to P5 36 1,7 POLICY RESEARCH WORKING PAPER 3 067 The Mini-Integrated Macroeconomic Model for Poverty Analysis A Framework for Analyzing the Unemployment and Poverty Effects of Fiscal and Labor Market Reforms Pierre-Richard Agenor The World Bank World Bank Institute Poverty Reduction and Economic Management Division May 2003 [ POLICY RESEARCH WORKING PAPER 3067 Ag6nor describes a specialized and less data-intensive accounting, for instance, for public education, version of the Integrated Macroeconomic Model for employment subsidies, and job security provisions) and Poverty Analysis (IMMPA) developed by Agenor, the tax structure. Simulations of a cut in payroll taxes on Izquierdo, and Fofack (2003) and Agenor, Fernandes, unskilled labor show the importance of accounting for Haddad, and van der Mensbrugghe (2002). The mini- the fiscal implications of labor market reforms when IMMPA focuses only on the "real" side but it offers a assessing their effects on unemployment and poverty. more detailed treatment of the labor market (by This paper-a product of the Poverty Reduction and Economic Management Division, World Bank Institute-is part of a larger effort in the institute to analyze the interactions between micro and macro factors in the design of poverty reduction strategies. Copies of the paper are available free from the World Bank, 1818 H StreetNW, Washington, DC 20433. Please contact Maria Gosiengfiao, room J4-280, telephone 202-473-3363, fax 202-676-9810, email address mgostengfiao@worldbank.org. Policy Research Worlcing Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at pagenor@worldbank.org. May 2003. (82 pages) The Policy Research Working Paper Senes disseminates the findings of work in progress to encourage the cxchange of ideas about development issues. An objective of the senes is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and shozsld be cited accordingly. The findings, interpretations, and conch!Siso;s expressed in this paper are entirely those of the authors. They do not necessarily represent the viewv of the World Bank, its ErXccutive Directors, or the countries they represent. Produced by Partnerships, Capacity Building, and Outreach The lJni-Integrated Macroeconomic Model for Poverty Analysis A FRamework for Analyzing the Unemployment and Poverty Effects of Fiscal and Labor Market Reforms Pierre-Richard Agenor* The World Bank, Washington DC 20433 JEL Classification Numbers: C68, D58, 011 *This paper is part of my ongoing research program on micro-macro linkages for poverty analysis. I am grateful to Dennis Snower for drawing my attention to some of the recent work on firing costs, and to Nihal Bayraktar, Michael Grimm, and Henning Jensen for excellent technical advice and assistance. Contents 1 Introduction 3 2 Structure of Mini-IMMPA 5 2.1 Production ...................... . 5 2.1.1 Rural Production ..................... 5 2.1.2 Urban Informal Production ..... . . . . . . . . . . 6 2.1.3 Urban Formal Private Production ..... . . . . . . . 7 2.1.4 Production of the public good ..... . . . . . . . . . 8 2.2 The Labor Market ....... . . . 9 2.2.1 Rural Wages and Employment ..... . . . . . . . . . 10 2.2.2 Urban Unskilled Wages, Employment, and Unemploy- ment ........ . . . . .. . . . . .. . . . . . .. . 12 2.2.3 Urban Skilled Wages and Employment .... . . . . . 14 2.2.4 Skills Formation . . . . . . . . . . . . . . . . . . . . . . 19 2.3 Supply and Demand ....... . ....... . . . . . . . . 20 2.4 External Trade ....... . . . ........ . . . . . . . . 22 2.5 Prices ......... . . .............. .. . .. . 22 2.6 Profits and Income ....... . . ....... . . . . . . . . 26 2.7 Private Consumption and Savings ... . ........ . . . . 27 2.8 Private Investment ....... . . ....... . . . . . . . . 28 2.9 Public Sector ........ . . . . . . .. . . . . . . .. . . . 30 2.10 Balance of Payments ...... . . ....... . . . . . . . . 31 2.11 Poverty and Distributional Effects ... . ........ . . . . 32 3 Policy Experiments 34 3.1 Reduction in the Minimum Wage . . . . . . . . . . . . . . . . 35 3.2 Cut in Payroll taxes on Unskilled Labor ..... . . . . . . . 40 3.2.1 Domestic Borrowing ...... . . . . . . . . . . . . . 40 3.2.2 Revenue-Neutral Change . . . . . . . . . . . . . . . . . 