## Structural Reform Packages, Sequencing, and the Informal Economy

_IMF Working Papers, May 26, 2017_

## Source details

**Canonical URL:** [Structural Reform Packages, Sequencing, and the Informal Economy](https://www.imf.org/en/publications/wp/issues/2017/05/26/structural-reform-packages-sequencing-and-the-informal-economy-44950)

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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

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### 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.

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## 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)](/-/media/files/publications/wp/2017/wp17125.pdf.md){rel="alternate" type="text/markdown"}
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_Source: https://www.imf.org/en/publications/wp/issues/2017/05/26/structural-reform-packages-sequencing-and-the-informal-economy-44950_