phenomenon, this paper constructs a theoretical framework to explain low employment elasticity in our country from the perspective of government intervention which is based on the decentralization management pattern of Chinese style. The core of Chinese style decentralization is the vertical combined closely of the political management system and fiscal decentralization system making the local govenment has the motivation and ability to intervene the economy. From the motive of local government’s behavior, this paper concluded that Chinese decentralization stimulates the local government to develop capital-intensive industries through government intervention. This behavior can make the rapid growth of GDP and tax growth in the short term. Capital-intensive industries’ excessive development will lead to capital deepening. Although capital deepening brings high economic growth, but not as much employment growth, resulting in excessive low employment elasticity. Then according to the theoretical framework this artical proposed three theoretical hypothesis. Hypothesis1is government intervention affects the employment elasticity. Hypothesis2is government intervention affects capital deepening. Hypothesis3is government intervention affects employment elasticity through capital deepening.Useing Chinese provincial panel data and Mr Acemoglu channel identification methods, measuring results show that the way government intervention affect employment elasticity is mainly through capital deepening that confirmed the theoretical hypothesis. Looking from the trend, if the ratio of government spending to GDP continue to rise, employment elasticity will continues to decline affected by government intervention through capital deepening. In order to improve the employment absorption of economic growthm, the policy implications of this article is to change the Chinese decentralized governance mode, to effectively control the direction and density of government intervention and to promot the growth of employment elasticity.