Labour supply, foreign investment and welfare in the presence of public infrastructure

Within the context of a small open economy where both foreign investment and the provision of public infrastructure are endogenous, this paper examines the impact of an exogenous increase in labour supply. An increase in labour supply can be attributed to labour inflow. A number of empirical studies have demonstrated the importance of public infrastructure in real economies and both developed and developing countries have attracted significant foreign investment in recent years. This paper shows that, in the case of a diversified equilibrium, variations in labour supply do not affect the wage rate, provision of public infrastructure or welfare. However, an increase in labour supply decreases foreign investment as long as the producers of the private goods derive equal benefits from public infrastructure. In the case of complete specialisation, an increase in labour supply increases the provision of public infrastructure, which leads to an increase in the wage rate and foreign investment. An increase in labour supply increases welfare as long as the provision of public infrastructure involves some fixed cost.     

Variable labour supply, specialisation-based external economies, and capital inflow

This paper examines the impact of exogenous capital inflow on prices, production, labour supply, and welfare in the presence of specialisation-based externalities. The paper utilises a simple model of an economy that produces one-final good by means of capital, labour, and a large number of varieties of an intermediate good. The intermediate good is produced by means of capital and labour. The supply of capital is exogenous but the supply of labour is endogenous. The presence of internal economies of scale in the intermediate good industry gives rise to specialisation-based external economies in the production of the final good. Perfect competition prevails in the final good industry whereas the intermediate good industry operates under Chamberlinian monopolistic competition. It is shown that exogenous capital inflow decreases labour supply and increases welfare only if the elasticity of substitution between leisure and the final good is equal to or less than unity. The paper also shows that, if trade opens up between two otherwise similar economies, a capital rich country would be a net importer of varieties of the intermediate good.     

Capital Inflow in the Presence of Endogenous Labour Supply and Monopolistic Competition

This paper examines the impact of capital mobility within the context of a simple general equilibrium model where the supply of labour is endogenous and the producer services sector is subject to monopolistic competition. It is shown that the presence of monopolistic competition influences the size of all comparative static results. The paper also shows that the size of the elasticity of substitution between leisure and consumption of the final good plays a crucial role in determining the impact of changes in the supply of capital on utility-maximising labour supply and welfare. Specifically, it is shown that capital mobility has no impact on optimal labour supply if the elasticity of substitution is equal to unity. The impact of a small capital inflow on welfare can be negative if the elasticity of substitution is sufficiently larger than unity.     

OPTIMAL CAPITAL TAXES FOR PUBLIC GOOD PROVISION*

This paper constructs a general equilibrium trade model of a small open economy that produces many traded private goods and one non-traded public consumption good. Trade in goods is free, but the country taxes the internationally mobile capital to finance the provision of the public good. Within this framework, the paper identifies the conditions under which the optimal policy on the internationally mobile capital calls for a tax. Under the assumptions that (i) the welfare function is concave with respect to the tax rate, and (ii) the net revenue-maximizing capital tax rate is positive, it is shown that the marginal cost of the public good always understates its social marginal cost.     

Increased Input Supplies,Government Size,Welfare and Trade in the Presence of Increasing Returns

This paper examines the impact of exogenous changes in the supply of primary factors of production on the relative size of government and welfare in the context of a model where increasing returns are present in the production of an intermediate good. It is shown that an increase in the supply of labor (capital) increases the relative size of government if the share of labor is large (small) in the public sector as compared to the private sector. An increase in the supply of capital increases welfare but the impact of an increase in the supply of labor cannot be unambiguously determined. In the context of a North-South model, the paper also considers the pattern of trade. It is shown that North will export capital-intensive intermediate goods to the South. Received September 13, 2001; revised version received June 1, 2002 Published online: February 17, 2003 I am indebted to Professor Bob Catley and two anonymous referees for invaluable comments and suggestions. However, responsibility of any remaining errors or omissions is mine alone.     

