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Policy makers in Latin America and the Caribbean (LAC) often complain that poor fiscal performance in their countries is a result of a high degree of spending rigidity. Despite being a common complaint, the issue has remained largely ignored by the literature because of the lack of adequate measures of rigidity that allow cross-country and time series comparability. This report helps close this gap by introducing a new measure of spending rigidities that can be easily applied to multiple countries. It focuses on the categories of spending that are naturally inflexible--wages, pensions, transfers to subnational governments, and debt service--and separates them into two components: structural and nonstructural. The structural component is determined by economic, demographic, and institutional fundamentals. The nonstructural component is determined by short-run transitory factors associated with business and political cycles. The degree of rigidity of spending is then proxied by the ratio of structural spending to total spending, with a higher value indicating that spending is driven mostly by factors out of the policy makers' control. This concept of rigidity was applied to 120 countries for the years 2000-17 and produced several interesting results: --Advanced economies and developing countries in other regions have higher levels of rigidity than countries in LAC. --The sources of rigidity vary by country. --Higher rigidity is associated with higher spending levels, higher tax rates, higher public debt, and lower efficiency of public spending. --Rigidity has pervasive effects on fiscal sustainability, increasing the country's financing needs and reducing the probability of the country starting a fiscal adjustment. Given these pervasive effects of spending rigidity, the report concludes by discussing several policies to contain the sources of rigidity in the long term, ranging from the importance of deepening the pension reform process to the need of establishing strong fiscal institutions promoting medium-term fiscal planning.

Budgetary Process --- Fiscal Policy --- Political Economy --- Public Debt --- Public Employment --- Wage Bill

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We study the determinants of employment and wages in the public sector, using a new set of panel data for 34 LDCs and 21 OECD countries from 1972–992, by estimating equations suggested by an efficiency wage model. We find that government employment is positively associated with the relaxation of resource constraints (the revenue-to-GDP ratio and foreign financing in the case of developing countries and GDP per capita in the case of OECD countries), urbanization, the level of education, and certain countercyclical pressures for government hiring (the real effective exchange rate for developing countries and private employment for OECD countries). Certain measures of government wages are positively associated with government revenues and negatively associated with the level of education, government debt, and countercyclical pressures.

Labor --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Wages, Compensation, and Labor Costs: General --- Labour --- income economics --- Civil service & public sector --- Public employment --- Public sector wages --- Civil service --- Economic theory --- United States

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This paper examines the drivers, and reestimates the size of shadow economies in Europe, with a focus on the emerging economies, and recommends policies to increase formality. The size of shadow economies declined across Europe in recent years but remains significant, especially in Eastern Europe. In the emerging European economies, the key determinants of shadow economy size are regulatory quality, government effectiveness, and human capital. The paper argues that a comprehensive package of reforms, focused on country-specific drivers, is needed to successfully combat the shadow economy. The menu of policies most relevant for Europe’s emerging economies include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness, as well as improving tax compliance, automating procedures, and promoting electronic payments.

Labor --- Economics: General --- Informal Economy --- Underground Econom --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Human Capital --- Skills --- Occupational Choice --- Labor Productivity --- Labor Standards: Labor Force Composition --- Economics of specific sectors --- Labour --- income economics --- Informal economy --- Informal employment --- Human capital --- Public employment --- Labor force participation --- Informal sector --- Economics --- Economic theory --- Labor market

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This paper examines the regional distribution of public employment in Italy and documents two sets of facts. The first is the use of public employment as a subsidy from the North to the less wealthy South. We calculate that about half of the wage bill in the South of Italy can be identified as a subsidy, with both the size of public employment and wage levels used as a redistributive device. The second set of facts concerns the negative effects of subsidized public employment on individuals’ attitudes toward job search, education, and “risk-taking” activities. We conclude that heavy reliance on public employment distorts incentives and discourages the development of market activities in the South.

Labor --- Macroeconomics --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Public Enterprises --- Public-Private Enterprises --- Wages, Compensation, and Labor Costs: General --- Labor Economics: General --- Labour --- income economics --- Civil service & public sector --- Public employment --- Public sector --- Economic sectors --- Economic theory --- Finance, Public --- Labor economics --- Italy

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Although Bosnia and Herzegovina (BiH) has experienced rapid growth in credit to households in recent years, most individuals are still credit constrained. This paper analyzes the determinants of household credit demand and credit constraints in BiH. To our knowledge, it is the first study on this topic employing household survey data (2001 and 2004) from Emerging Europe. Our results highlight the impact of the post-conflict and transitional nature of the country on the behavior of borrowers and lenders. As expected, age, income, wealth and education qualifications are the main factors driving credit market participation, while high income and high wealth lower credit constraints. In BiH, the probability of credit market participation peaks at 45 years old, considerably higher than in the advanced countries. At the same time, older individuals are significantly more constrained than their peers in the advanced countries. The results imply that the current credit boom may largely reflect the overall post-war demand, and indicate the worse-off position of the older generation in transition economy. Moreover, the results underscore the structural nature of unemployment as well as the mismatch between education qualifications and earning prospects in BiH. Education variables have no significant effect on the likelihood of being constrained, while, unlike in the advanced countries, being unemployed significantly increases the likelihood.

Labor --- Macroeconomics --- Money and Monetary Policy --- Personal Income, Wealth, and Their Distributions --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Education: General --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- Labor Demand --- Monetary economics --- Education --- Labour --- income economics --- Personal income --- Credit --- Public employment --- Self-employment --- Income --- Economic theory --- Self-employed --- United States