42 4 Conclusions 44 Appendix A: Equations of Mini-IMMPA 47 Appendix B: Variable Names and Definitions 53 Appendix C: Calibration and Solution 59 1 Introduction Fiscal and labor market reforms are at the forefront of the policy agenda in many developing countries, and assessing their effects on unemployment and poverty is a key issue in the design and sequencing of adjustment pro- grams. In turn, assessing these effects requires understanding not only how the labor market operates, but also how fiscal variables (taxes and expendi- ture) interact with the labor market. Because most taxes have an effect on the functioning of the economy, they also affect the labor market, both di- rectly and indirectly, through changes in the level and distribution of wages, labor supply decisions, and the level and composition of employment. For instance, taxing the profits of small firms (which tend to be more labor in- tensive) may affect their ability to create jobs, whereas income taxation and the existence of an unemployment benefit system may affect the propensity of the unemployed to seek employment. Payroll taxes (such as employers' social security contributions) raise the effective cost of labor over and above the wage paid, thereby affecting the demand for labor, whereas income taxes and employees' social security contributions reduce the return to being em- ployed, thereby affecting the decision to enter (or remain in) the labor force and possibly to invest in the acquisition of skills.' In addition to influencing the decision to enter into (or exit from) the labor force, changes in taxation may also affect the decision to engage in part-time work. Similarly, taxes on goods and services may affect the purchasing power of wages, and thus the decision to seek formal employment. High tax rates on income and ac- tivities in the formal economy may also drive firms underground, thereby impeding an efficient allocation of resources, with adverse effects on employ- ment and poverty. Indeed, as shown in Figure 1, in developing economies the overall tax ratio (in proportion of GDP), as well as the direct income tax ratio, seem to be positively correlated with the size of the informal economy, and thus with "disguised" unemployment.2 To the extent that the urban lAs is well known, changes in income taxes affect labor supply and leisure choices through both substitution and income effects. Because these effects tend generally to operate in opposite direction, the net effect of a change in the income tax on the supply of labor is a priorz ambiguous. 2At a more formal level, Loayza (1996), Johnson, Kaufman, and Zoido-Lobaton (1998), Schneider and Enste (2000), Ihrig and Moe (2000) and Dessy and Pallage (2003), have also found that a higher tax burden tends to be correlated with a larger informal sector. By contrast, there does not appear to be a simple correlation between the overall tax ratio and open unemployment. 3 poor tend to be concentrated in the infermal sector (as illustratea- in Figure 2), taxation could be positively correlated with poverty. But of course, the taxation-poverty correlation could also be weak or non existent, because it also depends on the use of tax proceeds-namely, whether taxes serve to finance expenditure on the poor, public spending on infrastructuere (which indirectly affect the poor through a comrplementarity effect on private invest- ment and thus labor demand), or are simply wasted on inefficient projects. Labor market distortions, and the RiLks between taxation and the labor market, have received limited attention in quantitative, general equilibrium models that have often been used for development policy analyss. The pir- pose of this paper is to present a quantitative framework that accourt for many of these distortions and linkages, and that modelers and pol'icy econo- mists in developing countries can use to assess the effects of fiscal and labor market reforms on unemployment and poverty. TL his framework, called Mini- TMIPA, is a specialized, and less-data intensive, version of the `:htegrated Macroeconomic Model for Poverty Analysis (¶MMPA) developed by Ag6nor, lzquierdo and Fofack (2003), and Ag6nor, Fernandes, Haddad arod van der Mensbrugghe (2003). Although Mini-IMMPA focuses only on -he "real" side, it offers a more detailed treatment of the labor market than _MMPA (by accounting for features such as bilateral wage bargaining, Eree public education, employment subsidies, and job security provisions) ard the tax structure. The resulting framework allows the user to analyze a variety of important policy issues, such as for instance the trade-offs involved in, shifting the tax burden away from unskilled labor in the formal sector ad toward other tax bases. The remainder of the paper is organized as follows. The next section describes in detail the structure of Mini-IIMMPA, considering in turn the production structure, the labor market, supply and demand of coxmmodi- ties, external trade, prices, profits and income, private consumption and savings, private investment, the public sC-ctor, and the balance of payments. The description of the labor is particularly detailed, given the _,_portaance of government-induced labor market distortions in developing countries. 