Adjustment Policies, Poverty, and Unemployment: The IMMPA Framework

Acknowledgments xiii

About the Editors xv

Introduction and Overview 1
Pierre-Richard Agénor, Alejandro Izquierdo, and Henning Tarp Jensen

1 The Analytics of Segmented Labor Markets 8
Pierre-Richard Agénor

1.1 Overview of Labor Markets 9

1.1.1 Basic Structure 9

1.1.2 Composition of Employment 11

1.1.3 Public Sector Pay and Employment 12

1.1.4 Labor Market Institutions and Regulations 13

1.1.5 Unemployment 22

1.2 Urban Labor Mobility and the Harris-Todaro Framework 24

1.3 Wage Formation in the Formal Sector 27

1.3.1 Efficiency Wages 28

1.3.2 Trade Unions 42

1.3.3 Bilateral Bargaining 44

1.3.4 Job Search 45

1.3.5 Adverse Selection Models 47

1.4 A Shirking Model with Segmented Markets 47

1.4.1 The Economy 48

1.4.2 Equilibrium with Skilled Unemployment 51

1.4.3 Labor Mobility and Unskilled Unemployment 56

1.4.4 Increase in the Minimum Wage 59

1.5 Concluding Remarks 62

Appendix: The Impact of a Change in the Minimum Wage 63

2 The Macroeconomics of Poverty Reduction 67
Pierre-Richard Agénor

2.1 A Distorted Agenda 69

2.1.1 A Topic Neglected by Macroeconomists 69

2.1.2 An Excessive Focus on Micro Aspects and Measurement Issues 72

2.1.3 The Confusion over “Pro-Poor Growth” 73

2.2 Transmission of Macro Shocks to the Poor 79

2.2.1 The Central Role of the Labor Market 79

2.2.2 Changes in Aggregate Demand 80

2.2.3 Expenditure Deflators and Inflation 81

2.2.4 The Real Exchange Rate and the Supply Side 82

2.2.5 Macroeconomic Volatility 83

2.2.6 Growth and Distributional Effects 84

2.2.7 Recessions and Crises: Asymmetric Effects 85

2.3 Theoretical Models for Poverty Analysis 86

2.3.1 A Two-Household Framework 86

2.3.2 Equilibrium 92

2.3.3 Cut in Government Spending 94

2.4 Some Research Directions 96

2.4.1 Poverty Traps 96

2.4.2 Asymmetric Effects of Output Shocks 100

2.4.3 Welfare Costs of Macroeconomic Volatility 100

2.4.4 Unemployment–Poverty Trade-offs 101

2.4.5 Can Redistribution Hurt the Poor? 102

2.5 Concluding Remarks 104

Appendix A: Asymmetric Effects of Output Shocks 106

Appendix B: Dynamic Structure and Stability Conditions 108

3 The Mini Integrated Macroeconomic Model for Poverty Analysis 110
Pierre-Richard Agénor

3.1 Structure of Mini-IMMPA 113

3.1.1 Production 113

3.1.2 The Labor Market 116

3.1.3 Supply and Demand 125

3.1.4 External Trade 126

3.1.5 Prices 127

3.1.6 Profits and Income 129

3.1.7 Private Consumption and Savings 130

3.1.8 Private Investment 130

3.1.9 Public Sector 132

3.1.10 Balance of Payments 133

3.1.11 Poverty and Distributional Effects 136

3.2 Policy Experiments 138

3.2.1 Reduction in the Minimum Wage 139

3.2.2 Cut in Payroll Taxes on Unskilled Labor 148

3.3 Conclusions 169

Appendix: Calibration and Parameter Values 171

4 Unemployment and Labor Market Policies in Morocco 178
Pierre-Richard Agénor and Karim ElAynaoui

4.1 The Labor Market in Morocco 180

4.1.1 Basic Structure 180

4.1.2 Employment, Unemployment, and the Returns to Education 181

4.1.3 Regulatory and Institutional Features 185

4.1.4 Wage Flexibility 188

4.1.5 Domestic and International Labor Migration 189

4.1.6 Constraints and Challenges 191

4.2 A Quantitative Framework 193

4.2.1 Production 193

4.2.2 Wages, Employment, Migration, and Skills Acquisition 197

4.2.3 Supply and Demand 204

4.2.4 External Trade 206

4.2.5 Prices 206

4.2.6 Profits and Income 208

4.2.7 Consumption, Savings, and Investment 210

4.2.8 Government 211

4.2.9 Balance of Payments 213

4.3 Policy Experiments 214

4.3.1 Cut in the Minimum Wage 214

4.3.2 Reduction in Payroll Taxes on Unskilled Labor 221

4.4 Concluding Remarks 228

Appendix: Calibration and Parameter Values 230

5 The Complete IMMPA Framework for Low-Income Countries 234
Pierre-Richard Agénor, Alejandro Izquierdo, and Hippolyte Fofack

