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Designing labor policy simulation approach

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  • 1. DESIGNING LABOR POLICY:A SIMULATION APPROACHLabor Market Policy Core Course – May 15th 20131PRESENTERS:MICHAEL WEBER AND DAVID A. ROBALINO
  • 2. Outline1 • Motivation – Why Simulation?2 • Ex-Ante Evaluation of LM Policies3 • simPLE – simulation for Policies in Labor Economics4 • Example: Unemployment Benefits in Colombia5 • Example: Unemployment Insurance for Malaysia6 • Example: Wage Subsidies in Tunisia7 • Conclusion2
  • 3. Motivation Evaluation of Labor Policies concerns all of us These policies have important impacts on Labor Markets andfiscal accounts Ex-post evaluations are costly and difficult Advances enable (Ex-Ante) Labor Policy Simulations Evaluations through Simulations facilitate Communication and Discussion of Policy Features, Expected Effects,and Assumptions Transparency and Comparison of Policies Sharing and Learning from Best Policy Practices Simulating is NOT forecasting3
  • 4. Approaches for Designing Policies I Ex-Post Evaluation (Experiments, Quasi-Experiments) Advantages: statistically valid and robust results of impact against acounterfactual Disadvantages: costly and time-consuming to implement high level of statistical complexity to account for selectionbias and the effects of unobservable characteristics (quasi-experimental)4
  • 5. Approaches for Designing Policies II Ex-Ante Evaluation ((Micro-)simulation) Advantages: projects potential impacts prior to implementation can determine the sensitivity of outcomes or the efficiencyand effectiveness of many alternative program designs Disadvantages: rely on structural models of economic behavior – (strong)underlying assumptions that may be controversial building upon existing data that can drive results5 Given numerous labor policy design alternatives, ex-ante approaches can support policy making
  • 6. Examples of Microsimulation Approaches EU: EUROMOD analysis of taxes and benefits on household incomesand work incentives Statistics Canada: Lifepaths (among others) simulates impacts of government programs over time onthe individual/household level and many others: Sweden: SVERIGE3; Australia: APPSIM; Italy:LABORsim; UK: PenSim2; …6
  • 7. simPLE – simulations for Policies in LaborEconomicsOur Approach: simPLE
  • 8. Types of LM Policies for simPLE to address8Benefits• UnemploymentBenefits(traditional UI,individualaccounts,solidarity funds,severance pay,etc.)Costs (ofLabor)• WageSubsidies• Minimum Wage• Firing Costs• Severance PayFinancing• Social SecurityContributions(Tax Wedge)
  • 9. simPLE – Simulation Tool to …9
  • 10. How the model works10unemploymentformal wageemploymentinformal wageemploymentself-employmenttimejobinterviews
  • 11. Structural Parameters for simPLE11Probability of getting job interviews (formal informal) that dependon the ratio of unemployed to vacanciesRelative productivity of labor in the formal and informal sectorProductivity of labor in self-employmentBargaining power of workers relative to employersProbability of loosing a job (formal wage, informal wage, self-employment)Interest ratesGrowth rates of vacancies
  • 12. LM indicators used to estimatestructural parameters12Unemployment rateShare of self employmentShare of informal wage employmentShare of formal wage employmentAverage wage self-employedAverage wage formal workersAverage wage informal workers
  • 13. Potential Sources of Data13Labor force surveys• Employment and its components: (in-)formal wage and self-employment• Unemployment• Wages• Distribution of relevant LM characteristics such as education levelAdministrative data• Number of recipients of benefits and subsidies• Actual levels and durations of benefits and subsidies• Actual contributions and taxes paidLabor Code and Social Insurance Law• Contribution rates to Labor Market and Social Insurance Programs• Payroll and other income related taxes• Minimum Wage regulations• Wage Subsidies• Severance Pay• Unemployment Insurance and Unemployment Assistance