7 account, in particular, for the existence of firing costs in the forreal sector. Such costs tend to benefit the employed (or "insiders") by lowering their probability of losing their job and increasing their bargaining power in wage determination, and to make firms reluctant to both hire and fre workers, thereby raising the duration (if not the level) of unemployment (lindbeck and Snower (2001)). Section II1 presents and discusses the results of two 4 policy simulations: a cut in the minimum wage, and a reduction in payroll taxes on unskilled labor (assuming both neutral and non-neutral revenue effects). The payroll tax experiment is of particular interest in light of the previous discussion emphasizing the links between fiscal and labor market re- forms. As it turns out, the unemployment and poverty effects of this policy change depend importantly on whether or not it is offset by other changes in sources of revenue, and what the precise nature of that source is. The last section summarizes the main results of the analysis and suggests various extensions. Appendices A, B and C provide a summary list of the model's equations, variable names and parameters, as well as a description of the calibration procedure. 2 Structure of Mini-IMMPA The building blocks of the "structural" components of mini-IMMPA consist of the production structure, the labor market, the supply and demand for goods and services, external trade, sectoral and aggregate prices, profits and income formation, private consumption and savings, private investment, the public sector, and the balance of payments. The link between the structural component and a (fictitious) household income and expenditure survey, which is necessary for poverty and distributional analysis, is also explained later on. 2.1 Production The basic distinction on the production side is that between rural and ur- ban sectors. In the rural economy (or agriculture) firms produces one good (referred to as good 1), which is sold domestically or exported. The urban economy consists of both formal and informal components. The informal economy produces nontraded services (referred to as good 2). in the formal urban economy production consists of a private good (referred to as good 3) and a nontraded public good (referred to as good 4). 2.1.1 Rural Production Land available for rural activities is assumed to be non marketed and in fixed supply. Gross output of the agricultural good, Xi, is the sum of value added, 5 V1, and intermediate consumption: 4 Xi = V1 + 7ajlXl, (1) i=l, where the a,, are input-output coefficients measuring relative sales from sec- tor i to sector j. Value added is produced with a Cobb-Douglas finction of 1and and a composite factor, defined as a constant elasticity of substitution (CES) func- tion of the number of unskilled workers employed in the sector, Ul, and the economy-wide stock of public physical capital (K0, defined below). Normal- izing the area of land allocated to production to unity yields Vt1 = [&!X1{,6xiul1 + (1 - ,i3x)GPx 1} PxlJ (2) where 0 < 71X < 1, and the other parameters have the standard interpreta- tion. Given the Cobb-Douglas specification, agricultural production exhibits decreasing returns to scale in the composite input. The presence of KG in (2) is based on the view that a greater availability of public physical capital in the economy (roads, power plants, and the like) improves the productivity of all production units in the rural sector, because it facilitates not only trade but also production itself. Firms in the rural sector allocate their output to exports, E1, or the domestic market, D1, according to a constant elasticity of tran-foi0rmation (CET) function: 1 = aEDj[/EDlEl 1 + (-3ED1 )DED )JPED1 (3) with the ratio ratio E1/D1 depending, as shown below, on the relative prices of exported and domestic goods. So12 oUJrba lEcnfirmal Rroluctnon Gross production in the urban informal sector, X2, is given also as the sum of value added, V2, and intermediate consumption: 4 X = 2 + a%2X2- (4) 6 There is no physical capital in the informal sector, and production requires only unskilled labor. Assuming decreasing returns to scale, value added can thus be written solely as a function of the number of unskilled workers employed in the informal economy, U2: V2 = U2 , ° < X2 <1. (5) FRom (5), the demand for labor in the informal sector is given by U2 = 71x2(V2/w2), (6) where W2 = W2/PV2 is the product wage, with W2 the nominal wage and PV2 the price of value added in the informal sector (defined below). 