The Unassuming Economist

Figure 1 provides a measure of the global unemployment rate based on data for 116 countries, of which 37 countries are classified as ‘advanced’ (i.e. high-income) countries and the remaining 79 as ‘emerging market and developing economies.’ (We refer to the second group using the acronym ‘EMDE’.)

Let’s begin with how the global unemployment picture looked before the IMF’s January 2016 WEO Update. Figure 1 provides a measure of the global unemployment rate based on data for 116 countries, of which 37 countries are classified as ‘advanced’ (i.e. high-income) countries and the remaining 79 as ‘emerging market and developing economies.’ (We refer to the second group using the acronym ‘EMDE’.) Focusing on the recent cycle, global unemployment rate peaked in 6.2 percent in 2009 and has since been returning slowly to its pre-crisis level. Over the coming year, the global unemployment rate is expected to go up slightly.

To understand where this increase is coming from, Figure 2 shows the unemployment rate for the two main groups of countries separately. This reveals that the increase comes from the emerging markets and developing countries (EMDE) group. Moreover, the increase in unemployment among this group occurs because of the expected increase in unemployment among fuelexporting countries (Figure 3).

How will the growth revisions affect the unemployment picture?

Now let’s consider how the revisions to the growth forecasts that the IMF announced in the January 2016 WEO Update could change the unemployment picture. At the global level, the forecast for GDP growth in 2016 was revised down by 0.2 percent, which would in turn increase the global unemployment rate only a little bit above the path projected in Figure 1. However, for some countries the revisions in growth forecasts are larger, as shown in Figure 4 below. The biggest change is in Brazil, followed by Saudi Arabia, South Africa and Russia.

Continue reading here.

A high degree of mobility has long been considered a distinguishing feature of the U.S. labor market.

A commonly-held view is that when a U.S. state is experiencing tough times (relative to other U.S. states), workers quickly leave the state for greener pastures; this keeps the state’s unemployment rate from going up too much and its labor force participation rate from declining too much.

My new work (with Mai Dao and Davide Furceri) offers a less sanguine view of the ability of U.S. workers to shield themselves from the consequences of adverse shocks. We show that, particularly in the short run, the adjustment to tough times occurs more through unemployment rates going up than through people leaving the state. And while migration picks up during recessions, people in the states that are doing very poorly have a difficult time exiting.

Here is a link to the paper and a technical summary of the paper:

Our first key finding is that labor mobility is less important as a cyclical adjustment mechanism, relative to changes in unemployment and participation, than suggested in earlier work. Some of this shift in view comes from the addition of over 20 years of data to the previous work. But the main reason is that, given the availability of official interstate net-migration data starting in 1991 we can also directly look at the behavior of migration, as opposed to backing it out as a residual. We find that it is primarily the relative unemployment rate, not net migration, that is the main adjustment mechanism in the first two years following a relative shock to state labor demand.

Our second set of findings pertains to a newer literature that documents longer-run movements in U.S. mobility, particularly the steady and widespread reduction in gross internal migration rates since the 1980’s. Here we establish several results that reveal important patterns in regional adjustment mechanisms.

• First, in the last two decades or so starting 1990, the response of net migration to given regional shocks in the short run has decreased, as has the response of relative unemployment and participation rates, resulting in less dispersion of employment growth in response to given dispersion in relative labor demand shocks.
• Second, the smaller migration response to shocks is driven entirely by less net out-migration from states that experience adverse labor demand shifts, whereas the net in-migration response to states with favorable labor demand shifts has increased or remained constant (depending on time horizon). This also suggests that in-migrants to the best states do not disproportionately come from the poorest states, a sign of lack of migration directedness and of scope for efficiency gains from an aggregate perspective.
• Third, despite the trend decline in gross migration rates since the early 1990’s, the migration response to a state-relative demand shock increases strongly in recessions, hence potentially playing a larger role as shock absorber during aggregate downturns than in normal times. Importantly, we observe that this counter-cyclical response of migration is driven primarily by a stronger response of positive net migration into states that do relatively better during recessions, while negative net migration from states that do relatively worse only increases by less and the response is delayed, occurring toward the end of the recession. When a state like North Dakota does relatively better than average during a recession thanks to the shale gas boom, it attracts disproportionately more in-migration than for instance Texas during an expansion, when strong demand for oil creates more jobs in Texas than elsewhere. However, the migrants into North Dakota during the recession do not come disproportionately more from states that are doing worse than average, say Michigan, as one would expect.

So, did the Fund fire its employment guru? Well, not quite, but after five years at the helm of the Fund’s Jobs & Growth working group, Prakash Loungani is moving on to other assignments. RES GESTAE spoke to him about the group’s travails in promoting the Fund’s work on jobs, growth and equity.

RG: What was the group set up to do?

Loungani: On jobs, the immediate task was to remind people that sometimes unemployment is high because demand is low. The Fund, like many others, often veers towards thinking of unemployment as largely a supply-side problem—people are lazy or we give them very generous unemployment benefits so they don’t search for jobs or there are structural problems that keep unemployment high. At the onset of the Great Recession, Olivier (Blanchard) and Min (Zhu)—who had oversight over the group—were worried that we would underplay the most obvious explanation for why unemployment had spiked up, namely that aggregate demand had fallen. Our mission was to keep the words “aggregate demand” alive within the building and outside.