Labor Inflow Induced Wage Inequality and Public Infrastructure

By making use of a simple general equilibrium model of a small open economy, the author examines the link between labor mobility and the size of wage inequality in the presence of productive public infrastructure. The paper shows that the provision of public infrastructure plays an important part in determining the size of labor inflow induced wage inequality. Specifically, it shows that, irrespective of the relative factor intensities, a small inflow of either skilled or unskilled labor does not affect the size of wage inequality if private industries derive equal benefits from public infrastructure provision. A small inflow of skilled (unskilled) labor increases (decreases) wage inequality if skilled (unskilled) labor intensive industry derives more benefits from public infrastructure.     

Privatization in a Small Open Economy with Imperfect Competition

We look at privatization in a general equilibrium model of a small, tariff‐distorted, open economy. There is a differentiated good produced by both private and public sector enterprises. A reduction in government production in order to cut losses from such production raises the returns to capital and increases the tariff revenue, which are welfare‐improving. However, privatization also leads to lower wages and possibly fewer private brands. This lowers workers’ welfare, which may make privatization politically infeasible. Privatization can improve workers’ welfare with complementary reforms, e.g., attracting foreign investment or trade liberalization.     

Skilled–unskilled wage inequality,product variety,public input and increasing returns: A static general equilibrium analysis

The paper develops a four sector small open economy model with two traded final good sectors, a public intermediate good producing sector and a nontraded good sector producing varieties of intermediate goods. There are three primary factors: capital, skilled labour and unskilled labour. Industrial sector producing a traded good uses capital, intermediate goods and skilled labour as inputs. Intermediate goods producing sector also uses capital and skilled labour. Public input producing sector and the agricultural sector producing the other traded good use capital and unskilled labour as inputs. It is shown that, if production technologies are the same for the agricultural sector and the public input producing sector and if the scale elasticity of output is very low, then an increase in capital stock (unskilled labour endowment) raises (lowers) the skilled–unskilled wage ratio. However, an increase in skilled labour endowment does not produce any unambiguous effect. On the other hand, an increase in the tax rate on industrial output and/or an increase in the price of the agricultural product, armed with the same set of assumptions, lowers the skilled–unskilled wage ratio.     

Economic liberalization and welfare in a model with an informal sector

The paper reexamines the conventional results relating to inflow of foreign capital, removal of protectionism and structural reform programmes, in a small open economy in terms of a two-sector general equilibrium model with an informal sector. The paper shows that in the presence of labour market distortion and a protectionist policy, inflow of foreign capital may be desirable irrespective of the pattern of trade of the economy due to its favourable impact on welfare. But the welfare implications of tariff reductions and/or structural adjustment programmes, such as deregulating the formal sector labour market, depend crucially on the economy's trade pattern. The paper provides an answer to the question as to whether in a developing economy labour market reform and tariff reform should go hand-in-hand or whether one should precede the other for welfare improvement.
JEL classification: F10, F13, F21, O17.     

Public consumer goods, output-generated variable returns, and labor supply

This paper develops a simple general-equilibrium model of a closed economy. The economy under consideration produces two final goods, one private and one public, which are both produced with labor and an intermediate good under constant returns to scale. The intermediate good is produced by labor alone, and its production is subject to output-generated variable returns to scale. The public good can be interpreted as government spending on environmental quality, police protection, cultural activities, and publicly funded health care. The model is used to examine the impact of an exogenous change in labor supply on the size of the government, relative prices, and welfare. Within the context of the present study, an increase in labor supply can be attributed to either exogenous immigration or population growth. The model is also used to examine the relationship between the size of the country and the pattern of trade.     

Aid,non‐traded goods,and growth

Abstract We examine the effects of foreign aid in a small recipient country with two traded goods, one non‐traded good, and two factors. Learning by doing and intersectoral knowledge spillovers contribute to endogenous growth. We obtain two main results. First, a permanent increase in untied aid raises (or lowers) the growth rate if and only if the non‐traded good is more capital intensive (or effective labour intensive) than the operating traded good. Second, a permanent increase in untied aid raises welfare if the non‐traded good is more capital intensive than the operating traded good; otherwise, it may raise or lower welfare.     

