Macroeconomic policy and employment flows

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Presentation given during the Project LINK meeting, New York, October 2010

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Macroeconomic policy and employment flows

  1. 1. Macroeconomic policy and employment flowsLabour market adjustment mechanisms in macroeconomic models Uma Amara Rani Matthieu Charpe Ekkehard Ernst International Institute for Labour Studies, ILO Project LINK meeting, New York Oct 22nd, 2010
  2. 2. Outline1 Objectives and main message2 Background considerations3 A labour market flows macro model4 Model estimation5 Conclusion Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 2 / 22
  3. 3. Objectives and main message ObjectivesObjectives Get a micro picture of labour dynamics Look at different margins of labour market flows Job creation vs. job destruction Assess their dynamics over the cycle Overcoming Okun’s fatality Okun’s law is time-varying and asymetric How to promote job-rich growth? How does weak employment growth affect the recovery? Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 3 / 22
  4. 4. Objectives and main message Bottom lineMain message Important insights from analysing labour flow dynamics Stark differences in labour flow dynamics over the business cycle Labour flow dynamics adds to the macro-economic feedback loops Large (short-run) employment multipliers (> 1), lower in the long-run (due to automatic stabilization) Scenario analysis suggests huge fiscal benefits to be had from additional stimulus Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 4 / 22
  5. 5. Background considerations Traditional macro modelsTraditional macro models Okun’s law as a corner stone Pre-determined employment elasticities of growth: Symmetric relation between output and employment growth Trickle-down effects of stimulus Trickle down effects of stimulus: First investment, than jobs (IMF: resilient recovery) Improved demand side will eventually lead to more (and better?) jobs But: Strong evidence for time-varying Okun’s law before the crisis Crisis makes elasticity approach obselete Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 5 / 22
  6. 6. Background considerations Labour flow macro modelsBuilding labour flows into macro models Labour flow macro models Since the mid-1990s, labour flows introduced in DSGE models Merz, 1995; Andolfatto, 1996; Trigari, 2003; Walsh, 2005 Increasingly becoming the industry standard Most New Keynesian models now contain labour flows Recent fiscal policy models exclusively rely on them But: Problems with the business cycle behaviour of flows Volatility not high enough to match data (Shimer, 2005) Unrealistic wage behaviour Estimation of the model difficult Internationally comparable data on labour flows hardly available Strong assumptions wrt functional form and parameter distribution Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 6 / 22
  7. 7. A labour market flows macro model Labour market flows and matchingStylised facts on labour flows Labour market flows present stark differences across countries over the business cycle Canada Germany −3 2 −4 0 −2 −5 Outflow probability Inflow probability −4 −6 Japan USA −3 2 −4 0 −2 −5 −4 −6 1970 1980 1990 2000 2010 1970 1980 1990 2000 2010 Unemployment outflows Unemployment inflows Note: Flow probabilities have been logit−transformed Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 7 / 22
  8. 8. A labour market flows macro model Determinants of labour flowsLabour flow accounting Decomposing unemployment dynamics Ut = Lt − ETt = INt − OUTt Decomposing employment creation ETt = JobCreationt − JobDestructiont ⇓ Link unemployment in- and outflows to its determinants Job creation Job destruction Labour force growth Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 8 / 22
  9. 9. A labour market flows macro model Determinants of labour flowsWhat drives labour market flows? Job creation Investment growth, private consumption, external demand Past employment rate, wages User cost of capital, Real share prices Job destruction Wages, real interest rates, tax wedge, external demand Schumpeter effect: TFP, Import growth Labour force dynamics Mainly driven by its own history plus Tax incentives Discouraged worker effects Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 9 / 22
  10. 10. A labour market flows macro model A macro frameworkA macro framework I Financial accelerator Interest rates affect net present value of vacancies Real share prices improve investment dynamics Feedback loops In- and outflows feed into AD through Government spending Disposable income Wages Government spending feeds into disposable income private investment Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 10 / 22
  11. 11. A labour market flows macro model A macro frameworkA macro framework II Double Phillips curve Hybrid Phillips curve for price dynamics Wage dynamics dependent on unemployment flows Taylor rule, depending on Expected inflation and output gap Government balances Automatic stabilisers, related to Unemployment in- and outflows Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 11 / 22
  12. 12. Model estimation Data and methodologyData and methodology Data Macro data from OECD Economic Outlook 87 Unemployment flow data from Elsby et al. (2008) Estimated flows based on LFS information on unemployment duration Match job creation/destruction rates under certain assumptions Methodology Start with single-equation identification Then estimate system of equations Full macro-model on the basis of GMM Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 12 / 22
  13. 13. Model estimation Single equation identificationDeterminants of job creationDecomposition of unemployment outflows shows that: Demand components play an important role (>40%) Indication for some financial accelerator effect (>30%) Relative prices (wages) more moderate role (<20%) 60 17.4 Contributions to unemployment outflows (in %) 40 14.1 11.8 20 10.9 0 −3.6 −20 −19.0 −40 −23.1 User cost of capital Real wage growth Employment rate (lagged) Capital stock growth Growth of real share prices External demand Real disposable income growth Total Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 13 / 22