  • 14. 14simPLEstructure
  • 15. How to reform the unemployment benefit (UB)system?Example: Colombia
  • 16. Colombia – UB Reform Proposal I16Model based on individual accounts (UISA)• incentive-compatible: reduces moral hazard• easier and less costly administration• positive balance will be transferred to the pensions account uponretirementCovering all formal sector employees• later extendable to self-employed workersComplemented by a solidarity fund• to supplement the low savings of some workers• additional obligations if accessing SF
  • 17. Colombia – UB Reform Proposal II17IndividualAccountSolidarity FundEmployerStateEmployeeAfter firstmonthif eligibleAny Reasonfor SeparationUISA with SFEligibilityConditions
  • 18. UB Selected Inputs for Simulation18
  • 19. Colombia – Outputs Summary• Sustainable system (base scenariowithout major shocks)• Driven by administrative costsFiscal impact• Still low in relation to total unemploymentspells (including informal)• However increased support for the (formal)unemployed over their unemployment spellCoverage• Consumption smoothing effect confirmedConsumption19
  • 20. Colombia Output – UB Payouts200500001000001500002000002500003000003500004000004500005000001 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59Benefits/ExpenditureTime (months)UI/SF Payments UISA Payments TOTAL
  • 21. Colombia Output – Revenues SolidarityFund (SF)21-10000001000002000003000004000005000001 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59Balance on UI/SF Fund (positive integers indicate a surplus)Expenditures/Benefits TOTALBalance on UI/SF Fund (positive integers indicate a surplus) $6,521,419Balance on Individual Savings Accounts $28,889,416
  • 22. Colombia Output – Coverage I2200.10.20.30.40.50.60.71 2 3 4 5 6MonthsDuration of Unemployment with UB coverage(censored tabulation)
  • 23. Colombia Output – Coverage II230%10%20%30%40%50%60%70%80%90%100%Total of all Unemployment SpellsUnemployment Spellswithout CoverageUnemployment Spells withUISA coverage onlyUnemployment Spells withUISA+SF coverage
  • 24. Shall the country adopt unemployment insurance?Example: Malaysia
  • 25. The situation in Malaysia I25
  • 26. 26The situation in Malaysia I
  • 27. 27The situation in Malaysia II
  • 28. 28The situation in Malaysia II
  • 29. Employment effects depend on policychoices29
  • 30. Employment effects depend on policychoices30
  • 31. How to use wage policies to employ youth?Example: Tunisia
  • 32. Human resources are underutilizedDistribution ofthe WorkingAge Population32
  • 33. The unemployed are concentrated in certaingroups33
  • 34. Long term unemployment is pervasive34
  • 35. Inefficient Labor Market Transitions6 YEARSAgeSchool to work transitions are difficult35
  • 36. SHORTAGE SURPLUSThere seems to be a surplus of professionals...... and a deficit of semi-skilled workers36
  • 37. The minimum wage today seems moderate relativeto other countries...37
  • 38. ... but it could be binding in the private sector38
  • 39. Model suggests the MG is reducing employment foryouth39
  • 40. At the aggregate level the impact of wagesubsidies has been modest...40
  • 41. Targeting wage subsidies -- 50% -- to low skilledworkers can have a more sizable effect ...41
  • 42. Conclusion42• Policymakers need information on LM and fiscalimpacts of alternative regulations and incomeprotection programsWhy?• can be successful but poorly designed policies cancreate incentive, efficiency, and equity problemsLabor MarketInterventions• ex-post evaluations are costly and difficult• ex-ante evaluations help gauge various alternativepolicy designsPolicy Evaluation• simulations can support policy makers to quickly andefficiently implement ex-ante evaluationssimPLE• simulating is not forecasting; ex-ante simulations cancomplement ex-post evaluationsMind:
  • 43. THANK YOUFOR YOUR ATTENTION!Labor Market Policy Core Course – May 15th, 201343