Growth,Employment and Taxation with Distortions in the Goods and Labour Market

Abstract. This paper analyses taxation in the presence of distortions in goods and labour markets in an endogenous growth model. The government disposes of capital, labour and consumption taxes. It is shown that the market solution leads to suboptimally low levels of growth and employment. However, available tax instruments are sufficient to attain the first‐best growth path in this economy. The paper further explores the relative distortion of capital and labour taxes. For plausible parametrisations of the model, lowering capital taxes dominate reductions in labour taxes in welfare terms.     

Debt Policy Rules in an Open Economy

In a small open economy model of endogenous growth with public capital accumulation, we examine the effects of a debt policy rule under which the government must reduce its debt–GDP ratio if it exceeds the criterion level. To sustain public debt at a finite level, the government should adjust public spending rather than the income tax rate. The long‐run debt–GDP ratio should be kept sufficiently low to avoid equilibrium indeterminacy. Under sustainability and determinacy, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low).     

Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time-consistent equilibrium is sub-optimal in terms of ex-ante intertemporal welfare, it yields higher long-run growth and welfare, through an accumulation of assets by the state and a cut in government consumption.     

Ecological dumping under foreign investment quotas

In this paper, we examine the discrimination of emission taxes between the export and nontradable sectors in a small open economy. A few articles indicate that there should be no differentiation of environmental policies between sectors in the economy if the government uses indirect instruments such as emission taxes. However, we show that discrimination of emission taxes may occur in an economy that imposes foreign investment quotas. In particular, the possibility that ecological dumping occurs is higher if export goods are more labor intensive than import goods (as in developing countries). Moreover, in the case where import goods are the most capital intensive, both emission tax rates may be lower than the marginal environmental damage, and ecological dumping may occur. It is also shown that easing foreign capital quotas may deteriorate the country’s welfare.     

公共资本投资、内生经济增长与合理政府债务规模*

本文基于一个具有内生增长机制的三部门世代交叠模型,讨论了政府举债为公共投资进行融资时经济的长期均衡;同时,通过数值模拟方法考察了我国的均衡政府债务规模及其影响因素。结果表明：在特定条件下,经济系统存在一个正的均衡政府债务-产出比重,该债务比重水平明显受到公共投资—产出比重、公共投资的债务融资比重、民间资本产出弹性等参数的影响。但是,均衡政府债务比重并不是无限上升的,当上述参数超过特定临界值时,经济系统无法达到均衡,政府债务-产出之比将持续上升,财政将不可持续。另外,当民间资本产出弹性较低时,较高的均衡政府债务比重可能导致经济运行动态无效率。数值模拟结果还显示,基于不同的假设情形,我国的均衡政府债务-产出比重均在不同程度上高于当前实际的政府债务规模,这为我国在未来期间实施扩张性财政政策提供了有利的依据。     

THE WELFARE EFFECTS OF FOREIGN CAPITAL INFLOW WITH TARIFF-RIDDEN AND QUOTA-RESTRICTED IMPORTS*

The welfare effects of foreign capital inflow and changes in the foreign price and tariff rate of a tariff-ridden imported good are considered for a small country for both 3 times 2 and 3 times 3 trade models with a quota-restricted imported good (whose special case is a nontraded good). For the 3 times 2 model, foreign capital inflow does not affect home welfare when there is no tariff on imports, but it harms the home country if a tariff is imposed on the imports to the extent that the tariff-ridden imported good is more capital intensive than the exported good. On the other hand, for the 3 times 3 model the foreign-capital inflow benefits the home country if the tariff rate is below a certain level under the analogous capital-intensity assumptions. The welfare effects of changes in the foreign price of the tariff-ridden good and its tariff rate remain the same for both models.     

Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks

The US real exchange rate and terms of trade have been found to appreciate when US labour productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard open‐economy sticky‐price dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labour productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home goods prices relative to foreign goods prices.