2.1.3 Urban Formal Private Production Gross production of the private formal urban sector, X3, is once again taken to be given by the sum of value added, V3, and intermediate consumption: V 4 X3 = V3 + a3X3. (7) i Private formal production uses as inputs both skilled and unskilled labor, as well as physical capital. Skilled labor and private physical capital are as- sumed, in line with the evidence discussed in Agenor (2000) and Hamermesh (1993), to have a higher degree of complementarity-that is, a lower degree of substitution-than physical capital and unskilled labor. In order to ac- count for these differences in the degree of substitutability among inputs, a nested CES production structure is adopted. Specifically, at the lowest level of factor combination, skilled labor, S3, and private physical capital, K3, are combined to form the composite input JL, with a relatively low elasticity of substitution (as measured by CYX3L = 1/(1 + PX3L)) between them: JL(S3, K3) = aX3L[3 X3LS3 3 + (1 - 3X3L)K3 PX3L. (8) At the second level, this composite input is used together with unskilled labor, U3, to form the composite input JH: JH(JL, U3) = aX3H{3X,H JL x + (1 -/3X3H)U3 PX3H . (9) 7 The elasticity of substitution between JL and unskilled workers, zrneasured by 0X3H = 1/(l+Px3H), is taken to be Egher than between S3 and K3, that is UX3H > 0X3H- The final layer combines JH and KG (the stock of government capital) as production inputs, with public capital subject to congestion effects: V3(JH, KG) = aX3 [3X3 JH _ (1 X3){ URBdc3 }PX3 X (10) where URB is the size of the urban population (defined below), EaM dc3 > 0. The presence of the term KG/URB in this equation can be exulained as follows (see Ag6nor (2003b)). As in agriculture, public physical capital has a positive impact on the productivity of production factors in the ufcan private sector. However, this positive effect is now subject to congestion effects. As long as dc3 > 0, the positive externality of public capital decreases as its usage by the urban population increases, that is, the larger the size of the urban population, the lower is the contribution of the public capital stock to private urban production. Private firms in the urban formal sector allocate their output to exports, E3, or the domestic market, D3, according to a production possibility frontier, again defined by a CET function: X 3 =ED3 P[ED3 E3 + ( - ED3 )D3 3] PED3. (11) As shown later, the ratio E3/D3 depends on the relative prices or exported and domestic goods. MO14d Production of the pubRic good Gross production of the public good, X4, is given by the sum of value added, V4, and intermediate consumption: X4 = 4 + E7a14X4- (12) 8= Value added in the public sector is measured by the government wage bill, as in national accounts: V4 = (WUGU4 + WSGS4)/PV4. (13) where S4 and U4 (respectively WSG and WUG) denote employment levels (respectively wages) of skilled and unskilled workers in government. Em- ployment levels are treated as predetermined policy variables, whereas wage formation is discussed below. 2.2 The Labor Market As noted earlier, there are two categories of workers in the economy, skilled and unskilled. Unskilled workers may be employed either in the rural econ- omy or in the urban economy, whereas skilled workers are employed only in the urban economy. As discussed later, skilled workers have a high reserva- tion wage and therefore do not seek employment in the informal economy, even when they are unable to find a job in the formal sector. In addition to accounting for various sources of labor market segmenta- tion (a pervasive feature of the labor market in developing countries), Mini- IMMPA accounts for the existence of employment protection regulations, an important component of which being state-mandated firing costs. Indeed, in many of developing countries, severance payments tend to be a partial sub- stitute to unemployment insurance benefits. An important issue is whether these costs contribute to a high level of unemployment and to its degree of persistence-perhaps by reducing employment variation over the business cycle, as argued by Bertola (1990).3 A general conclusion of the literature is that firing costs