5.1 Model Structure 236

5.1.1 Production 236

5.1.2 Wage Formation, Employment, Migration, and Skills Acquisition 240

5.1.3 Supply and Demand 248

5.1.4 External Trade 250

5.1.5 Prices 250

5.1.6 Profits and Income 253

5.1.7 Savings, Consumption, and Investment 255

5.1.8 Financial Sector 257

5.1.9 Public Sector 262

5.2 Poverty and Income Distribution Indicators 267

5.3 Calibration 275

5.3.1 Initial Values 275

5.3.2 Parameter Values 277

5.4 Some Illustrative Experiments 277

5.4.1 Terms-of-Trade Shock 278

5.4.2 Cut in Domestic Credit to Government 289

5.4.3 Debt Reduction and Expenditure Reallocation 299

5.5 Conclusions 327

6 Stabilization Policy, Poverty, and Unemployment in Brazil 329
Pierre-Richard Agénor, Reynaldo Fernandes, Eduardo Haddad, and Henning Tarp Jensen

6.1 An IMMPA Framework forBrazil331

6.1.1 Production 332

6.1.2 Wages, Employment, Migration, and Skills Acquisition 334

6.1.3 Supply and Demand 339

6.1.4 External Trade 340

6.1.5 Prices 341

6.1.6 Profits and Income 343

6.1.7 Savings, Financial Wealth, and Investment 344

6.1.8 Asset Allocation and the Financial Sector 345

6.1.9 Public Sector 349

6.1.10 Balance of Payments and the Exchange Rate 353

6.1.11 Currency and Bond Market Equilibrium 354

6.2 Poverty and Income Distribution Indicators 355

6.3 Calibration and Survey Characteristics 359

6.4 Stabilization, Unemployment, and Poverty 359

6.5 Concluding Remarks 371

Appendix C: Calibration and Parameter Values 373

7 Disinflation, Fiscal Sustainability, and Labor Market Adjustment in Turkey 383
Pierre-Richard Agénor, Henning Tarp Jensen, Mathew Verghis, and Erinç Yeldan

7.1 Structure of theModel388

7.1.1 Production 388

7.1.2 The Labor Market 391

7.1.3 Export Supply and Import Demand 400

7.1.4 Aggregate Supply and Demand 400

7.1.5 Profits and Income 401

7.1.6 Savings and Wealth Accumulation 404

7.1.7 Private Investment 405

7.1.8 Asset Allocation and the Credit Market 408

7.1.9 Public Sector 417

7.1.10 The Balance of Payments and the Exchange Rate 419

7.1.11 Currency and Bond Market Equilibrium 420

7.1.12 Price Determination 421

7.1.13 Default Risk, Credibility, and Expectations 423

7.2 Calibration and Solution 426

7.3 Policy Experiments 426

7.3.1 Increase in Official Interest Rates 427

7.3.2 Fiscal Adjustment 437

7.4 Concluding Remarks 454

Appendix: Calibration and Parameter Values 456

8 Linking Representative Household Models with Household Surveys for Poverty Analysis: A Comparison of Alternative Methodologies 465
Pierre-Richard Agénor, Derek H. C. Chen, and Michael Grimm

8.1 Macro-RHG Models and Poverty Analysis 466

8.2 Linking Income Survey Data with Macro-RHG Models 467

8.2.1 A Simple Micro-Accounting Method 468

8.2.2 An Extension with Reweighting Techniques 470

8.2.3 The Use of Distribution Functions 472

8.3 The Macro-RHG Framework 476

8.3.1 Production and the Labor Market 476

8.3.2 Composition of Demand and Prices 478

8.3.3 Profits and Income 478

8.3.4 Investment–Savings Balance 479

8.3.5 Public Sector and the Balance of Payments 479

8.4 Comparing Policy Shocks with Alternative Linkages 479

8.4.1 Reduction in the Minimum Wage 480

8.4.2 Increase in Employment Subsidies 491

8.5 Conclusions 502

Appendix A: Reweighting when Using Real Survey Data 504

Appendix B: Estimated Shape Parameters and Fitted Poverty Measures with Beta Distribution Functions 505

9 Some Research Perspectives 509
Pierre-Richard Agénor, Alejandro Izquierdo, and Henning Tarp Jensen

9.1 Labor Market Structure and Policies 510

9.2 Macroeconomic Effects of Foreign Aid 511

9.3 Public Investment, Growth, and Congestion Costs 513

9.4 Linking Macro Models and Surveys 515

References 519