Determinants of labour productivity: Comparison between developing and developed countries of Asia‐Pacific

The current study investigates the trends in labour productivity of the major developing and developed economies of the Asia‐Pacific region and examines its determinants over the period 1980–2014. The study analyses capital deepening, human capital, technology, share of agriculture in GDP, financial development, institutional quality, inflation as well as macroeconomic variables as potential determinants of productivity, and identifies the differences in the impact of these factors on the productivity of developing and developed countries. Using panel cointegration and group‐mean fully modified ordinary least squares estimation, the study finds that capital deepening, human capital, technology, institutional quality and macroeconomic variables (i.e. government size and openness) are significant determinants of labour productivity of both developing and developed economies of the Asia‐Pacific region. The study further finds that while both trade openness and foreign direct investment affect productivity of developing economies positively, only trade openness has a positive and significant impact on the productivity of developed economies. The share of agriculture in GDP affects the labour productivity of developing Asia‐Pacific economies significantly but not that of developed economies. Furthermore, capital deepening has a much higher impact on the productivity of developing Asia‐Pacific economies than that of developed economies.     

Trade-threshold Effect on Inflation in Tunisia: New Evidence Resulting from a Nonlinear Approach

Trade openness is an important determinant of the inflation process. The effect of trade openness on inflation, however, is still an issue of debate at both theoretical and empirical levels. This study tried to provide a contribution to the literature by examining the relationship between inflation and trade openness in Tunisia over the period 1975Q1-2015Q4 using a nonlinear model. The originality of this study stems from the fact that it is the first investigation considering both the Residual-Based Tests for Cointegration in Models with the Regime Shifts and Threshold Regression model. The linear model confirms the existence of a positive relationship between inflation and trade in Tunisia. Yet, considering the nonlinear model, trade openness growth and Consumer Price Index (CPI) inflation growth show a statistically significant negative link as long as the trade openness evolution does not exceed the threshold. Nevertheless, if the trade openness growth is higher than the threshold, integrating the trade positively affects CPI inflation. Furthermore, a positive influence of Money supply growth on this type of inflation was noticed in Tunisia in all the considered regimes proving the effect of monetary factors on inflation level. Consequently, trade openness could be used to control inflation in Tunisia.     

Real wages,profit margins and inflation in Turkish manufacturing under post-liberalization

This article reports investigations into the behaviour of gross profit margins (mark-ups) in Turkish manufacturing industries for the post-1980 liberalization period in relation to price inflation, trade liberalization (openness) and real wage costs. Panel data econometrics over 29 subsectors of Turkish manufacturing are used over the period 1980–1996. Results suggest that profit margins are positively and significantly related both to price inflation and real wage costs. However, openness is found to have very little impact on profit margins.     

Dynamic effects of trade openness on financial development

This paper employs the Pooled Mean Group (PMG) approach of Pesaran et al. (1999) to study the dynamic effects of trade openness on financial development. The advantage of the PMG estimator over other dynamic panel econometric techniques is that it allows short-run coefficients, speeds of adjustment and error variances to vary across countries, with cross-country homogeneity restrictions only on long-run parameters. Our results spanning 88 countries over 1960–2005 show that a positive long-run relationship between trade openness and financial development coexists with a negative short-run relationship. But when splitting the data into different income or inflation groups, this finding is observed only in relatively low-income countries or high-inflation economies.     

International Trade and the Connection between Excess Demand and Inflation

This paper demonstrates that globalization, taking the form of a higher import component of consumption and a larger export component of GDP, is the cause of the apparent breakdown in the relationship between excess demand and inflation. Within a parsimonious empirical framework, we show that increasing openness of the US economy is all that is needed to re‐establish the relationship between inflation and capacity utilization. We also show that international trade has a significant separate influence on inflation, and is important for identifying a Phillips curve relationship between unemployment and inflation.     

Globalization and inflation: A threshold investigation

We use a threshold methodology to investigate the importance of non-linear effects in the analysis of the inflation globalization hypothesis. Accounting for potential non-linearities in the Phillips Curve, we show that trade openness is not rejected as a threshold variable for the effects of domestic and foreign slack on inflation in many advanced economies, and we find a switch of the output gap slopes from one regime to the other that is consistent with the key predictions of the inflation globalization hypothesis. For some countries the threshold Phillips Curve model also leads to improvements in out-of-sample forecast over the linear Phillips models, especially at longer horizons. Contrary to most of the previous literature which ignores such non-linearities, our new approach provides some interesting empirical evidence supportive of the effect globalization has on a country’s inflation dynamics.     

