The Unassuming Economist

Minimum wages are set to increase in China under the country’s latest five-year plan. This vox column documents that past increases led to lower employment. However, the impact is heterogeneous. Firms with high average wages or large profit margins actually increase employment, while those with low average wages or small profit margins downsize.

Do minimum wages lower or raise employment in China? Yes. That’s the answer from the paper my co-author Yi Huang presented at the University of Zurich’s Macro-Finance-Labor Seminar. 

Over the past few years, the IMF has argued that Okun isn’t brokun’—the relationship between output growth and unemployment remains tight. We’ve done so here, here, here, here, here, and here. Hear! Hear! Finally it seems we’re being heard.

An independent study by the San Francisco Fed—independent in the sense that it seems unaware of any of the 6 links given above—finds that rumors of the demise of Okun’s Law may have been exaggerated; see the WSJ story on the study.

For those tempted to say, “yes, that’s the U.S. but my country is different,” see the evidence we provide in one of the six links above on how well Okun’s Law fits for advanced economies, including high unemployment countries like Spain.

Why does it matter whether Okun’s Law holds? It’s because the alleged demise of Okun’s Law is often used as a jumping-off point to argue that the link between jobs and growth is broken, so structural reforms are needed to restore job creation. The stability of Okun’s Law, combined with evidence that the Beveridge Curve is looping back to normality, as noted by Krugman, suggests that cyclical factors may still be behind the weakness in labor markets.

The sales of Piketty’s book threaten to put him into the top 1% of earners. On tax day in the US, Piketty presented his book the IMF Book Forum (and Jobs & Growth Seminar). The event was chaired by George Akerlof and Martin Ravallion was the discussant. Here are the links to the slides by Ravallion and Piketty.

Piketty said “we live in a world where we have to rely on Forbes to know the wealth of billionaires. I would prefer to get these statistics from the IMF but apparently there isn’t a publication on the distribution on income. Perhaps one day there will be.”

IMF First Deputy Managing Director David Lipton released a new paper on fiscal policy and inequality, adding to the stock of IMF work on this issue. Here are links and a cheat sheet to the key papers:

1) Painful Medicine: This (non-wonkish) paper documented that fiscal consolidations not only lower aggregate incomes but have distributional consequences—wage incomes fall more than profits; and the long-term unemployed are affected more than short-term unemployed.

2) The Distributional Effects of Fiscal Consolidation: A wonkish version of the “Painful Medicine” article, with the additional result that, between 1978 and 2009, fiscal consolidations in advanced economies increased the Gini measure on income inequality.

3) Distributional Consequences of Fiscal Consolidation and the Role of Fiscal Policy: In addition to confirming the results in the previous papers, this paper brings in evidence from emerging markets. It also discusses how policies can be designed to mitigate the impacts of fiscal policy on inequality.

4) Who Let the Gini Out? A (non-wonkish) summary of some of the previous papers.

5)  Fiscal Policy and Inequality: A key finding of the paper is that fiscal consolidations during the Great Recession did not lead to increases in inequality.