The Unassuming Economist

From a new Tinbergen Institute Discussion Paper:

“Recently, in an important paper, Ball et al. (2017) investigated the Okun relationship for the US and 20 other advanced economies. Focusing on the fit of the relationship between the unemployment rate and output (using both the gap and difference form of Okun’s Law) they find for US data over the sample period 1948-2013 that Okun’s law is a strong, reliable and stable relationship and that a constant (not time-varying) Okun coefficient is a good approximation to reality. They also noted that the Okun coefficient appears to be larger during recessions than during expansions. How can we reconcile empirical evidence that Okun’s coefficient is stable over time, while being asymmetric over the business cycle?

Our paper proposes another look at the relationship between changes in the unemployment rate and output growth through the lens of labor market flows. As far as we know, no one has utilized flows data in this context. Yet clearly the change in the unemployment rate reflects the balance of flows into and out of unemployment within a period and thus it is natural to look at the Okun relationship as a relationship between output growth and labor market flows.”

From a new PolicyLink report:

“Economic insecurity is both widespread and uneven, reflecting not only the toxic polarization of wealth and income in this nation, but also the persistence of racial inequities. Structural racism and systemic barriers have long excluded people of color from American prosperity, and while economic insecurity plagues people of all races and ethnicities, people of color are disproportionately burdened by economic insecurity. Given the rapid demographic changes in the United States, if economic conditions do not improve among people of color, a larger and larger share of the population will struggle to make ends meet.

A mounting body of research suggests that such inequality and exclusion lead to declining economic growth. The inverse is also true: by developing high-impact, targeted solutions that dismantle barriers and connect economically insecure people and households to resources and opportunities, we can lay the foundation for an economy that works for everyone. Now is the time for bold policy and systems changes that deliver on the promise of inclusive prosperity.”

A new IMF working paper discusses “the definition and modelling of a universal basic income (UBI). After clarifying the debate about what a UBI is and presenting the arguments in favor and against, an analytical approach for its assessment is proposed. The adoption of a UBI as a policy tool is discussed with regard to the policy objectives (shaped by social preferences) it is designed to achieve. Key design dimensions to be considered include: coverage, generosity of the program, overall progressivity of the policy, and its financing.”

“The joint empirical analysis of the relative redistributive performance of a UBI, existing social
safety nets and available financing options is powerful in highlighting the tradeoffs faced by
policymakers when assessing social spending programs along key dimensions:

1. coverage at the bottom of the income distribution vs. leakages to richer households,
2. generosity of transfers vs. incentives and economic distortions,
3. fiscal cost vs. alternative use of scarce fiscal resources.

The fourth aspect that weighs heavily in shaping policy choices is how to reconcile objectives and
implementation challenges.

The saliency of each of these tradeoffs depends on each country specific circumstances, in
particular on its position in the coverage/generosity/progressivity space (Figure 2), its capacity to
raise resources in a progressive and sustainable manner and the ability to roll out a (more or less)
complex program. Social preferences, together with constraints, determine how these tradeoffs
are called.

The relevance of these tradeoffs and the design of a transfer program has implications that go beyond the performance of the specific scheme. They are related to and impact how a country overall benefit-tax system affects individual behaviors,27 bearing far-reaching implications for labor market, consumption and investment decisions that will in turn impact back the fiscal sustainability of the tax-and-transfer system. As mentioned, inefficiencies (e.g., disincentives to
work) are relevant issues also under existing safety nets—that are rarely universal and unconditional—and their current financing mechanism. For this reason, a broader discussion is needed, that would move beyond just looking at UBI in isolation to assessing whether a policy package encompassing a UBI would increase or decrease the distortionary impact of government policies and or improve/reduce the performance of a safety net. As important is the thorough assessment of implementation capacity both for targeted and universal type of programs. In short, efficiency and equity impact of a UBI cannot be gauged in isolation.

Beyond the discussion presented in this paper and short-term considerations, other issues also point to the usefulness of broadening the horizon when discussing universal programs and looking for ways to make social protection systems adequate for facing future challenges. For example, in an economic environment where job security decreases and income volatility increases, expanding available insurance mechanisms for those who are out of work may become an important policy objective; similarly, where there is a need to generate public support while protecting vulnerable households from undesired side effects of structural reforms that impact large segments of the population. protecting vulnerable households from undesired side effects of structural reforms that impact large segments of the population.”

From a new VOX post:

“The impact of trade shocks on labour market shifts is usually studied in the context of re-training and social welfare frictions. Using evidence from Denmark, this column shows how workers can experience long-run reductions in earnings no matter how easy it is to change sector. A sudden and obligatory shift toward a new sector may, by its nature, generate some worker dissatisfaction.”

“Figure 1 shows the import competition-induced sectoral change. Each marker shows the causal effect of import competition in the corresponding year on employment at the respective job/sector indicated in the legend, as captured by the difference-in-difference specification with individual fixed effects.”

“The challenges faced by manufacturing workers, who once exemplified the middle class, have important implications for the whole society. My findings show that adjustment problems do not end once manufacturing workers find full-time jobs in the growing service sector. And the Danish labour market institutions, despite being successful in keeping the workers within the labour market and ensuring fast inter-sectoral movement as well as largely covering the earnings losses of workers with transfers, were not fully successful in relieving the pain of the people whose human capital is not relevant for service sector jobs. In the end one feels better when earning a living rather than getting a transfer, and when enjoying and taking pride in work rather than changing from one job to another due to skill mis-match. Thus, it may be unavoidable that a sudden and obligatory shift toward a new sector demanding new skills leads to dissatisfaction. Although, the social system in Denmark may be a factor in keeping the dissatisfaction within limits and preventing unwanted political consequences.”

From a new VOX post by Christine Lagarde and Jonathan D. Ostry:

“The persistent gap between female and male labour force participation comes at a significant economic cost. This column argues that because women and men complement each other in the production process, the economic benefits from gender diversity are likely to be larger than suggested by previous studies. Gender complementarity also has important implications for the welfare costs from barriers to female labour force participation. The case for gender equity is even more compelling and pressing.”

“These are not all new concerns, but there is a renewed sense of urgency. For years, the IMF has been at the forefront of policy analysis highlighting the economic costs of inequality and possible remedies (Ostry et al. 2014, 2019). We know that the unlevel playing field between women and men has substantial economic costs. What we are now learning is that these costs are even larger than we previously thought. Now that we see the full picture, the case for greater gender equity has become even more compelling and pressing.”