Structural Reform Packages, Sequencing, and the Informal Economy

IMF Working Papers, May 26, 2017

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Structural Reform Packages, Sequencing, and the Informal Economy

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Bibliographic details

• Authors: Zsuzsa Munkacsi, Magnus Saxegaard
• Published: May 26, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484302101.001

Summary

• Paper explores macroeconomic impacts of labor and product market deregulation using a small open-economy model with formal and informal markets.
• Examines both long-run effects and the transition toward the post-reform equilibrium.
• Main focus: reform packages and sequencing.
• The unofficial sector is a major determinant of the sign, and, in particular, the magnitude of responses.
• South Africa is considered when Bayesian estimating the model.
• Key high-level conclusions:
  • Both labor and product market reforms considerably increase output in the long run.
  • Labor market reforms are more successful in decreasing unemployment.
  • Short-term costs can include decreases in household consumption, net exports, output, or competition.
  • Combining reforms, especially with product market deregulation, reduces short-term costs.
  • Regarding speed of adjustment, it is usually better to start with a labor market reform.

Key findings and projections

• Long-run impacts:
  • Both labor and product market reforms considerably increase output.
  • Labor market reforms more effective at lowering unemployment.
• Transition dynamics and short-run outcomes:
  • Reforms can cause short-term decreases in household consumption, net exports, output, or competition.
  • The magnitude and sign of transition responses are strongly influenced by the size and behavior of the unofficial (informal) sector.
• Interaction effects:
  • Combining reforms (reform packages) tends to mitigate short-term costs.
  • Product market deregulation within packages plays an important role in reducing adverse short-term effects.

Policy sequencing and recommendations

• Sequencing:
  • It is usually better to start with a labor market reform when considering speed of adjustment.
• Package design:
  • Combine labor and product market reforms to harness complementary effects and reduce short-term adjustment costs.
  • Emphasize product market deregulation within reform packages to offset short-term adverse impacts.

Empirical approach and scope

• Model: small open-economy model with formal and informal markets.
• Estimation: Bayesian estimation using South Africa as the emerging-country case study.
• Subjects and keywords included in the study: Commodity markets, Employment, Financial markets, Labor, Labor market reforms, Labor markets, Unemployment, Wages; Africa; endogenous firm entry; exit rate; export price elasticity; firm exit; Global; hiring cost; hiring costs; informal employment; labor market; labor market deregulation; physical capital; product market; product market deregulation; product market reform; reform packages; sequencing; shadow economy; small-open economy; structural reforms; unemployment; value function; Wages; WP.

Content in this bundle

• Structural Reform Packages, Sequencing, and the Informal Economy, WP/17/125, May 2017
  • Structural Reform Packages, Sequencing, and the Informal Economy, WP/17/125, May 2017 (Markdown version)
  • Structural Reform Packages, Sequencing, and the Informal Economy, WP/17/125, May 2017 (PDF)