The Unassuming Economist

From a new VoxDev post by Dani Rodrik:

“A new generation of work has been moving us beyond the largely ideological debates of the past to a more contextual, pragmatic understanding. The most recent strand is rooted in two developments. One of these is the indisputable economic success of China, a country that has made liberal use of a diverse array of industrial policies: cheap loans, public ownership, local-content requirements, export subsidies, and technology-transfer requirements. The other is the dissatisfaction with Washington Consensus-type policies, which in Latin America and elsewhere produced weak returns in terms of structural change and productive diversification.

The Inter-American Development Bank has been at the forefront of the new pragmatic approach, producing a series of case studies of successful and less successful interventions in Latin America. These studies analyse in some detail the nature of public-sector engagement with the private sector in a range of tradable industries (Sabel et al. 2012, IDB 2014, Fernández-Arias et al. 2016). One important difference from the earlier tradition of case studies is that these pay much greater attention to methodological issues and the problems of causal inference. Consequently, they are duly careful about the conclusions that can be drawn. Nevertheless, they provide considerable insight about appropriate institutional frameworks.

These studies build on existing works emphasising the role of disciplined public-private collaboration as a “search engine” for identifying the most important constraints faced by entrepreneurs, as well as the most appropriate mechanisms for alleviating such constraints (Hidalgo et al. 2007, Hausmann et al. 2005, Rodrik 2007, 2008, Sabel 2007). When designed appropriately, public–private collaboration can ameliorate both of the risks identified above: lack of information and political capture. Their work draws on the experience of successful practitioners (e.g. Ghezzi 2017), while informing them in turn.”

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From a working paper by Sandra Polaski:

“This paper reviews the erosion of labor and social protections for U.S. workers and households over recent decades. It discusses the causes and the relative weight of different elements of the erosion in order to bring clarity to the discussion of needed reforms. It proposes a framework of policy objectives and principles to guide choices for reform among policy alternatives in the specific U.S. context. The paper also explores the relative merits of some alternative proposals to address these challenges. The prospects for political and legislative action to create a viable modern social and labor protection system are discussed. The paper concludes that updating and strengthening existing elements of the U.S. system provides a firm foundation for creating an adequate U.S. labor and social protection floor for the 21st century, if critical additional rights and programs are built on and integrated into this foundation.”

From the IMF’s latest report on Senegal:

“This paper quantitatively assesses the macroeconomic and distributional impacts of fiscal consolidation in Senegal through value added tax (VAT), personal income tax (PIT), and corporate income tax (CIT). We analyze the trade-offs between growth and equity for each tax instrument. We find that VAT has the least efficiency cost in output and consumption but expands the rural-urban inequality gap because significant VAT tax incidence falls on the rural area. PIT is the most detrimental in terms of growth and inequality. CIT on the other hand, despite causing large efficiency loss, has better distributional implications by distributing the tax burden more evenly across regions. Much of the output and distributional costs can be mitigated by using the additional revenue for infrastructure investment and cash transfer.”

 

From the IMF’s latest report on Senegal:

“For Senegal to meet its goal of reaching emerging market status by 2035, reforms should address development challenges, including gender inequality. Gender inequality is associated with lower economic growth (IMF 2015, Hakura and others 2016; Gonzales and others 2015), higher income inequality (Gonzales and others 2015, IMF 2016), lower economic diversification (Kazandjian and others 2016), and less bank stability (Sahay and others 2017), while it worsens other development indicators.

Senegal still has large gender gaps in both education access and labor opportunities. Authorities should improve incentives for girls to continue their studies, by diminishing indirect costs of studying (such as those in transportation and in school supplies); enforcing civil laws and campaigning against child marriage and early pregnancy; targeting areas with higher gender gaps (especially rural areas); and reducing discrimination in the labor market (thus increasing the financial returns from studying). To improve outcomes in the labor market, authorities should address gender gaps in access to assets, especially credit and land, and employment segregation.

Net costs of policies can be mitigated through an enlargement of the formal sector and an improvement of spending efficiency. As shown in the model simulations, increasing average years of education to 5, combined with increasing the formal sector share of GDP by 10 percentage points can boost government tax revenues to more than cover the costs, generating a net surplus for the government budget. Furthermore, improving education spending efficiency (for instance as pointed out by the experiments in Senegal by Carneiro and others, 2016) would reduce the government’s overall cost of education.

Mixed policies are necessary to tackle all sources of macro-critical gender inequalities. The framework presented is a valuable tool to show how gender gaps should be tackled from different angles simultaneously to end gender gaps in economic opportunities. For instance, although higher expected returns from labor expands female labor force participation (as seen in Figure 6), it is difficult to close the participation gap entirely if policies to address family costs for women to work outside the house (such as those in Table 1) are not implemented. Similarly, wage gaps cannot be closed if authorities address education gaps but ignore gaps in the labor market.”

From VoxEU post by Guay Lim, Robert Dixon, Jan van Ours:

“One version of Okun’s law specifies a relationship between the change in the unemployment rate and output growth. This column uses US labour market flows data to investigate this relationship between 1990 and 2017. It finds that the net flows between employment and unemployment are sensitive to changes in growth but respond differently to positive and negative changes. This implies that the US Okun relationship is stable but asymmetric, the effect of a change being larger in contractionary periods than in expansionary ones.

There is a large body of research based on Okun (1962) in which researchers (like Okun himself) approach the relationship the law specifies in different ways. Most common are the ‘difference approach’ (i.e. examining the relationship between the change in the unemployment rate and output growth) and the ‘gap approach’ (i.e. examining the relationship between the deviation of the actual from the natural or equilibrium unemployment rate, on the one hand, and the gap between the level of actual and potential output on the other).

Recent research on US data has focused on the magnitude, the stability, and the asymmetry of the Okun coefficient over the economic cycle. Owyang and Sekhposyan (2012) show that during recent US recessions – including the Great Recession – unemployment appears to be more sensitive to economic growth than before. Cazes et al. (2013) also find that the Okun coefficient varies over time and appears to be larger during recessions than during expansions. Pereira (2013) concludes that there are asymmetries in the Okun relationship with a weaker relationship during periods of expansion. Valadkhani and Smyth (2015) also find asymmetries and a weakening of the Okun relationship since the early 1980s. Furthermore, Belaire-Franch and Peiro (2015) conclude that there is an asymmetry in the relationship between unemployment and the business cycle. Finally, Ball et al. (2017) find 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.

In a recent paper (Lim et al. 2018), we look at the relationship between changes in the unemployment rate and output growth through the lens of US labour market flows. As far as we know, no one has utilised 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. Therefore it is natural to look at the Okun relationship as one between output growth and labour market flows. Our analysis is based on the ‘difference approach’ to Okun’s law, since labour market flows are informative about the change in the unemployment rate. We also propose focusing on net flows (the balance of the gross flows between any two states) as they more effectively highlight the dynamics (including asymmetries) behind the evolution of the Okun coefficient.

The flows framework provides an encompassing structure to study the relationship between GDP growth and changes in the unemployment rate and in particular, the conditions under which the Okun coefficient (i.e. the coefficient linking the change in the unemployment rate to the output growth rate) is time-varying and/or asymmetric, i.e. the change in the unemployment rate differs for positive/negative shocks to growth. Furthermore, the flows approach allows us to adopt a three-state analysis – namely, flows between employment, unemployment and not in the labour force. Thus we study how shocks to growth affects labour flows and how they, in turn, translate into changes in three summary statistics – the unemployment rate, the participation rate and the employment–population ratio.”