The Unassuming Economist

From my latest IMF working paper with Sangyup Choi and Davide Furceri:

“Central bankers often assert that low inflation and anchoring of inflation expectations are good for economic growth (Bernanke 2007, Plosser 2007). We test this claim using panel data on sectoral growth for 22 manufacturing industries for 36 advanced and emerging market economies over the period 1990-2014. Inflation anchoring in each country is measured as the response of inflation expectations to inflation surprises (Levin et al., 2004). We find that credit constrained industries—those characterized by high external financial dependence and R&D intensity and low asset tangibility—tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, such as financial development, inflation, the size of government, overall economic growth, monetary policy counter-cyclicality and the level of inflation. Importantly, the results suggest that it is inflation anchoring and not the level of inflation per se that has a significant effect on average industry growth. Finally, the results are robust to IV techniques, using as instruments indicators of monetary policy transparency and independence.”

From the latest IMF report on Korea’s minimum wage:

“The 2018 minimum wage hike is by far the largest increase in real terms since the minimum wage system was established in late 1980s. […] This hike will bring Korea’s minimum wage close to the OECD average.

A hike in the minimum wage could have an impact on multiple fronts. In general, it effects employment, especially youth employment, the overall wage levels in the economy, income distribution, and competitiveness of the firms. These in turn affect economic growth and inflation.” Continue reading here.

From the latest IMF report on Korea’s youth unemployment:

“While Korea’s rate of youth unemployment is low in international comparison, it has recently increased. In addition, the share of inactive youth is exceptionally high. These developments are concerning as extensive research has shown long-lasting negative effects for individuals affected and the society and economy as a whole.

This paper discusses the potential drivers behind youth unemployment in Korea, the various measures taken by the authorities and best practices from the literature and other countries. The analysis suggests that various factors have contributed to the current situation, including cyclical, structural and policy variables. In particular, weak consumption, a temporary increase in the youth cohort and expectation and skill mismatches are likely responsible. Moreover, issues with educational quality, a focus on direct job creation and high protection of regular workers and the resulting labor market duality have also contributed.

The Korean government has already made significant and comprehensive efforts to tackle youth employment issues and plans to further expand on them. Based on a growing literature of international experiences and policy evaluations, the government could consider (i) fine-tuning existing measures, (ii) expanding preemptive measures and (iii) addressing general cyclical and structural impediments.”

A new IMF report says that “Labor market duality in Korea is a complex issue, which encompasses various types of non-regular workers. Nonetheless, it is particularly prominent among SMEs and in the service sector and disproportionately affects women, the elderly and youth. On a macro level it has likely contributed to increasing inequality, low fertility rates and declining productivity growth. The two main drivers behind duality are various employment protection legislations and large productivity differentials in the product market. A general equilibrium search-and-matching model is applied to model duality and simulate the impact of flexicurity policies. It finds that a well-calibrated introduction of flexicurity could address a number of issues that Korea is facing, such as reducing duality and inequality, and raising productivity and welfare. For this it would be crucial to implement all three pillars to ensure gains are distributed among all individuals.”

From the IMF’s latest report on UK:

“Barriers to labor mobility may reduce its effectiveness as a regional adjustment mechanism. Migration of workers from poor, low-productivity areas to rich and highly productive ones is an important channel through which cross-region convergence may be achieved. Factors distorting internal labor flows are potentially relevant determinants of regional disparities in income and productivity. Indeed, the pattern of internal flows for England and Wales shows that highly productive regions tend to have net outflows instead of inflows. This suggests that factors other than labor market conditions (i.e. productivity differentials) are likely significant determinants of internal migration patterns in the UK.

Housing prices (and regulations) have a significant impact on internal migration patterns in the UK. Analysis of bilateral gross flows between regions in England and Wales shows that house prices are negatively related to workers’ movement from one region to another (Box 1). Results are in line with Biswas et al. (2009), who study inter-regional migration in England, Wales, Scotland and Northern Ireland, and Rabe and Taylor (2010), who analyze internal migration flows using household-level data for 11 regions in the UK. In turn, Hilber and Vermeulen (2015) show that housing prices are significantly (causally) affected by housing regulations. The impact is economically large: if the South East (the most regulated English region) had the regulatory restrictiveness of the North East, house prices in the South East would have been roughly 25 percent lower in 2008.

Evidence also suggests that local housing regulatory constraints have affected income convergence across regions. Data on local housing regulatory restrictions for 46 English counties is used to test whether housing restrictions have affected interregional convergence in the UK. The specification, following Ganong and Shoag (2015), models the change in workers’ real earnings between 1979 and 2008 as a function of its starting level in 1979, a measure of severity of housing restrictions in the same period from Hilber and Vermeulen (2015), and an interaction term of the two variables (Table 1). The coefficient on the starting level of earnings is significant and negative, suggesting income convergence between counties with low initial earnings and counties with a high starting level of earnings. The interaction term of earnings and housing regulations is highly significant and positive, indicating a dampening effect of tighter housing regulations on the speed of convergence across counties. To the extent that earnings are correlated with productivity, housing restrictions have likely contributed to differences in productivity across regions as well.

Policy measures to promote housing supply may therefore have a positive impact on labor mobility and growth. Regulatory constraints tend to be higher and more binding in more developed and productive areas (see Hilber and Robert-Nicoud 2013). Evidence from the US suggests that lowering regulatory constraints in the more productive cities would favor a more efficient allocation of labor and have an economically significant effect on growth (Hsieh and Moretti 2017). Efforts should continue to further boost housing supply, including by easing planning restrictions, mobilizing unused publicly-owned lands for construction, and providing incentives for local authorities to facilitate residential development (Hilber 2015, IMF 2016, and OECD 2017).”