Adjustment Policies, Poverty, and Unemployment

Pierre-Richard Agénor is Hallsworth Professor of International Macroeconomics and Development Economics at the University of Manchester, and co-director of the Centre for Growth and Business Cycle Research. His research interests include international macroeconomics, development economics, and growth theory. He has published widely in leading professional journals and is the author of several best-selling books, including Development Macroeconomics (with Peter Montiel) and The Economics of Adjustment and Growth.Alejandro Izquierdo is Senior Economist in the Research Department of the Inter-American Development Bank and a former economist at the World Bank. His current research focuses on international finance and open-economy macroeconomics, with a particular interest in the analysis of sudden stops in capital flows. Henning Tarp Jensen is Assistant Professor and member of the Development Economics Research Group (DERG) at the Institute of Economics, University of Copenhagen. He has a well-established publication record within the area of computable general equilibrium modeling and a long-standing research interest in low- and middle-income countries, including Mozambique and Vietnam, as well as Argentina, Brazil, Bolivia, Colombia, and Turkey.

• Acknowledgments xiiiAbout the Editors xvIntroduction and Overview 1Pierre-Richard Agénor, Alejandro Izquierdo, and Henning Tarp Jensen1 The Analytics of Segmented Labor Markets 8Pierre-Richard Agénor1.1 Overview of Labor Markets 91.1.1 Basic Structure 91.1.2 Composition of Employment 111.1.3 Public Sector Pay and Employment 121.1.4 Labor Market Institutions and Regulations 131.1.5 Unemployment 221.2 Urban Labor Mobility and the Harris-Todaro Framework 241.3 Wage Formation in the Formal Sector 271.3.1 Efficiency Wages 281.3.2 Trade Unions 421.3.3 Bilateral Bargaining 441.3.4 Job Search 451.3.5 Adverse Selection Models 471.4 A Shirking Model with Segmented Markets 471.4.1 The Economy 481.4.2 Equilibrium with Skilled Unemployment 511.4.3 Labor Mobility and Unskilled Unemployment 561.4.4 Increase in the Minimum Wage 591.5 Concluding Remarks 62Appendix: The Impact of a Change in the Minimum Wage 632 The Macroeconomics of Poverty Reduction 67Pierre-Richard Agénor2.1 A Distorted Agenda 692.1.1 A Topic Neglected by Macroeconomists 692.1.2 An Excessive Focus on Micro Aspects and Measurement Issues 722.1.3 The Confusion over “Pro-Poor Growth” 732.2 Transmission of Macro Shocks to the Poor 792.2.1 The Central Role of the Labor Market 792.2.2 Changes in Aggregate Demand 802.2.3 Expenditure Deflators and Inflation 812.2.4 The Real Exchange Rate and the Supply Side 822.2.5 Macroeconomic Volatility 832.2.6 Growth and Distributional Effects 842.2.7 Recessions and Crises: Asymmetric Effects 852.3 Theoretical Models for Poverty Analysis 862.3.1 A Two-Household Framework 862.3.2 Equilibrium 922.3.3 Cut in Government Spending 942.4 Some Research Directions 962.4.1 Poverty Traps 962.4.2 Asymmetric Effects of Output Shocks 1002.4.3 Welfare Costs of Macroeconomic Volatility 1002.4.4 Unemployment–Poverty Trade-offs 1012.4.5 Can Redistribution Hurt the Poor? 1022.5 Concluding Remarks 104Appendix A: Asymmetric Effects of Output Shocks 106Appendix B: Dynamic Structure and Stability Conditions 1083 The Mini Integrated Macroeconomic Model for Poverty Analysis 110Pierre-Richard Agénor3.1 Structure of Mini-IMMPA 1133.1.1 Production 1133.1.2 The Labor Market 1163.1.3 Supply and Demand 1253.1.4 External Trade 1263.1.5 Prices 1273.1.6 Profits and Income 1293.1.7 Private Consumption and Savings 1303.1.8 Private Investment 1303.1.9 Public Sector 1323.1.10 Balance of Payments 1333.1.11 Poverty and Distributional Effects 1363.2 Policy Experiments 1383.2.1 Reduction in the Minimum Wage 1393.2.2 Cut in Payroll Taxes on Unskilled Labor 1483.3 Conclusions 169Appendix: Calibration and Parameter Values 1714 Unemployment and Labor Market Policies in Morocco 178Pierre-Richard Agénor and Karim ElAynaoui4.1 The Labor Market in Morocco 1804.1.1 Basic Structure 1804.1.2 Employment, Unemployment, and the Returns to Education 1814.1.3 Regulatory and Institutional Features 1854.1.4 Wage Flexibility 1884.1.5 Domestic and International Labor Migration 1894.1.6 Constraints and Challenges 1914.2 A Quantitative Framework 1934.2.1 Production 1934.2.2 Wages, Employment, Migration, and Skills Acquisition 1974.2.3 Supply and Demand 2044.2.4 External Trade 2064.2.5 Prices 2064.2.6 Profits and Income 2084.2.7 Consumption, Savings, and Investment 2104.2.8 Government 2114.2.9 Balance of Payments 2134.3 Policy Experiments 2144.3.1 Cut in the Minimum Wage 2144.3.2 Reduction in Payroll Taxes on Unskilled Labor 2214.4 Concluding Remarks 228Appendix: Calibration and Parameter Values 2305 The Complete IMMPA Framework for Low-Income Countries 234Pierre-Richard Agénor, Alejandro Izquierdo, and Hippolyte Fofack5.1 Model Structure 2365.1.1 Production 2365.1.2 Wage Formation, Employment, Migration, and