The Unassuming Economist

A new IMF working paper, by authors Niels-Jakob Hansen, Joannes Mongardini and Fan Zhang, discusses the labor market slack and outgap through the Korean experience :

“Output gap estimates are widely used to inform macroeconomic policy decisions, including in Korea. The main determinant of these estimates is the measure of labor market slack. The traditional measure of unemployment in Korea yields an incomplete estimate of labor market slack, given that many workers prefer involuntary part-time jobs or leaving the labor force rather than registering as unemployed. This paper discusses a way in which the measure of unemployment can be broadened to yield a more accurate measure of labor market slack. This broader measure is then used to estimate the output gap using a multivariate filter, yielding a more meaningful measure of the output gap.”

A new paper by authors Werner Eichhorst, Arne L. Kalleberg, André Portela de Souza and Jelle Visse discusses on how to design sustainable labor market institutions:

“Demographic shifts, technological innovation, institutional reforms and global economic integration affect the way people work. Technological innovations have a major impact on occupations and industries, changing the ways economies in different world regions, in both developed and developing countries, work along with new division of labour that are facilitated by global economic integration. This paper is based on the joint work within the International Panel on Social Progress. It highlights three main areas of attention: a) skill formation, d) the challenges to collective bargaining, and e) social protection and labour market policies. Based on an assessment of the existing evidence, the paper suggests some policy principles and concrete policy options that might further those objectives, not ignoring some tensions that might exist between flexibility and security in the different labour markets. The ultimate direction of reforms in line with an idea of social progress lies in institutional arrangements that facilitate the reconciliation of flexibility and productivity with access to decent jobs and social protection. We argue that distinct policy options are available that can be implemented more globally in order to achieve these goals simultaneously”

In the context of Brexit and the developments within UK, this  interesting paper  by Monica Langella and Alan Manning gives a perspective on the labor market in the UK:

“One of the main forces that economists expect to equalize economic opportunity across areas is migration: individuals leaving depressed areas for booming areas. There is strong evidencethat migration does respond to differences in economic opportunity (for a thorough, though early, survey see Greenwood, 1997). The classic reference for the US is Blanchard and Katz (1992) who concluded that negative local labour demand shocks cause a short-run rise in the unemployment rate but that migration causes unemployment rates to be equalized within 5-7 years, a relatively short time. However, Amior and Manning (2018) argue that for the US the migration response over decades is slower than that estimated by Blanchard and Katz (1992) and that local demand shocks are highly persistent, causing very persistent differentials in unemployment rates. The US has also had a marked fall in residential mobility in recent years that has attracted attention (Molloy, Smith and Wozniak, 2011, 2014; Dao, Furceri, and Loungani, 2017). Similar exercises for Europe (e.g. Pissarides and McMaster, 1990; Decressin and Fatas, 1995; Overman , 2002; OECD 2005) find slower adjustment processes than in the US though Amior and Manning (2019) argue that the net migration response to unemployment in the UK is higher and more similar to the US than commonly believed. Although these studies do provide convincing evidence that migration does respond to economic opportunities, there is still surprisingly little evidence on the process in recent years (the survey of Greenwood, 1997, seems to be the most recent) and considerable gaps in our knowledge“

In a new paper, authors Eiji Goto and Constantin Burgi analyze the Okun’s law through sectoral and cross-country differences. The specific value add to existing research, according to the authors, is as follows:

“We contribute to the literature on cyclical differences by determining which category the Okun’s coefficient falls in. Specifically, we test whether the aggregate differences disappear if the sector sizes are the same across countries (e.g. if manufacturing has the same share of GDP for all countries) and we find that this can be rejected. We also examine whether all of the sectoral coefficients are proportional and we find that we cannot reject this. Next, we inspect whether any sector’s coefficient is the same as the aggregate’s and we find that this can also be rejected. Lastly, we decompose the Okun’s coefficient to determine whether the correlation between unemployment or the standard deviations of unemployment or GDP are driving the differences. We find that the standard deviation of unemployment is the main driver”

From Stumbling and Mumbling:

“The Resolution Foundation’s James Smith has written a nice paper on the likelihood of recession and the fact that, with monetary less able to support the economy, we need to think about alternative ways of tackling recessions. I just want to amplify what he says in two ways.

First, there’s increasing evidence that recessions can do long-term damage, even if the economy appears to bounce back in the short-term. There are at least three mechanisms here:

– Education. Bryan Stuart shows that the 1980-82 recession in the US “generated sizable long-run reductions in education and income.” Parents who suffer a drop in income spend less on children’s books and educational trips, and this makes them less likely to go to college a few years later. Such effects are magnified if bad macro policy causes restraints upon public spending on schools and libraries.

– Productivity. Recessions increase uncertainty, which depresses investment in both capital and R&D, leading to lower productivity growth. The Bank of England’s Dario Bonciani and Joonseok Jason Oh say:

Shocks increasing macroeconomic uncertainty can lead to very persistent negative effects on economic activity that last well beyond the business cycle frequency.

– Scarring. A recent paper by Erin McGuire shows that people who grow up in hard times “invest less in risky assets throughout their lives, invest more in property, and are less likely to be self-employed.” This corroborates research (pdf) by Ulrike Malmendier and Stefan Nagel. Through this channel, recessions can reduce entrepreneurship and increase the cost of capital even decades later.

Against all this, it is theoretically possible that recessions have a beneficial “cleansing” (pdf) effect: in driving inefficient firms out of business, they make it easier for more efficient ones to expand, and this raises productivity growth.”

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