RG: Did you succeed?

Loungani: Perhaps more outside the building than within it, at least initially. Under Olivier’s supervision—he gave me a two-page outline and said “follow this”—Mai Dao and I wrote a 2010 paper which Paul Krugman praised: “A recovery in aggregate demand is the single best cure for unemployment. What a relief to hear the IMF say that!” This sentiment was echoed by many others over the ensuing years, including many in the trade union movement. We had a tougher time at other institutions: after one of my presentations in Europe a person came up to me and said: “I heard the same thing from Olivier 30 years ago and I didn’t believe it then.”

RG: And within the Fund building?

Loungani: It has been a tough sell. Larry Ball (of Johns Hopkins), Davide Furceri, Daniel Leigh and I kept up a drumbeat that the short-run relationship between output and unemployment—known as Okun’s Law—had remained stable through the Great Recession. Antonio Spilimbergo started calling us the “Okun police”. I think it eventually started to rub off; one piece of evidence is EUR’s paper on the rise in youth unemployment, which provides an even-handed treatment of the respective roles of aggregate demand and supply factors.

RG: What was the task on growth?

Loungani: Olivier put it as “moving beyond mantras”. Both he and I had the view that the Fund goes to countries and says: “Here are 25 (structural) areas on which you are behind international standards. Improve on all them by next year and you will surely grow”. So I started to look through the Fund’s advice on growth.

RG: What did you find?

Loungani: That the characterization is unfair. Though you can still find examples of the kind I mentioned, the bulk of the Fund’s advice on growth is actually quite ‘granular’; that is, it digs down to see the specific problems the country is facing. Think, for example, of the great work that Patrizia Tumbarello and many other Fund staff have done in providing advice to small states on sustainable growth.

RG: So what did the group do?

Loungani: In the “Jobs & Growth” Board paper, we summarized the current ‘do’s and don’ts’ on growth and then showed that staff had been broadly following that advice. We also issued a very nice guidance note for Fund staff on how to tackle growth issues—I am not praising myself here as this was largely the work of several SPR colleagues. In this case too, as with jobs, we got some external recognition—in this case some back-handed praise from Dani Rodrik, who in the past has been critical of our advice on growth.

RG: And, finally, on inequality?

Loungani: Here the guidance came largely from Min (Zhu), at least initially. Around 2010-11, when the group’s work started, Min was more concerned about inequality than was Olivier. Min said we should see how policies, including Fund policies, affect inequality, so we could take these effects into account in our surveillance and program work.

RG: So does Fund policy advice affect inequality?

Loungani: One of the first things we did was to see how fiscal consolidations—referred to as ‘austerity’ outside our building—affected inequality. In a 2011 piece we found that austerity raises inequality. This initially proved controversial within the building—and, not surprisingly, popular in some circles outside—but management supported us and the paper was published. In 2014, FAD did a very nice Board paper on fiscal policy and inequality and has just issued a new book on the topic. Recently we have shown that openness—capital account liberalization—raises inequality; I hope MCM picks up on this, the way FAD did with fiscal policy. Min also wanted us to see how monetary and exchange rate policies affect inequality; I never got around to it but hope springs eternal—here again MCM could help.

RG: What’s next for you?

Loungani: I have a few residual tasks to complete in the Jobs & Growth agenda. One is to finish extensions of the work on Okun’s Law to emerging markets and low-income countries. The other is to think about the advice the Fund gives to these countries on the design of labor market institutions. This was a topic close to Olivier’s and my hearts; but while Olivier and I did a paper on it for advanced economies (with Florence Jaumotte), I never got around to doing the follow-up paper for other countries. But my main job is to head the division within RES that deals with low-income countries.

RG: And what’s next for the group? Is it disbanded and how would you summarize its impact?

Loungani: Well, my co-chair Ranil Salgado and I have both moved on. But the agenda continues under new management—and the seminar series we launched continues as well. In RES, Romain Duval has taken over and had added structural reforms to the agenda—this is good as the focus we had placed on aggregate demand was appropriate for the time but we should be even-handed. And of course, inequality has become a big deal at the Fund now—with the astounding success of the work by Jonathan Ostry and Andy Berg, the blossoming work on gender inequality, the pilot cases on operationalizating inequality.

On the impact: I suspect Gerry Rice would not call it “huge”. But, in the words of the poet, we managed “to swell a progress, start a scene or two.”

Opening up capital markets, unless managed well, can raise inequality. That’s the message of a new working paper by Davide Furceri and me that the IMF released today. Paul Krugman, based on the early evidence from our work, wrote:

“Davide Furceri and Prakash Loungani use an event-study framework — looking at what happens on average after clear changes in policy — to assess the effects of “neoliberal” policy changes (although they don’t put it that way) on inequality. Sure enough, they find that both fiscal austerity and liberalization of international capital movements are followed by noticeable rises in income inequality. So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.”

Well, our evidence holds up to further scrutiny. And the conclusions we’d like you to draw from our work are summarized in our new blog. And then, if you really want to get a break from the in-laws, here’s the paper. Nothing clears the living room better than a statement like “Guys, let me tell you about this fascinating paper – its findings do not imply that countries should not undertake capital account liberalization, but it suggests an additional reason for caution.”

Happy Thanksgiving,
Prakash