Financing government investment and its implications for public capital: A small open economy perspective

Expenditure reductions played a key role in many small open economies during fiscal consolidation, with large declines in public investment. This led to a reduction in public capital stock and affected the competitiveness of these economies. After the sovereign debt crisis, the governments that consider increasing investment to replenish the public capital stock have limited fiscal space and have to avoid external imbalances. We show that using budget-neutral investment spending can generate long-term benefits of higher public capital stock while at the same time limiting negative consequences for the public finances and the trade balance. The best way of financing government investment, which preserves fiscal and trade balances, and increases welfare, is by reducing other government spending. The second-best is financing investment with value-added tax. Financing with debt worsens fiscal and trade balances, while using distortionary labour taxes reduces labour supply, increases wage costs and worsens the trade deficit in the short run.     

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

A tale of industrial stagnation from Africa

Many African economies have experienced rather dismal industrial development since the 1980s. The consensus is that African firms lack competitiveness in a world with increasing trade openness. What determines competitiveness? A well‐known explanation is that resource endowments in Africa favour land not labour, which results in high wages, especially in comparison with ‘labour abundant’ Asian economies. This paper examines the validity of this view on the basis of the case of Sudan. We demonstrate that the lack of competitiveness of manufacturing industries is not caused by high wages. Assuming a direct relationship between labour productivity and international competitiveness, we argue that acute capacity underutilisation, caused by supply‐side constraints, lowers manufacturing productivity, which in turn negatively influences competitiveness.     

Globalization and inter‐industry wage differentials in China

This paper explores the relationship between globalization and inter‐industry wage differentials in China by using a two‐stage estimation approach. Taking advantage of a rich household survey dataset, this paper estimates the wage premium for each industry in the first stage conditional on individual worker and firm characteristics. Alternative measures of globalization are considered in the second stage: trade openness and capital openness. A disaggregation of trade into trade in final and intermediate goods shows that increases in import (export) shares of final goods reduce (increase) the wage premia significantly, whereas imports or exports of intermediate goods do not explain differences in industry wage premia. This finding is supported by stronger effects for final goods trade in coastal than noncoastal regions. Our results also show a positive relationship between capital openness and industrial wage premia, though this finding is less robust when potential endogeneity issues are allowed for.     

Decomposing the effect of trade on the gender wage gap

This paper uses variation in exposure to increased Chinese imports in Brazil to investigate the impact of trade on gender wage inequality. First, using Brazilian census data, we find that rising imports reduced the gender wage gap in Brazilian local labour markets. Next, using Oaxaca–Blinder decompositions, we show that this reduction in the wage gap was largely explained by trade increasing the share of female workers in higher-paying occupations. Finally, we use a matched employer–employee data set to investigate how individual workers adjust to the trade shock. Similar to the local labour market analysis, we find that male workers exposed to increased import competition saw a larger decline in both wages and cumulative earnings relative to female workers. In addition, we uncover an interesting asymmetry in that, while male workers exhibited much higher degrees of industry mobility in response to the trade shock, female workers exhibited an equal if not higher degree of occupational mobility.     

A Union-bashing Model of Inflation Targeting

This paper shows that in an open two‐sector economy, centralization of wage setting may be important in determining the employment (and welfare) effects of different monetary targets. By disciplining unions in the sectors open to international trade, exchange rate targeting yields higher employment than inflation targeting when wage‐setting is more centralized in the open sector than in the shielded sector. When wage‐setting centralization is higher in the shielded sector, we show that general price‐level inflation targeting, while better than exchange rate targeting, is inferior to an inflation target that focuses more heavily on shielded sector prices.     

Downward nominal wage rigidity in Canada: Evidence against a “greasing effect”

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession. A rise in the inflation target would attenuate the long‐run level of unemployment and hasten economic recovery after an adverse shock. Following Daly and Hobijn (2014), we re‐examine these issues in a model that accounts for precautionary motives in wage‐setting behaviour. We confirm that DNWR generates a long‐run negative relationship between inflation and unemployment, in line with previous contributions to the literature. However, we also find that the increase in the number of people bound by DNWR following a negative demand shock rises with the inflation target, offsetting the beneficial effects a higher inflation target has on closing the unemployment gap. As an implication, contrary to previous contributions that neglected precautionary behaviour, the speed at which unemployment returns back to pre‐crisis levels during recessions is relatively unaffected by variations in the inflation target.     

Globalization, the output-inflation tradeoff and inflation

This paper provides comprehensive evidence on the relation between inflation and globalization, defined here as trade and financial openness, using a large cross-section of 91 countries over the period 1985-2004. We establish two main empirical regularities: both higher trade and financial openness (i) reduce central banks’ inflation bias, yielding lower average inflation and (ii) are associated with a larger output-inflation tradeoff. This evidence is at odds with the standard Barro-Gordon framework, which would require globalization to have a negative effect on the output-inflation tradeoff to yield lower equilibrium inflation, but it is consistent with a recent strand of new Keynesian models emphasizing the role of imperfect competition and nominal rigidities. Our findings also support the relevance of the time-inconsistency hypothesis, which underlies the theoretical models predicting a relation between globalization and inflation. For the OECD subsample, however, we do not find an effect of openness on inflation (the output-inflation tradeoff), suggesting that these countries have created an institutional framework for central banks that eliminates distortions due to the time-inconsistency problem.     

