Download Productivity, Resources Allocations, and Labor Market Reforms

Productivity,
Resources Allocations,
and Labor Market
Reforms
Presentation Prepared for:
XXXVII MEETING OF THE NETWORK OF CENTRAL BANKS AND FINANCE MINISTRIES
April 17, 2013
Session 3. International Currency Wars and Domestic Reforms
Luca Flabbi (IDB)
ISSUE:
LAC’s productivity has declined against the US and
Emerging Asian Countries
TFP Region/ TFP US
120
110
Index 1980=100
100
90
80
70
60
50
Latin America
Emerging Asia
POSSIBLE EXPLANATION:
Missallocation of resources
LAC relative to the US, 1960 - 2007
Per capita income gap
Total factor productivity
Factor accumulation
0%
-5%
Percentage
-10%
-15%
-11%
-20%
-25%
-26%
-30%
-35%
-40%
-37%
For the typical LAC country, two thirds of the LAC-US per capita income gap is
due to lagging productivity.
POLICY IMPLICATIONS:
Large gains from improving resources allocation
Mexico '04
Venezuela
Venezuela '01
Mexico
Bolivia '01
Uruguay
El Salvador '05
Argentina
Argentina '02
Bolivia
Uruguay '05
El Salvador
Ecuador '05
Colombia
Chile '06
Colombia '98
Ecuador
United States '97
Chile
0
50
100
Difference in TFP from the optimum
If the median country allocated
resources as efficiently as the US,
there would be a 20% increase in TFP.
1st Quintile=0.6
0.0
0.5
1.0
4th Quintile=1.3
1.5
2.0
2.5
Increase in growth (percent)
Translated into growth, the median
country would grow by an additional 1%
per annum over ten years as a result of
reforms that improve resource allocation.
4
HOW CAN WE IMPROVE ALLOCATION?
Misallocation may (must) have many sources
Incentives: tax and social systems and institutions
Inputs
Efficiency in
allocation
Labor
Infrastructure
Capital
Land
Input Quality:
•
•
•
•
•
Education
Skills
Training
Technology
Innovation
TFP
Complementarities
between inputs
TENTATIVE RACCOMANDATION: Focus on labor markets reforms
WHY LABOR MARKETS?
1) Low level of reform activity
Financial
Liberalization
Trade
Privatizations
Taxes
Labor
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Change in reforms index relative to 1985
1999
2009
6
WHY LABOR MARKETS?
2) Characterized by high level of informality
Share of labor force in the informal sector
90
80
70
Average = 56%
Percent
60
50
40
30
20
10
0
Informal workers = do not participate in Contributory Social Insurance
7
and informality is usually associated with lower
productivity
Table: Cross-country Correlation
Productivity and Informality
TFP Gap w.r.t. US
Informality
rate
0.47***
0.49**
(0.14)
(0.21)
Controls
No
Yes
Obs.
99
68
Countries
13
12
0.11
0.32
R-sq
Note: Unbalanced panel up to 2007.
Data source: Daude and Fernandez-Arias (2010); Lora (2012); ILO
(2012)
1. Smaller firm size associated with:
–
–
–
–
unexploited economies of scale
less labor training
lower technological innovation
limited access to credit markets
2. Higher workers turnover associated
with:
–
–
lower accumulation of human capital
both pre-labor market and on-the-job
3. Higher risk to engage in illegal
activities:
–
negative externality on every steps of
the production process
8
WHAT REFORMS?
A few tentative principles
oLabor markets vary greatly across countries:
• reforms should be tailored to particular country characteristics.
o In countries with high informality rates:
• reducing informality should be a key reform objective.
o Labor market reforms to tackle informality are:
• necessarily complex;
• may require the reform of social protection programs.
o As a result, a good reform design should include:
1.a diagnosis identifying which institutional features are creating
distortions;
2.a design balancing both economic and social objectives;
3.a set of incentives targeted to both workers and firms.
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