  14. 14. Model estimation Single equation identificationDeterminants of job destructionDecomposition of unemployment inflows No Schumpeterian effect from import penetration (strong demand effect) Job churning due to changes in interest rates and TFP growth 23.0 50 Contributions to unemployment inflows (in %) 14.0 25 10.9 0 −9.0 −25 −20.1 −50 −22.9 Growth of real imports External demand Changes in Terms of Trade Labour force growth Growth of Total Factor Productivity Real short−term interest rate Total Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 14 / 22
  15. 15. Model estimation System-equation approachEstimation Two-step procedure System-equations approach to understand the impact of different policies Use GMM to estimate the full macro model Steady-state analysis Dynamic system allows for unique steady state (details in the paper) Allows to differentiate between short- and long-run effects of policies Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 15 / 22
  16. 16. Model estimation System-equation approachShort- and long-run employment multipliers Policy contributions to outflows (short− vs. long−term) Policy contributions to inflows (short− vs. long−term) Government Government non− Government wage Government Government wage Government non− spending wage spending spending spending spending wage spending 40 40 20 20 Contributions (in %) Contributions (in %) 0 0 40 −20 40 −20 Contributions (in %) Contributions (in %) 20 20 0 0 −20 −20 Unemployment Hiring Training Public employment Direct job Training Public employment Hiring Unemployment Direct job benefits incentives expenditures services creation expenditures services incentives benefits creation Short−term effect Long−term effect Short−term effect Long−term effect on outflows on outflows on inflows on inflows Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 16 / 22
  17. 17. Model estimation Dynamic model simulationBusiness cycle Constant INt−1 LFPRt−1 ∆TFPt−1 RIRSt−1 TaxIndt−1 Gapt OUTt(1) INt -3.503*** 0.593*** 1.141*** 0.465*** 0.009*** 2.032*** -0.021*** -0.032*** (0.139) (0.019) (0.095) (0.028) (0.001) (0.237) (0.001) (0.009) Constant OUTt−1 ETRt UCCt ∆WRt ∆INVt Gapt INt(2) OUTt -1.311*** 0.606*** 1.790*** -0.008*** -0.868*** 3.517*** 0.031*** 0.145*** (0.145) (0.014) (0.135) (0.002) (0.108) (0.205) (0.002) (0.018) Constant RIRSt−1 E {GAPt+1 } GovConst−1 TAXt−1 E {πt+1 }(3) RIRSt 1.201** 0.791*** 0.076*** 4.756** -6.247*** 5.168*** (0.539) (0.012) (0.016) (1.971) (1.322) (1.138) Constant E {RSharet+1 } GovInvt−1 ∆Prodt−1 RIRLt−1 ∆ETt−1 GAPt−1(4) INVt 0.007 0.011*** 0.350** 0.831*** -0.001*** 0.473*** 0.001*** (0.006) (0.002) (0.154) (0.051) (0.000) (0.023) (0.000) Constant OUTt INt−1 ∆INVt−1 GovConst−1 TAXt−1 ∆NetExportst−1(8) GAPt -12.931*** 1.620*** -1.940*** 56.495*** 22.651*** -30.290* 0.001*** (1.918) (0.136) (0.388) (4.624) (2.083) (18.368) (0.000) Constant πt−1 E {πt+1 } ∆ToTt−1 GAPt−1(9) πt 0.001*** 0.500*** 0.489*** -0.044*** 0.001*** (0.000) (0.012) (0.013) (0.008) (0.000) Constant ∆WSSEt−1 ∆ETt−1(10) ∆WSSEt 0.006*** 0.792*** 0.146*** (0.001) (0.011) (0.039) Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 17 / 22
  18. 18. Model estimation Application: Understanding recovery optionsAlternatives to austerity IAnalysing crisis exit scenarios Early consolidation (individually or globally) Additional spending Government deficit 0.0 Government net lending −0.5 (in % of GDP) −1.0 −1.5 2005 2010 2015 2020 Baseline scenario Early withdrawal Global fiscal Additional spending for consolidation 3 years (3% of GDP) Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 18 / 22
  19. 19. Model estimation Application: Understanding recovery optionsAlternatives to austerity IISubstantially different employment patterns Additional stimulus pushes up employment growth beyond trend within 2 years With consolidation the gap will not be closed at the end of the forecast period Employment growth 0.2 Annual rate of employment growth −0.6 −0.4 −0.2 0.0 (in %) −0.8 2005 2010 2015 2020 Baseline scenario Early withdrawal Global fiscal Additional spending for consolidation 3 years (3% of GDP) Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 19 / 22
  20. 20. Model estimation Application: Understanding recovery optionsAlternatives to austerity IIIDistinct transmission mechanisms of policies Additional spending works mainly through higher outflows Fiscal consolidation depresses outflows AND increases inflows Unemployment outflows Unemployment inflows 0.3 2.0 Rate of unemployment outflows Rate of unemployment inflows 0.2 1.5 0.1 1.0 0.1 0.5 0.1 0.0 2005 2010 2015 2020 2005 2010 2015 2020 Baseline scenario Early withdrawal Baseline scenario Early withdrawal Additional spending for 3 years (3% of GDP) Global fiscal consolidation Additional spending for 3 years (3% of GDP) Global fiscal consolidation Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 20 / 22
  21. 21. Conclusion SummarySummary How should countries adjust their exit strategies? 1 Labour market policies more effective than generic government spending 2 Focus on measures that contribute to automatic stabilization 3 Additional stimulus might have positive fiscal implications 4 Premature consolidation packages will be damaging on both flow margins Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 21 / 22
  22. 22. Conclusion Future extensionsWay forward Coverage of country specificities 1 Increase country coverage (developing economies) 2 Consider more complex labour market flows 3 Estimate country-specific models Extend the macro framework 1 Financial market interactions à la Wasmer and Weil (2004) 2 Enrich policy framework to cover different policy instruments 3 This includes proper treatment of monetary policy 4 Calibrate the model to make it fit for forecasting Amara, Charpe, Ernst (ILO) Macro policy and employment flows Oct 2010 22 / 22

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