affect employment dynamics more than the average level of employment; unemployment tends to be more persistent in countries charac- terized by high job security provisions, because mandatory firing costs play a stabilizing effect on aggregate employment. On the one hand, firing costs 3Bertola's analysis assumes that workers are risk-neutral. But as noted by Booth (1999), typically most workers derive their income from employment, and it is difficult for most of them to diversify across jobs; it seems therefore more plausible to assume that workers are risk averse. She also considers the case in which firms and workers bargain about both wages and the size of redundancy payments. However, these modifications do not change Bertola's main result, which is that firing costs tend to stabilize employment over the business cycle. 9 prevent workers from losing their jobs (thereby preventing the loss of firm- specific human capital if downturns are temporary); but on the other, they discourage new hires.4 They also tend to increase the incidence of temporary employment contracts, as noted by Betcherman, Luinstra, and Ogawa (2001), Heckman and Pages (2000), and Lindauer (1999).5 In what follows the effect of firing costs on both employment and wage formation is captured under the assumption that workers (or the trade union that represents them) inter- nalize, while bargaining with employers, the value of the severance payment that they would receive in the event of dismissal. 2.2.1 Rural Wages and Employment The demand for labor in agriculture, Ul, is derived in standard fashion from the first-order condition for profit maximization and is given by (1+P 1- +1 __ Ud = 5, . Px} (14) I ~ ~ WI ax1 where w, = W1/PV1 is the product wage in agriculture, W1 the nominal wage, and PV1 the net output price (determined below). The nominal wage in agriculture, W1, adjusts to clear the labor market. With UR representing labor supply in agriculture, the equilibrium condition of the labor market is thus given by U =RU6 1 ,PV ) (15) The supply of labor in the rural sector is predetermined at any given point in time, but grows over time at the exogenous rural population growth rate, 9R, net of worker migration to urban areas, MIG: UR= UR-1(l +gR)-MIG. (16) 4'As shown by Gavin (1986), the impact of firing costs on labor demand depends not only on the size of the required severance payments and the wage elasticity of labor demand, but also on the variability and persistence of shocks to labor demand, and the firm's discount rate. 5For some evidence on the effects of job security regulations, see Fallon and Lucas (1993), Kugler (2000), Dabalen (2002), and Besley and Burgess (2002). 10 Following Harris and Todaro (1970), the incentives to migrate are taken to depend negatively on the ratio of the average expected consumption wage in rural areas to that prevailing in urban areas. Unskilled workers in the urban economy may be employed either in the private formal sector, in which case they are paid a minimum wage, WM, or they can enter the informal economy and receive the average income in that sector (before transfers), ym .6 When rural workers make the decision to migrate to urban areas, they are uncertain as to which type of job they will be able to get, and therefore weigh wages in each sector by the probability of finding a job in that sector. These probabilities are approximated by prevailing employment ratios. Finally, potential migrants also consider what their expected purchasing power in rural and urban areas is likely to be, depending on whether they stay in the rural sector and consume the "typical" basket of goods of rural households, or migrate and consume the "typical" urban basket of goods. The expected, unskilled urban real wage, wl, is thus a weighted average of the minimum wage in the formal sector and the going wage in the informal sector, deflated by the urban consumption price index for unskilled workers, Puu (defined below): e OUWM,_1 + (1- OU)Y2-I (17) u P~~UU,-1 where Ou is the probability of finding a job in the urban formal sector, mea- sured by the proportion of unskilled workers in the private formal sector, relative to the total number of unskilled urban workers (net of government employment) looking for a job, UF - U4, in the previous period: _u U3,-1 (18) A similar reasoning is used to calculate the expected rural consumption real wage, wA. Here the employment probability is equal to unity, because workers can always find a job at the going wage. Assuming a one-period lag yields 6As discussed below, there