Skills Acquisition 2405.1.3 Supply and Demand 2485.1.4 External Trade 2505.1.5 Prices 2505.1.6 Profits and Income 2535.1.7 Savings, Consumption, and Investment 2555.1.8 Financial Sector 2575.1.9 Public Sector 2625.2 Poverty and Income Distribution Indicators 2675.3 Calibration 2755.3.1 Initial Values 2755.3.2 Parameter Values 2775.4 Some Illustrative Experiments 2775.4.1 Terms-of-Trade Shock 2785.4.2 Cut in Domestic Credit to Government 2895.4.3 Debt Reduction and Expenditure Reallocation 2995.5 Conclusions 3276 Stabilization Policy, Poverty, and Unemployment in Brazil 329Pierre-Richard Agénor, Reynaldo Fernandes, Eduardo Haddad, and Henning Tarp Jensen6.1 An IMMPA Framework forBrazil3316.1.1 Production 3326.1.2 Wages, Employment, Migration, and Skills Acquisition 3346.1.3 Supply and Demand 3396.1.4 External Trade 3406.1.5 Prices 3416.1.6 Profits and Income 3436.1.7 Savings, Financial Wealth, and Investment 3446.1.8 Asset Allocation and the Financial Sector 3456.1.9 Public Sector 3496.1.10 Balance of Payments and the Exchange Rate 3536.1.11 Currency and Bond Market Equilibrium 3546.2 Poverty and Income Distribution Indicators 3556.3 Calibration and Survey Characteristics 3596.4 Stabilization, Unemployment, and Poverty 3596.5 Concluding Remarks 371Appendix C: Calibration and Parameter Values 3737 Disinflation, Fiscal Sustainability, and Labor Market Adjustment in Turkey 383Pierre-Richard Agénor, Henning Tarp Jensen, Mathew Verghis, and Erinç Yeldan7.1 Structure of theModel3887.1.1 Production 3887.1.2 The Labor Market 3917.1.3 Export Supply and Import Demand 4007.1.4 Aggregate Supply and Demand 4007.1.5 Profits and Income 4017.1.6 Savings and Wealth Accumulation 4047.1.7 Private Investment 4057.1.8 Asset Allocation and the Credit Market 4087.1.9 Public Sector 4177.1.10 The Balance of Payments and the Exchange Rate 4197.1.11 Currency and Bond Market Equilibrium 4207.1.12 Price Determination 4217.1.13 Default Risk, Credibility, and Expectations 4237.2 Calibration and Solution 4267.3 Policy Experiments 4267.3.1 Increase in Official Interest Rates 4277.3.2 Fiscal Adjustment 4377.4 Concluding Remarks 454Appendix: Calibration and Parameter Values 4568 Linking Representative Household Models with Household Surveys for Poverty Analysis: A Comparison of Alternative Methodologies 465Pierre-Richard Agénor, Derek H. C. Chen, and Michael Grimm8.1 Macro-RHG Models and Poverty Analysis 4668.2 Linking Income Survey Data with Macro-RHG Models 4678.2.1 A Simple Micro-Accounting Method 4688.2.2 An Extension with Reweighting Techniques 4708.2.3 The Use of Distribution Functions 4728.3 The Macro-RHG Framework 4768.3.1 Production and the Labor Market 4768.3.2 Composition of Demand and Prices 4788.3.3 Profits and Income 4788.3.4 Investment–Savings Balance 4798.3.5 Public Sector and the Balance of Payments 4798.4 Comparing Policy Shocks with Alternative Linkages 4798.4.1 Reduction in the Minimum Wage 4808.4.2 Increase in Employment Subsidies 4918.5 Conclusions 502Appendix A: Reweighting when Using Real Survey Data 504Appendix B: Estimated Shape Parameters and Fitted Poverty Measures with Beta Distribution Functions 5059 Some Research Perspectives 509Pierre-Richard Agénor, Alejandro Izquierdo, and Henning Tarp Jensen9.1 Labor Market Structure and Policies 5109.2 Macroeconomic Effects of Foreign Aid 5119.3 Public Investment, Growth, and Congestion Costs 5139.4 Linking Macro Models and Surveys 515References 519

"Including papers originally circulated through the World Bank, as well as new material that places this important work in its larger context, the book details the history and uses of these models and points to future developments for thier utilization."International Social Security Review "While economic growth may potentially raise living standards across the board in developing countries, the policies adopted at the macro level to promote growth are clearly not distribution-neutral. Because the urgency to raise living standards is greatest at the bottom of the income distribution in such countries, the need to understand the links between macroeconomic policies and poverty reduction looms large on the development research agenda. Unfortunately, because this issue is at the intersection of micro- and macroeconomics, it has tended to fall between the stools of researchers, despite the attention that the issue has recently received in policy circles. "This volume represents an impressive start in redressing this situation. The papers contained here develop innovative analytical tools that are applied to investigate the employment and distributional effects of standard macroeconomic policies in the context of specific developing countries, showing the way to future progress in this important area of research. It is bound to become a standard reference for future research on the macroeconomics of unemployment and poverty reduction in developing countries."Peter Montiel, Professor of Economics, Williams College