The Unassuming Economist

A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogeneous effect of reform waves on GDP per capita.

For details, see my new paper.

Papers on labor market issues, particularly on low-income countries, welcome for this special issue of Open Economies Review. See call for papers for details. Deadline for submission is Nov. 1, 2016.

A new IMF report discusses whether increases in the minimum wage in Japan will succeed in raising wage growth. It concludes: “In order to revamp growth and permanently exit deflation, Japan needs vigorous wage growth. The government has recognized this and announced substantial increases in the minimum wage and we empirically estimate its impact on average wages. Our econometric results suggest that the 3 percent hourly minimum wage increase could cause monthly wages to increase by about 1.5 percent on a year-on-year basis. The minimum wage policy should be complemented by other income policies—e.g. a “soft target” for wage growth and increases in public wages to create cost-push pressures in line with the inflation target.”

The United States has always been regarded as a highly mobile society. Previous work has left the impression that when adverse economic shocks hit their cities or regions, Americans are quickly able to move and find jobs elsewhere within the country. In a new paper, Mai Dao, Davide Furceri and I provide new evidence that questions this view. Our evidence shows that the ability to migrate is not as immediate as previously supposed; in the first year or two after an adverse shock to a state, the bulk of the burden is borne by an increase in the state unemployment and a decline in its labor force participation rate. We also find that while net mobility across states picks up during national recessions, this increase is driven more by a stronger population inflow into states that are doing better rather than stronger population outflow from states that are doing worse; the outflow occurs only toward the end of the recession. Overall, therefore, our results offer a less sanguine view of the ability of U.S. workers to shield themselves from the consequences of adverse shocks than is available in the literature. Here is a link to the paper and to an online appendix which is a wonk’s delight.

In a revised version of our 2013 paper, Larry Ball, Daniel Leigh and I still conclude: “It is rare to call a macroeconomic relationship a “law.” Yet we believe that Okun’s Law has earned its name. It is not as universal as the law of gravity (which has the same parameters in all advanced economies), but it is strong and stable by the standards of macroeconomics. Reports of deviations from the Law are often exaggerated. Okun’s Law is certainly more reliable than a typical macro relationship like the Phillips curve, which is constantly under repair as new anomalies arise in the data.” The paper provides estimates of Okun’s Law for 20 advanced economies, including the United States.