Convergence patterns and switchovers in comparative advantage

Although there exists a vast literature on convergence and divergence of income levels across countries or regions at the aggregate level, there is only little work on convergence and/or divergence processes of productivity and wage levels at the more disaggregated industrial level. These are especially important in the context of international trade as these determine the dynamics of comparative advantages and the resulting trade structures between developing and developed countries. In the first theoretical part, we discuss some theoretical aspects of uneven sectoral productivity and wage catching-up processes and their links to dynamic comparative advantages and trade structures. In the second part, we present an econometric study of catching-up of wages, productivity, and labour unit costs. The analysis is conducted at the industrial level (ISIC 3-digit) over the period 1965–1992 for a set of catching-up economies compared with more advanced countries.     

The impact of trade openness on labour force participation rate

In this article, we investigate the impact of trade openness on labour force participation rate. We use tariff rate as the main indicator of trade openness and we employ the number of regional trade agreements and the average tariff rate in the neighbours’ countries as instrumental variables to diminish the endogeneity problem of the tariff rate. We find that trade openness increases the participation rate which is economically and statistically significant. The results show that this correlation is robust under controlling for different variables and using various specifications. We find that 10 percentage point increase in tariff rate lowers the participation rate by 4–6 percentage point and this relationship is more severe in the long run. Finally, we show that changes in labour force population accounts for about 27% of changes in the unemployment rate following a trade liberalization.     

Trends in employment and the employment elasticity in manufacturing, 1971-92: an international comparison

Employment growth in manufacturing is limited by output growthin this sector, but the elasticity of employment with respectto output has varied widely in different regions and economies.This paper focuses attention on the idea that a major determinantof employment elasticity is the way the fruits of output growthare divided between employment growth and wage growth. But beforewe are able to determine the quantitative dimension of the trade-off,we have to allow for two other factors which affect the sizeof the cake available to labour in real terms. These are: (i)the elasticity of the wage bill with respect to output, whichdetermines the trend in the share of labour; and (ii) the priceeffect, depending partly on the rate of inflation and partlyon the movements of producer prices relative to consumer prices.A simple decomposition procedure is outlined in the paper whichallows us to quantify the relative importance of these factors,and hence give a clearer idea of the labour market outcome leaningto one or other of the two interests, employment growth andreal wage growth. The empirical analysis for different regionsof the world is carried out on time series data for the manufacturingsector collected by UNIDO from the national surveys of membercountries for the decades of the 1970s and the 1980s.     

INTERACTIONS BETWEEN FINANCIAL DEVELOPMENT AND TRADE OPENNESS

This paper empirically investigates the interaction between financial development and trade openness through simultaneous‐equation systems. The identification and estimation of the systems rely on the methodology of identification through heteroskedasticity proposed by Rigobon (2003). Using a panel consisting of 70 countries over the period 1960–2007, we find a two‐way causal relationship between financial development and trade openness. A better‐developed financial sector induces higher openness to trade, while higher openness in goods market stymies financial development. And such findings hold well for low‐income, high‐inflation, or low‐governance countries.     

R&D and manufacturing production specialization in developed economies

A study of the relation between technology and manufacturing production specialization in a series of developed economies is performed by means of models relating indicators of revealed symmetric comparative advantage of value added and exports to similar measures of comparative performance of R&D expenditure, capital intensity, total factor productivity and wage costs. The production and R&D specialization are shown to be substantial and sticky. This contrasts with the evidence of a substantial degree of convergence in the patterns of the other variables. Regression estimates show that, although all variables play their part, the impact of comparative R&D efforts on production specialization is by far the strongest. This impact is found to be stronger in the smaller economies and it is especially important in research-intensive industries. The influence of comparative wages is, moreover, found to be positive here, suggesting the dominance of a labour skill and efficiency wage effect over a wage cost competitiveness effect. These findings are shown to conform quite well with the predictions of Schumpeterian theory and of certain contributions to ‘new trade theory’ that have stressed the importance of dynamic economies of scale.     

The Manufacturing Wage Inequality in Latin America and East Asia: Openness, Technology Transfer, and Labor Supply

This paper examines wage inequality in the manufacturing sector for a panel of Latin American and East Asian economies during the last three decades. A labor supply and demand model is presented where three main determinants of wage inequality are investigated: trade openness, technology transfer, and labor supply. Findings indicate that wage inequality in the two regions has responded differently to the various determinants enumerated above. Some lessons from the comparative experience of the two regions are drawn.