The Unassuming Economist

An IMF country report on Mexico documents “the composition, trends, and labor market implications of informality using data from the National Employment Survey (ENOE). Over half of the employed population has informal contractual relationships in Mexico both at formal and informal firms. Informality is found to be associated with lower levels of pay –even when accounting for worker composition differences– and lower wage growth over the life cycle.”
“Future labor market reforms should take a holistic approach that addresses both distributional concerns and formality barriers. One alternative is to reduce dependence on payroll taxes that are biased towards formal salaried workers while transitioning towards a social insurance system that provides good-quality services for all, irrespective of their salaried/non-salaried status. Another is easing firing and hiring restrictions of salaried workers while increasing protections to the unemployed through a more universal unemployment insurance scheme. This type of profound long-term transformations should, of course, only be implemented after careful review of policy alternatives guided by experiences in other countries and detailed impact analysis.”

“Short-term reforms should build towards a system where the non-exclusive targets of boosting social protection and removing distortionary restrictions are achieved. Policy proposals, such as hikes in the minimum wage, should be gradual, viewed in the context of other distortionary polices, and carefully weigh equity benefits against the potential displacement of labor towards unproductive informality.”

From a new IMF working paper:

“In this paper we analyze the incidence of the VAT and its effects on the income distribution. To identify these effects, we rely on two tax reforms undertaken in Mexico that increased the VAT rate for a group of cities and left the rest unaffected. We compare the inflation rate of the affected cities with the exempted cities before and after the law changed. We find that the effect on prices is limited and conclude that the burden of the tax is indeed shared between producers and consumers. Regarding welfare, we find that the VAT is progressive in both absolute and relative terms to the overall expenditure. Finally, we show that an identical change in the VAT rate when inflation is high and persistent doubles its pass-through to inflation and its welfare loss for the average household.”

From a new VOX post:

“Economic mobility varies dramatically across the US. This column introduces a new interactive mapping tool that traces the roots of outcomes such as poverty and incarceration back to the neighbourhoods in which children grew up. Among the insights the data reveal are that children who grow up a few miles apart in families with comparable incomes have very different life outcomes, and that moving in early childhood to a neighbourhood with better outcomes can increase a child’s income by several thousands of dollars later in life.”

“Children who move to high-upward-mobility neighbourhoods earlier in their childhood earn more as adults, as illustrated in Figure 2. This chart shows the average income (at age 35) of children raised in low- income families who move from the Central District of Seattle, a low-upward mobility area, to Shoreline, a high upward-mobility area that is ten miles north. Children who make this move at birth earn $9,000 more per year than those who move in their 20s.”

A new OCP Policy Center policy brief shows that “downward trend of employment in manufacturing in Morocco is due primarily to labor productivity improvement and that the increased deficit in manufacturing trade also plays an important role. While recognizing the crucial importance of a vibrant manufacturing sector in Morocco, this brief argues that Morocco cannot rely primarily on manufactures to “pull” labor out of agriculture. To provide more jobs, Moroccan policies should pay more attention to sectors which employ large numbers of people and where employment is expanding as a result of the ongoing structural transformation of the Moroccan economy.”

From a new Bloomberg Opinion article by Minouche Shafik:

“We are living in an age of insecurity, with the values of the global liberal order under fire despite the progress they’ve delivered for the vast majority of people. The rise of populism in politics, fears over slowing economic progress in advanced economies, and worsening prospects for future generations, as well as mounting evidence of declining subjective well-being and trust in many countries, are all expressions of this. Those who don’t feel they’ve benefited from the current order are understandably agitating to change it.

This backlash against “globalization” reflects a failure of our social contract — the mechanisms through which we share risks and offset, to some extent, the impact of luck on life chances. This is embodied in our welfare states, which define the rights and obligations of citizenship; the payment of taxes in exchange for public goods; and the way in which we look after the young, the old, the infirm and those who have fallen on hard times. While globalization increased the total pie, our social contract has done a poor job of sharing the benefits. We need to rethink that contract if we are to provide people with a greater sense of security and better economic prospects.

Central to this task are measures to ensure our economies are fairer. While globalization has meant the world has become more equal between nations — with many poor countries having seen huge progress in recent decades — it’s also exacerbated inequalities within advanced economies particularly.

To combat this over the medium term, “pre-distribution” policies such as investments in education and infrastructure will be key. In the short run, however, redistribution also needs to play a part, especially as labor markets reward the highly skilled more and more. Tax reforms in advanced economies over the last 20 years have become less progressive; this needs to be reversed. Wealth inequality has grown even more than income inequality, so taxes on wealth such as land and real estate should be considered.

We also need to counter the large increase in the share of total income that’s gone to capital relative to labor. Capital is highly mobile and can evade taxation through the use of havens and various “tax-efficient” arrangements. International agreement on ways to close such loopholes and tax economic activity where it takes place would go a long way toward making the world economy fairer.

That needs to be complemented by giving citizens more time to adjust to the competitive pressures and technological changes that globalization brings. Mechanisms are needed to give workers more bargaining power — including stronger trade unions, and the use of profit-sharing schemes or cooperatives.

There also needs to be a floor on incomes to ensure everyone can enjoy a reasonable standard of living even if their wages are low. Rather than the much discussed universal basic income, better solutions could include wage subsidies, earned-income tax credits or higher minimum wages, combined with better access to services such as education, health and other public goods.

We also need to reassure citizens about their economic futures even as the societies around them age and their workplaces are automated. Demographic changes mean that many of us who are fit enough will have to work longer. Linking retirement ages explicitly to life expectancy (as the Netherlands has done) would help tailor expectations to this new reality.

Re-skilling over one’s lifetime will also become ever more important, and governments will have to invest substantial resources in the task, as Denmark does, since employers will have weak incentives to do so when employee turnover is rising. In fact, workers should be given a financial entitlement to invest in their own skills so they can retool and be able to continue to support themselves throughout their lives.

Automation will transform labor markets regardless. While eventually new jobs will emerge, workers need to be supported during this transition. We should use gains in productivity as an opportunity to eliminate aspects of jobs that are routine and repetitive and replace them with more meaningful work and leisure. As countries get richer, people work fewer hours. Giving part-time and temporary workers (who tend to be lower-skilled and lower-paid) more rights to pensions, paid leave and training has worked out well for countries such as Denmark, Germany and the Netherlands.

Some new social contract along these lines is essential to sustain political support for open economies and societies. These issues are deeply rooted in history and values, so every country will make different choices on the balance of responsibilities between the individual, the state and the market. But the conversation needs to be had — and soon — if we are to restore a sense of security and hope in our societies.”