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Labor market deregulation, intended to boost productivity and employment, is one plausible, yet little studied, driver of the decline in labor shares that took place across most advanced economies since the early 1990s. This paper assesses the impact of job protection deregulation in a sample of 26 advanced economies over the period 1970-2015, using a newly constructed dataset of major reforms to employment protection legislation for regular contracts. We apply the local projection method to estimate the dynamic response of the labor share to our reform events at both the country and the country-industry levels. For the latter, we employ a differences-in-differences identification strategy using two identifying assumptions grounded in theory—namely that job protection deregulation should have larger negative effects in industries characterized by (i) a higher “natural” propensity to adjust the workforce, and (ii) a lower elasticity of substitution between capital and labor. We find a statistically significant, economically large and robust negative effect of deregulation on the labor share. In particular, illustrative back-of-the-envelope calculations suggest that job protection deregulation may have contributed about 15 percent to the average labor share decline in advanced economies. Together with existing evidence regarding the macroeconomic gains from job protection and other labor market reforms, our results also point to the need for policymakers to address efficiency-equity trade-offs when designing such reforms.
Business cycles. --- Economic stabilization. --- Economic cycles --- Economic fluctuations --- Cycles --- Adjustment, Economic --- Business stabilization --- Economic adjustment --- Stabilization, Economic --- Economic policy --- Labor --- Macroeconomics --- Business Fluctuations --- Labor Force and Employment, Size, and Structure --- Unemployment Insurance --- Severance Pay --- Plant Closings --- Legal Monopolies and Regulation or Deregulation --- Institutions and Growth --- Measurement of Economic Growth --- Aggregate Productivity --- Cross-Country Output Convergence --- Wages, Compensation, and Labor Costs: General --- Labor Contracts --- Labor Economics: General --- Demand and Supply of Labor: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Labour --- income economics --- Labor share --- Employment protection --- Labor markets --- Real wages --- Manpower policy --- Labor economics --- Labor market --- Economic theory --- United States --- Income economics
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The negative and stable relationship between an economy’s aggregate demand conditions and overall unemployment is well-documented. We show that there is a large degree of heterogeneity in the cyclical sensitivities of unemployment across worker and economy groups. First, unemployment is more than twice as sensitive to aggregate demand in advanced as in emerging market and developing economies. Second, youth’s unemployment is twice as sensitive as that of adults’. Third, women’s unemployment is significantly less sensitive to demand than men’s in advanced economies. These findings point to the highly unequal impacts of the business cycle across worker and economy groups.
Macroeconomics --- Economics: General --- Labor --- Women''s Studies' --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Informal Economy --- Underground Econom --- Demand and Supply of Labor: General --- Labor Force and Employment, Size, and Structure --- Particular Labor Markets: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Labor Standards: Labor Force Composition --- Economics of Gender --- Non-labor Discrimination --- Economic & financial crises & disasters --- Economics of specific sectors --- Labour --- income economics --- Gender studies --- women & girls --- Labor force participation --- Cyclical unemployment --- Women --- Gender --- Currency crises --- Informal sector --- Economics --- Labor market --- Economic theory --- United States
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The negative and stable relationship between an economy’s aggregate demand conditions and overall unemployment is well-documented. We show that there is a large degree of heterogeneity in the cyclical sensitivities of unemployment across worker and economy groups. First, unemployment is more than twice as sensitive to aggregate demand in advanced as in emerging market and developing economies. Second, youth’s unemployment is twice as sensitive as that of adults’. Third, women’s unemployment is significantly less sensitive to demand than men’s in advanced economies. These findings point to the highly unequal impacts of the business cycle across worker and economy groups.
United States --- Macroeconomics --- Economics: General --- Labor --- Women''s Studies' --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Informal Economy --- Underground Econom --- Demand and Supply of Labor: General --- Labor Force and Employment, Size, and Structure --- Particular Labor Markets: General --- Unemployment: Models, Duration, Incidence, and Job Search --- Labor Standards: Labor Force Composition --- Economics of Gender --- Non-labor Discrimination --- Economic & financial crises & disasters --- Economics of specific sectors --- Labour --- income economics --- Gender studies --- women & girls --- Labor force participation --- Cyclical unemployment --- Women --- Gender --- Currency crises --- Informal sector --- Economics --- Labor market --- Economic theory --- Income economics --- Women & girls --- Women's Studies
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Employment Protection Deregulation and Labor Shares in Advanced Economies.
