The Unassuming Economist

From a new VOX post:

“The impact of trade shocks on labour market shifts is usually studied in the context of re-training and social welfare frictions. Using evidence from Denmark, this column shows how workers can experience long-run reductions in earnings no matter how easy it is to change sector. A sudden and obligatory shift toward a new sector may, by its nature, generate some worker dissatisfaction.”

“Figure 1 shows the import competition-induced sectoral change. Each marker shows the causal effect of import competition in the corresponding year on employment at the respective job/sector indicated in the legend, as captured by the difference-in-difference specification with individual fixed effects.”

“The challenges faced by manufacturing workers, who once exemplified the middle class, have important implications for the whole society. My findings show that adjustment problems do not end once manufacturing workers find full-time jobs in the growing service sector. And the Danish labour market institutions, despite being successful in keeping the workers within the labour market and ensuring fast inter-sectoral movement as well as largely covering the earnings losses of workers with transfers, were not fully successful in relieving the pain of the people whose human capital is not relevant for service sector jobs. In the end one feels better when earning a living rather than getting a transfer, and when enjoying and taking pride in work rather than changing from one job to another due to skill mis-match. Thus, it may be unavoidable that a sudden and obligatory shift toward a new sector demanding new skills leads to dissatisfaction. Although, the social system in Denmark may be a factor in keeping the dissatisfaction within limits and preventing unwanted political consequences.”

From a new VOX post by Christine Lagarde and Jonathan D. Ostry:

“The persistent gap between female and male labour force participation comes at a significant economic cost. This column argues that because women and men complement each other in the production process, the economic benefits from gender diversity are likely to be larger than suggested by previous studies. Gender complementarity also has important implications for the welfare costs from barriers to female labour force participation. The case for gender equity is even more compelling and pressing.”

“These are not all new concerns, but there is a renewed sense of urgency. For years, the IMF has been at the forefront of policy analysis highlighting the economic costs of inequality and possible remedies (Ostry et al. 2014, 2019). We know that the unlevel playing field between women and men has substantial economic costs. What we are now learning is that these costs are even larger than we previously thought. Now that we see the full picture, the case for greater gender equity has become even more compelling and pressing.”

From a new paper by Yannis Dafermos and Christos Papatheodorou:

“The recent empirical literature on the distributional effects of monetary policy on inequality has focused on the various channels through which a change in the policy interest rate or the central bank asset purchases affect income and wealth inequality. Although most studies show that expansionary (contractionary) conventional policy tends to reduce (increase) income inequality (see Coibion et al., 2017; Mumtaz and Theophilopoulou, 2017; Furceri et al., 2018; Guerello, 2018; Ampudia et al., 2018), there is no consensus on whether these effects are economically significant. In addition, there is no consensus about (i) the size and the direction of the effects of conventional monetary policy on wealth inequality and (ii) the distributional impact of quantitative easing (see e.g. Saiki and Frost, 2014; Domaski et al., 2016; Montecino and Epstein, 2017; Mumtaz and Thephilopoulou, 2017; O’Farrell and Rawdanowicz, 2016; Ampudia et al., 2018; Casiraghi et al., 2018; Guerello, 2018; Koedijk, 2018). This comes as no surprise: the magnitude of the distribution channels of monetary policy depends on a number of factors which influence the impact of these channels across countries and time periods. For example, it has been shown that the effect of monetary policy on inequality depends on the initial wealth distribution and the composition of household financial assets (O’Farrell and Rawdanowicz, 2017; Guerello, 2018), the initial wage share (Furceri et al., 2018) and the marginal propensity to consume (Ampudia et al., 2018).

Despite these recent developments in the empirical literature, there is currently no theoretical model that incorporates the key distribution channels of monetary policy simultaneously and is capable of analysing in a systematic way the exact conditions under which monetary policy has economically significant effects on inequality. This paper develops such a model by combining the agent-based (AB) and the stock-flow consistent (SFC) approaches to macroeconomic modelling. The SFC approach is characterised by the explicit incorporation of accounting principles into dynamic macro modelling and the emphasis that it places on the dynamic interplay between monetary stocks and flows (see Godley and Lavoie, 2007a). The AB approach is suitable for exploring how macroeconomic phenomena emerge out of the interactions between heterogeneous agents. It has been recently argued that the combination of agent-based and stockflow consistent approaches is a fruitful avenue for the reconstruction of macroeconomics, moving beyond the conventional representative agents framework (see e.g. van der Hoog and Dawid, 2015; Caiani et al., 2016).”

From a new IMF working paper:

“This paper has approached progressivity from different angles. Bringing together our findings, we can conclude strongly that progressivity has decreased over the last few decades, a finding that is robust to the choice of measure. We also conclude, but with less certainty, that the reduction in progressivity appears not to have given growth a boost.

While this paper focused on personal income taxes, developments in capital income taxation are also likely to have contributed to reducing overall progressivity: Capital income is distributed more unequally than labor income, has risen over the past few decades as a share of total income (IMF, 2017b), and is often taxed at a lower rate than labor income. The corporate income tax, in particular, plays an important role in determining progressivity. First, there can be a direct effect to the extent that it is partly borne by owners of corporations. Second, it indirectly supports the enforcement of the taxation of labor income: Corporate taxation mitigates arbitrage in response to taxation of entrepreneurial income, because distinguishing labor income from capital income can be difficult (or impossible) when individuals can freely choose the form through which they declare their income (IMF, 2014). When the personal income tax base can be shifted to some alternative tax base that is taxed at a lower rate (such as corporate income), optimal tax theory implies that the optimal tax rate on personal income rises with the tax rate on the alternative base. In recent decades, international tax competition—resulting from capital mobility—has led to a steady downward trend in corporate income tax rates (Table 2). This trend reduces overall tax progressivity and may also put downward pressure on personal income tax rates—even though labor itself is less mobile and could be taxed more easily in a globalized world.

There are many unresolved questions and areas for further research. For example, progressivity measures taking the entire tax and benefit system, and ideally even public spending, into account would enhance the understanding of overall progressivity tremendously. The challenges in finding such a measure, especially one that is still independent of pre-tax and spending distributions are enormous.

Despite the absence of a fully comprehensive measure of progressivity, and some reasonable doubts about the impact of progressivity on growth, it appears safe to say that progressivity-enhancing measures could be taken without major risks to growth. This would be especially relevant in countries that are marked by great inequality.”

From a new IMF working paper:

“Following a period of disinflation during the 1990s and early 2000s, inflation in emerging markets has remained remarkably low. The volatility and persistence of inflation also fell considerably and remained low despite large swings in commodity prices, the global financial crisis, and periods of strong and sustained US dollar appreciation. A key question is whether this improved inflation performance is sustainable or rather reflects global disinflationary forces that could prove temporary. In this paper, we use a New-Keynesian Phillips curve framework and data for 19 large emerging market economies over 2004-18 to assess the contribution of domestic and global factors to domestic inflation dynamics. Our results suggest that longer-term inflation expectations, linked to domestic factors, were the main determinant of inflation. External factors played a considerably smaller role. The results underscore that although emerging markets are increasingly integrated into the global economy, policymakers remain largely in control of domestic inflation developments.”