The Unassuming Economist

A new IMF report says that “Portugal achieved an impressive consolidation of its public wage bill during the adjustment program, with large efficiency gains and savings generated in the education and health sectors. As in many European countries, these efforts relied on blunt but quick measures such as across-the-board attrition and temporary wage cuts, which could not be sustained over the medium-term. From 2015, these measures were reversed or unwound, and structural reforms lost momentum. Going forward, Portugal projects a large reduction in the wage bill from 2017-2021 (-1.3 percentage points of GDP) that needs to be supported by specific reforms. This will prove challenging, as wage and public employment policies show evidence of procyclicality. To prevent adverse impact on public service provision, targeted reduction in public employment will require adjusting employment levels across sectors. Finally, containing public compensation will require structural wage measures to gradually address large public wage premium relative to the private sector.”

No, the causes for high unemployment rate appear to be more structural in nature, as an IMF report documents.

My paper “Okun’s Law: Fit at Fifty?” (with Larry Ball and Daniel Leigh) has now been published in the October 2017 issue of the Journal of Money, Credit & Banking. For those without access to the journal, here is a link to the penultimate version of the paper, which also provides the data and programs needed to replicate the results of the paper. The main result of the paper is that, fifty five years after it was proposed, Okun’s Law remains visible to the naked eye (see the chart below). We find that, for the United States, Okun’s Law is fairly stable and held up during the Great Recession, substantiating predictions that Paul Krugman made in 2011. We also provide evidence for several other advanced economies, such as Spain and Germany.

Recent discussions of the extent of decoupling between greenhouse gas (GHG) emissions and real gross domestic product (GDP) provide mixed evidence and have generated much debate. We show that to get a clear picture of decoupling it is important to distinguish cycles from trends: there is an Environmental Okun’s Law (a cyclical relationship between emissions and real GDP) that often obscures the trend relationship between emissions and real GDP. We show that, once the cyclical relationship is accounted for, the trends show evidence of decoupling in richer nations—particularly in European countries, but not yet in emerging markets. The picture changes somewhat, however, if we take into consideration the effects of international trade, that is, if we distinguish between production-based and consumption-based emissions. Once we add in their net emission transfers, the evidence for decoupling among the richer countries gets weaker. The good news is that countries with underlying policy frameworks more supportive of renewable energy and supportive of climate change tend to have greater decoupling between trend emissions and trend GDP, and for both production- and consumption-based emissions.

Continue reading here.

A new IMF reports finds that “China has grown rapidly and is on the brink of eradicating poverty. However, income inequality increased sharply from the early 1980s. While less equality is to be expected in the transition from central planning to a market-based economy, China is now among the most unequal countries in the world, despite a recent modest improvement.

Inequality has been driven by structural factors (especially demographics, the urban/rural divide and education/skills), with little offset from fiscal policies. These structural factors are likely to drive inequality higher.

This calls for more proactive use of fiscal policies to reduce inequality. On the revenue side: (1) increasing the progressivity of social security contributions and of personal and property taxes. On the spending side: (2) boosting social spending and promoting equal access across provinces and regardless of residency.”

Continue reading here.