The Unassuming Economist

From a new IMF working paper:

“In this paper we analyze the incidence of the VAT and its effects on the income distribution. To identify these effects, we rely on two tax reforms undertaken in Mexico that increased the VAT rate for a group of cities and left the rest unaffected. We compare the inflation rate of the affected cities with the exempted cities before and after the law changed. We find that the effect on prices is limited and conclude that the burden of the tax is indeed shared between producers and consumers. Regarding welfare, we find that the VAT is progressive in both absolute and relative terms to the overall expenditure. Finally, we show that an identical change in the VAT rate when inflation is high and persistent doubles its pass-through to inflation and its welfare loss for the average household.”

From a new VOX post:

“Economic mobility varies dramatically across the US. This column introduces a new interactive mapping tool that traces the roots of outcomes such as poverty and incarceration back to the neighbourhoods in which children grew up. Among the insights the data reveal are that children who grow up a few miles apart in families with comparable incomes have very different life outcomes, and that moving in early childhood to a neighbourhood with better outcomes can increase a child’s income by several thousands of dollars later in life.”

“Children who move to high-upward-mobility neighbourhoods earlier in their childhood earn more as adults, as illustrated in Figure 2. This chart shows the average income (at age 35) of children raised in low- income families who move from the Central District of Seattle, a low-upward mobility area, to Shoreline, a high upward-mobility area that is ten miles north. Children who make this move at birth earn $9,000 more per year than those who move in their 20s.”

A new OCP Policy Center policy brief shows that “downward trend of employment in manufacturing in Morocco is due primarily to labor productivity improvement and that the increased deficit in manufacturing trade also plays an important role. While recognizing the crucial importance of a vibrant manufacturing sector in Morocco, this brief argues that Morocco cannot rely primarily on manufactures to “pull” labor out of agriculture. To provide more jobs, Moroccan policies should pay more attention to sectors which employ large numbers of people and where employment is expanding as a result of the ongoing structural transformation of the Moroccan economy.”

From a new Bloomberg Opinion article by Minouche Shafik:

“We are living in an age of insecurity, with the values of the global liberal order under fire despite the progress they’ve delivered for the vast majority of people. The rise of populism in politics, fears over slowing economic progress in advanced economies, and worsening prospects for future generations, as well as mounting evidence of declining subjective well-being and trust in many countries, are all expressions of this. Those who don’t feel they’ve benefited from the current order are understandably agitating to change it.

This backlash against “globalization” reflects a failure of our social contract — the mechanisms through which we share risks and offset, to some extent, the impact of luck on life chances. This is embodied in our welfare states, which define the rights and obligations of citizenship; the payment of taxes in exchange for public goods; and the way in which we look after the young, the old, the infirm and those who have fallen on hard times. While globalization increased the total pie, our social contract has done a poor job of sharing the benefits. We need to rethink that contract if we are to provide people with a greater sense of security and better economic prospects.

Central to this task are measures to ensure our economies are fairer. While globalization has meant the world has become more equal between nations — with many poor countries having seen huge progress in recent decades — it’s also exacerbated inequalities within advanced economies particularly.

To combat this over the medium term, “pre-distribution” policies such as investments in education and infrastructure will be key. In the short run, however, redistribution also needs to play a part, especially as labor markets reward the highly skilled more and more. Tax reforms in advanced economies over the last 20 years have become less progressive; this needs to be reversed. Wealth inequality has grown even more than income inequality, so taxes on wealth such as land and real estate should be considered.

We also need to counter the large increase in the share of total income that’s gone to capital relative to labor. Capital is highly mobile and can evade taxation through the use of havens and various “tax-efficient” arrangements. International agreement on ways to close such loopholes and tax economic activity where it takes place would go a long way toward making the world economy fairer.

That needs to be complemented by giving citizens more time to adjust to the competitive pressures and technological changes that globalization brings. Mechanisms are needed to give workers more bargaining power — including stronger trade unions, and the use of profit-sharing schemes or cooperatives.

There also needs to be a floor on incomes to ensure everyone can enjoy a reasonable standard of living even if their wages are low. Rather than the much discussed universal basic income, better solutions could include wage subsidies, earned-income tax credits or higher minimum wages, combined with better access to services such as education, health and other public goods.

We also need to reassure citizens about their economic futures even as the societies around them age and their workplaces are automated. Demographic changes mean that many of us who are fit enough will have to work longer. Linking retirement ages explicitly to life expectancy (as the Netherlands has done) would help tailor expectations to this new reality.

Re-skilling over one’s lifetime will also become ever more important, and governments will have to invest substantial resources in the task, as Denmark does, since employers will have weak incentives to do so when employee turnover is rising. In fact, workers should be given a financial entitlement to invest in their own skills so they can retool and be able to continue to support themselves throughout their lives.

Automation will transform labor markets regardless. While eventually new jobs will emerge, workers need to be supported during this transition. We should use gains in productivity as an opportunity to eliminate aspects of jobs that are routine and repetitive and replace them with more meaningful work and leisure. As countries get richer, people work fewer hours. Giving part-time and temporary workers (who tend to be lower-skilled and lower-paid) more rights to pensions, paid leave and training has worked out well for countries such as Denmark, Germany and the Netherlands.

Some new social contract along these lines is essential to sustain political support for open economies and societies. These issues are deeply rooted in history and values, so every country will make different choices on the balance of responsibilities between the individual, the state and the market. But the conversation needs to be had — and soon — if we are to restore a sense of security and hope in our societies.”

From a new Social Europe post:

IMF Rediscovers “Political Economy”

“This summer, the IMF challenged yet another pillar of neoliberal thinking when it published its Working Paper on the negative impact of deregulating job protection on the labour income share. Whereas the economic mainstream has systematically argued that technological progress is the main reason for the global trend of falling labour share (see OECD chapter 2 and IMF), this new paper finds a strong link with the policies of weakening job protection that have been pursued over previous decades.

By introducing the element of bargaining power between labour and capital into this discussion, the IMF thus provides for an important broadening of the policy discussion going beyond the standard recommendations to invest more in education and training: “This paper contends that, alongside these (non-mutually exclusive) drivers, changes in institutions that weakened worker bargaining power have also played a role”. It seems that the IMF, which usually adheres to the neoclassical economic argument that wages in the absence of rigidities are completely driven by marginal productivity and technological developments, has rediscovered the political economy thinking of classical economists such as Karl Marx and Adam Smith.”

Displaced Workers: A More Balanced OECD View On Advance Notification

“Another interesting piece of research is the OECD’s work on nine country cases that examine how to get displaced workers back to work (job displacement is defined as permanent economic dismissal affecting workers with at least one year of tenure). Here, one remarkable policy message running throughout the OECD research (chapter 4) is the importance of adequate job protection in the form of advance notification.

Here, its starting point is that early intervention and starting the process of adjustment beforeworkers become unemployed has many advantages. One is that the ‘hysteresis’ effect under which labour market prospects decline the longer a worker is unemployed can be averted. This is because, on the employers’ side, prospective employers tend to view job applicants who are still at work more favourably than those who are already unemployed. And, on the side of the workers, intervening early when workers are still in a job serves to limit long unemployment spells during which skills and work-related attitudes could deteriorate.”

Continue reading the IMF working paper here.