The Unassuming Economist

From a new ECB Research Bulletin:

“How beneficial is labour market flexibility – for instance, the ability to hire and fire workers – for firm growth? And how does such flexibility interact with a firm’s ability to obtain bank credit? This article provides evidence that less rigid employment protection benefits firms during times of scarce credit. We study the performance of credit constrained Spanish firms during the financial crisis of 2008-09, exploiting a firm-size-specific labour regulation that imposes more stringent employment protection on firms with more than 50 employees. We find that Spanish firms with fewer than 50 employees operating in sectors in which labour and capital are close substitutes grew faster during the financial crisis when exposed to a negative credit shock than similarly credit constrained but larger firms. This effect is more pronounced for firms that were more productive before the crisis, suggesting that flexible employment protection laws benefit otherwise healthy firms that are credit constrained, by enabling them to substitute labour for capital and continue growing.”

A new working paper introduces “an original panel dataset based on the text of country reports by the International Monetary Fund. It consists of a total of 2594 Article IV consultation and program review documents. The reports were published between 2004 and 2017 and cover 189 countries. The text of these reports provides a unique in-depth window into the IMF ‘s assessment of the most important macroeconomic issues. They provide indications of the perceived policy weaknesses, economic risks, ongoing reforms and implemented or neglected policy advice. Thus the content of IMF reports are widely used for qualitative and quantitative analysis in the economics, political science and IR literature.”

The paper also presents “three examples in applying text analytic techniques on the dataset to demonstrate and validate its application for research. First, [it] compares conventional measures of resource dependence with a metric based on term frequency in reports. ”

“Second, [it] analyzes mentions preceding reform events as a way to study reform intent.”

“Finally, [it] shows how mentions of keywords describing opposite fiscal policy stances mimic changes in IMF policy advice during the global financial crisis.”

An IMF country report analyzes the “income inequalities and government transfers using microdata from Mexico’s survey on household income and expenditures (ENIGH). It highlights the positive role played by government transfers in reducing inequalities over 2004-2016 and suggests that there is scope for better targeting existing social programs.”

“Transfers and taxes play a much more limited role in alleviating inequalities in Mexico than in other OECD countries. The Gini reduction effect of transfers and taxes is lower in Mexico than in all OECD countries. This limited redistributive role of fiscal policies in Mexico may result from a tax system that is insufficiently progressive. It also reflects the low level of public social spending as a share of GDP, in particular on non-contributory cash transfers targeted at the poorest households.”

“After a modest increase over 2007-2015, public social spending as a share of GDP has
fallen in the last two years. Public social spending increased by 2.5 percent of GDP from 2007 to
2015, reaching a maximum of 12.1 percent of GDP, before shrinking to 10.4 percent in 2017. Social
assistance and education, the first two components of public social spending, absorb together more
than 60 percent of the total, while health expenditures amount to close to a fourth.”

“Mexico’s social assistance programs cover well households at the bottom of the income distribution. 31 percent of the households in the bottom income quintile benefit from Mexico’s conditional cash transfer program Prospera (formerly known as Oportunidades and initially launched as Progresa), which has served as a model for many countries around the world (Parker and Todd, 2017). Similarly, the share of households benefiting from old-age social assistance is three times higher in the first income quintile than in the fifth one. Prospera and old-age social assistance programs account for about ¾ of the decline in the Gini coefficient coming from government transfers, while they represent about half of the total government transfer amount received by an average household.”

An IMF country report on Mexico documents “the composition, trends, and labor market implications of informality using data from the National Employment Survey (ENOE). Over half of the employed population has informal contractual relationships in Mexico both at formal and informal firms. Informality is found to be associated with lower levels of pay –even when accounting for worker composition differences– and lower wage growth over the life cycle.”
“Future labor market reforms should take a holistic approach that addresses both distributional concerns and formality barriers. One alternative is to reduce dependence on payroll taxes that are biased towards formal salaried workers while transitioning towards a social insurance system that provides good-quality services for all, irrespective of their salaried/non-salaried status. Another is easing firing and hiring restrictions of salaried workers while increasing protections to the unemployed through a more universal unemployment insurance scheme. This type of profound long-term transformations should, of course, only be implemented after careful review of policy alternatives guided by experiences in other countries and detailed impact analysis.”

“Short-term reforms should build towards a system where the non-exclusive targets of boosting social protection and removing distortionary restrictions are achieved. Policy proposals, such as hikes in the minimum wage, should be gradual, viewed in the context of other distortionary polices, and carefully weigh equity benefits against the potential displacement of labor towards unproductive informality.”

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.”