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This article assesses the effects of combining fiscal austerity with policies aimed at reducing labour costs and, in doing so, sheds new light on current policy debates. Taking a global perspective, the authors explore the aggregation problem by proposing a stylized analytical macro-model with explicit distribution dynamics. In this framework, flexibilization policies that suppress the labour share trigger global feedbacks that result in a downward spiral, with contraction even in export-led economies. The initial gains of more competitive economies are shown to be ephemeral. In the long term, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.
Following United States withdrawal, the Trans‐Pacific Partnership agreement (TPP) is likely to be replaced or complemented by a series of bilateral deals between the US and TPP partners. In this case, TPP will shape trade, finance and public policy globally even without formal US participation. Proponents of TPP emphasize its prospective economic benefits, with economic growth increasing due to rising trade volumes and investment. Widely cited projections suggest modest GDP gains after 10 years, varying from less than half a percentage point in the USA to 13 per cent in Vietnam. However, these projections assume full employment and constant income distribution in all countries, excluding some of the major risks of trade liberalization. This article provides alternative projections of the TPP's economic effects using the United Nations Global Policy Model, which allows for changes in employment and income distribution. Using this model, the authors obtain very different results. They find that the benefits to economic growth are even smaller than those projected with full‐employment models, and are negative for Japan and the USA. More importantly, they find that the TPP will likely lead to losses in employment and increases in inequality.
This article assesses the effects of combining fiscal austerity with policies aimed at reducing labour costs and, in doing so, sheds new light on current policy debates. Taking a global perspective, the authors explore the aggregation problem by proposing a stylized analytical macro-model with explicit distribution dynamics. In this framework, flexibilization policies that suppress the labour share trigger global feedbacks that result in a downward spiral, with contraction even in export-led economies. The initial gains of more competitive economies are shown to be ephemeral. In the long term, the world economy is essentially wage-led and responds positively to coordinated Keynesian stimuli.
Labor market regulation is a controversial area of public policy in both developed and developing countries. After decades of de-regulatory advice, international financial institutions have recently come to a less extreme position. But any concessions to labor regulation are based on concerns for social stability or for short-term support to aggregate demand, while regulation continues to be viewed as harmful to economic efficiency. In this paper we take a deeper look at the impact of labor institutions on economic development in two ways. First, we propose a macroeconomic model with balance-of-payments constraint for a "small" developing country open to trade and foreign capital. This helps us clarify the importance of a dynamic view of economic efficiency, as opposed to the static view embedded in mainstream policy advice. Secondly, we discuss the political economy of labor regulation. We argue that labor institutions promote economic development though positive effects on aggregate demand, labor productivity and technology. * An earlier version of this article has appeared in Nissanke and Ocampo (2019). The authors would like to thank Alex Izurieta for helpful comments and suggestions.
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