The Unassuming Economist

My paper with Davide Furceri on the effects of capital account liberalization on inequality is now forthcoming in the Journal of Development Economics and is available (link) at the JDE website. We find that capital account liberalization is associated with a persistent increase in the share of income going to the top. We investigate three channels through which these impacts could occur. First, the impact of liberalization on inequality is stronger where credit markets lack depth and financial inclusion is low; positive impacts of liberalization on poverty rates also vanish when financial inclusion is low. Second, the impact on inequality is also stronger when liberalization is followed by a financial crisis. Third, liberalization seems to alter the relative bargaining power of firms and workers: the labor share of income falls in the aftermath of capital account liberalization. For those without access to the JDE, an earlier working paper (link) version is available.

Figure 10. The effect of capital account liberalization on the top income shares

From the opening remarks of Vitor Gaspar, Director of the Fiscal Affairs Department:

“This issue of the Fiscal Monitor looks at inequality. First, it documents trends in inequality and examines the role of fiscal policy. Then, it examines the following three policies that are currently widely debated: first, progressive taxation; second, universal basic income (UBI); and third, public spending on education and health.”

Continue reading here.

A new IMF report finds that “Over the past three years, the Spanish labor market has seen a strong turnaround, recovering more than a third of jobs lost during the crisis. This rebound has taken place on the back of significant wage moderation and regained external competitiveness, supported by labor market reforms. Employment has been growing across sectors, with services accounting for 80 percent of net employment creation, marking a sectoral shift away from construction. Except for some fast-growing smaller sectors such as information and communications, the new service-sector jobs are generally in the lower-productivity segment, including in tourism-related activities, and just over half are of temporary nature. Job growth has also varied across regions, reflecting different employment situations and sectoral specializations. Generally, the newly created jobs make sub-optimal use of existing skill patterns in Spain, with over-skilling becoming more prevalent and persistent skills gaps among the lower-educated preventing many from finding employment.”

The IMF’s latest report states: “In staff’s view, the strong fiscal buffers, the availability of financing, and the current cyclical position of the economy mean that rapid fiscal consolidation is neither necessary nor desirable. Saudi Arabia has some fiscal space that can be used for a more gradual fiscal consolidation that balances the budget by 2022 rather than in 2019 …”. Read the report for the full background and context for the advice.

A new IMF working paper ranks countries combining data on average incomes and the extent of income inequality, and how much societies are assumed to dislike inequality (called ‘inequality aversion’). Hong Kong SAR is almost always at the top. The United States is second if societies are assumed not to care too about inequality. But it slides to number 24 if societies are assumed to dislike inequality a lot, with more equal societies like Norway, Canada, and New Zealand taking the higher ranks. (For wonks: see Appendix Table 1 of the working paper for hours of fun comparing countries.)