Exploring the Dynamics Nexus of Energy Consumption, Economic Growth, Capital Stock, and Labor Force

Abstract

The present study investigates the impact of energy consumption on real GDP, capital stock, and labor force using annual data from 1971 to 2017. The empirical analysis is conducted within the structural vector auto-regression framework. The findings from the SVAR model provide several key insights into the dynamic relationships among these variables. The results reveal that economic growth significantly increases the demand for the labor force, however, this increase is not sustainable over the long term. This suggests that while economic expansion initially boosts employment, the effect may diminish as the labor market reaches saturation or as technological advancements reduce the need for additional labor. Similarly, the study finds that other factors, such as capital stock and energy consumption, exhibit comparable patterns. Greater energy inputs are required to support new additions to the capital stock, indicating a strong interdependence between energy use and capital investment. This implies that as the economy grows and new capital is accumulated, there is a concurrent increase in energy demand to sustain the expanded production capacity. Furthermore, the analysis shows that exogenous shocks to capital stock and the labor force stimulate economic activity, but these effects are also temporary. This suggests that while sudden increases in capital and labor can boost GDP in the short term, the long-term sustainability of this growth is questionable without consistent improvements in productivity and efficiency. Rising capital stock is associated with higher demand for labor, reflecting the expansion of production activities within the economy. As businesses invest in more capital, they require additional workers to operate the new machinery and facilities, thus driving up employment levels. Based on these findings, the study recommends that the government should focus on stabilizing and enhancing the supply of energy. A reliable and affordable power supply is critical for sustaining economic growth. Ensuring a consistent energy supply will help support ongoing capital investments and maintain the operational capacity needed for economic expansion.