The Unassuming Economist

From a new IMF Staff Discussion Notes on youth employment:

“Economic development and growth depend on a country’s young people. With most of their working life ahead of them they make up about a third of the working-age population in the typical emerging market and developing economy. But the youth in these economies face a daunting labor market—about 20 percent of them are neither employed, in school, nor in training (the youth inactivity rate). This is double the share in the average advanced economy. Were nothing else to change, bringing youth inactivity in these economies down to what it is in advanced economies and getting those inactive young people into new jobs would have a striking effect. The working-age employment rate in the average emerging market and developing economy would rise more than 3 percentage points, and real output would get a 5 percent boost.

• A two-pronged strategy focused on better learning opportunities and improved job prospects for young people is needed. Secondary and postsecondary schooling has doubled over the past 25 years in the average emerging market and developing economy, which is impressive. But it will take further improvements in education and learning opportunities to close the gap with advanced economies, respond to technology-driven changes in the nature of work, and cope with aging populations. At the same time, young people who are not in school need help so they can find their place in the labor market. This discussion note draws on new analyses that use macro- and microeconomic data to look at how broad structural policies, including labor and product market reforms, can address challenges in the youth labor market.
• Poor labor market outcomes for youth can be traced in part to large and persistent gender gaps. Young women’s inactivity rate, at about 30 percent in the average emerging market and developing economy, is almost twice that of young men. Some of this can be explained by the effects of marriage and children on young women’s employment prospects. The right policies can make a difference. For example, when women receive equal employment protection under the law, the gender gap in employment and participation is smaller; women’s outcomes are better without men’s outcomes being worse—for workers of all ages.
• In areas that are more vulnerable to automation fewer young men—and to a lesser extent, older men—participate or are employed. As technology makes it easier to substitute capital for labor, men may contend with a tougher labor market. Targeted expansion in the social safety net, enhanced general education, and active labor market policies may help the young better cope with such disruptions.
• Aggregate youth unemployment in all economies is twice as sensitive to overall demand as adults’, underscoring how countercyclical macroeconomic policy can help protect young people from economic fluctuations. As emerging market and developing economies continue to develop and formal employment—which is more sensitive to the business cycle—rises, prompt countercyclical policy will be imperative.
• Everyone in emerging market and developing economies seems to benefit from broad policies that enhance the flexibility of the formal labor market and improve job quality—there is no trade-off between youth and adults’ job prospects, even though young people tend to benefit more. Lower business start-up costs, more openness to trade, and encouraging greater competition and entrepreneurship also point to better youth outcomes. These findings are consistent with the very strong positive correlation between youth and adult employment across emerging market and developing economies. Broad structural reforms should therefore be part of the toolkit, alongside more targeted improvements in education and active labor market policies.”

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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.”