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Many countries are experiencing persistent, weak medium-term growth and limited fiscal space. Against this background, economic policy agendas—in both advanced and developing economies—are focusing increasingly on structural reforms. While there is broad agreement on the economic benefits of structural reforms, the political-economy of reform is less settled. This is because reforms may generate gains only in the longer term while distributional effects may be sizable in the short run, and because governments may lack political capital to confront vocal interest groups. In these circumstances, politicians may hold back on reforms, fearing they will be penalized at the ballot box. The aim of this Staff Discussion Note is to examine whether the fear of a political cost associated with structural reforms is justified by the available evidence, and whether there are lessons from the data about how reform strategies might be designed to mitigate potential political costs. It provides a major addition to recent IMF analysis examining the output and employment effect of reforms.
Aggregate Productivity --- Balance of payments --- Capital account --- Cross-Country Output Convergence --- Current Account Adjustment --- Current account --- Economics of Regulation --- Exports and Imports --- Finance: General --- Financial regulation and supervision --- Financial sector reform --- Financial services industry --- Financial services law & regulation --- Fiscal consolidation --- Fiscal Policy --- Fiscal policy --- General Financial Markets: Government Policy and Regulation --- Institutions and Growth --- Institutions and the Macroeconomy --- International economics --- Legal Monopolies and Regulation or Deregulation --- Macroeconomics --- Macrostructural analysis --- Measurement of Economic Growth --- Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior --- Plant Closings --- Political Economy --- Severance Pay --- Short-term Capital Movements --- Structural reforms --- Unemployment Insurance --- Spain
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Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments. We also find that the electoral cost of austerity—especially tax hikes—can be contained if it is implemented during good economic times.
Macroeconomics --- Economics: General --- Budgeting --- Public Finance --- Investments: Commodities --- Foreign Exchange --- Informal Economy --- Underground Econom --- Taxation, Subsidies, and Revenues: Other Sources of Revenue --- National Government Expenditures and Related Policies: General --- Debt --- Debt Management --- Sovereign Debt --- Commodity Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- Budgeting & financial management --- Public finance & taxation --- Investment & securities --- Tax expenditures --- Public financial management (PFM) --- Expenditure --- Government debt management --- Commodities --- Currency crises --- Informal sector --- Economics --- Budget --- Expenditures, Public --- Debts, Public --- Commercial products --- United States
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Conventional wisdom holds that voters punish governments that implement fiscal austerity. Yet, most empirical studies, which rely on ex-post yearly austerity measures, do not find supportive evidence. This paper revisits the issue using action-based, real-time, ex-ante measures of fiscal austerity as well as a new database of changes in vote shares of incumbent parties. The analysis emphasizes the importance of the ‘how’—whether austerity is done via tax hikes or expenditure cuts—and the ‘who’—whether it is carried out by left- vs. right-leaning governments. Our main finding is that tax-based austerity carries large electoral costs, while the effect of expenditure-based consolidations depends on the political-leaning of the government. An austerity package worth 1% of GDP, carried out mostly through tax hikes, reduces the vote share of the leader’s party by about 7%. In contrast, expenditure-based austerity is detrimental for left- but beneficial for right-leaning governments. We also find that the electoral cost of austerity—especially tax hikes—can be contained if it is implemented during good economic times.
United States --- Macroeconomics --- Economics: General --- Budgeting --- Public Finance --- Investments: Commodities --- Foreign Exchange --- Informal Economy --- Underground Econom --- Taxation, Subsidies, and Revenues: Other Sources of Revenue --- National Government Expenditures and Related Policies: General --- Debt --- Debt Management --- Sovereign Debt --- Commodity Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- Budgeting & financial management --- Public finance & taxation --- Investment & securities --- Tax expenditures --- Public financial management (PFM) --- Expenditure --- Government debt management --- Commodities --- Currency crises --- Informal sector --- Economics --- Budget --- Expenditures, Public --- Debts, Public --- Commercial products
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