is no job turnover for either category of workers in the public sector. Given that, as discussed below, households in the informal sector receive all profits from production, average income is a better measure of expected income in that sector than the going wage. where PR is the rural consumption price index (defined below). The migration function is therefore specified as MIG = (WC M (19e) UR,-1 0WA ( where am > 0 measures the elasticity of (relative) migration flows with re- spect to expected wages. Note that the evidence suggests that there are several factors, in addition to wage differentials, that affect rural-to-urban migration. The family, in particular, appears to play a particula-ly impor- tant role in explaining migration by individuals (Lucas (1997)) as well as cash-seeking behavior, which trarslates into a positive impact of the compo- sition or rural income, in addition to its level (Velenchik (1994)). Moreover, if workers are risk averse, they may reouire a greater wage premJi-m for ur- ban employment than the one implied by the observed wage dife:ential, to compensate them for the risk of being unemployed. However, some of these considerations are difficult to integrate in the type of models considered here. 2.2.2 UJrban Unskilled Wages9 =Royrxeznt, and Unez2syrnent Both the government and private firms in the formal and informal urban sec- tors use unskilled labor in production. The public sector hires an exogenous level of unskilled workers, U4, at the nominal wage TWUG, whereas the de- mand for unskilled labor by the formal private sector is deterzcine- ( by firms' profit maximization subject to t'he giver minimrm wage, WM.7 3oth WVUG and WM are assumed to be indexed on tae price of the consumption basket for urban unskilled households, Puu (defined below): Wt =wsP~Uut i=UG, M, (20) where w1 is the real wage and 0 < idx, < J tshe indexation parameter. In order to avoid corner solutions, the wage rate paid to unskilled labor in the formal urban sector is assumed to be systematicaUy greater than the wage rate paid in the informal sector. Consequently, unskilled workers in the urban area will always seek employment in the porivate formal sector first. 7The assumption that the minimum wage is binding in the formal sectoz is actually a source of debate; see for instance Dabalen (2000) for a review of the evidence for sub- Saharan Africa. However, what is needed is that the distribution of unskIilled wages shifts as a result of a change in the minimium wage. 12 Firms also pay a payroll tax, at the rate 0 < ptxu < 1 for unskilled workers, which is proportional to the wage bill, WMU3; and they receive a nominal employment subsidy on unskilled labor of ESu < WM per worker. Using (9), unskilled labor demand by the private sector is thus given by J a~~~~~X3 H U~~=JH((l± 13H X3H H (1 + ptxu)WM-ESu a PX3H ) (21) X3H In addition, mobility of the unskilled labor force between the formal and the informal sectors is assumed to be imperfect and determined by expected income opportunities. Specifically, the total supply of unskilled workers in the formal sector (including public sector workers), UF, is taken to change over time as a function of the expected wage differential across sectors. Wage and employment prospects are formed on the basis of prevailing conditions in the labor market. Because there is no job turnover in the public sector, the expected real wage in the formal economy, we, is equal to the real min- imum wage (measured in terms of the price of the consumption basket for unskilled workers) weighted by the probability of being hired in the private sector. Assuming that hiring in that sector is random, this probability can be approximated by the ratio of employed workers to those seeking employment. Assuming a one-period lag, we U3,_1 WM)I I The expected real wage in the informal economy is simply the average real income in that sector (measured again in terms of the relevant consumption price index), because there are no barriers to entry in that sector. Assuming again a one-period lag, e Y27-1 WI = t1 The flow supply of unskilled workers in the formal sector thus evolves over time according to UF,I ( F m , F > O, (22) LI T; \P1 UU, 1Y2,13 13 where oF denotes the elasticity of labor flows with respect to the (expected) wage ratio. The rate of unskilled unemp.-oyment in the formal sector, UNEU, is thus given by UNEu=- (U + U4) (23) UsF where U3 + U4 is total unskilled formal employment. The supply of labor in the informal economy, U2, is given by UV = Uu-UF (24) The informal labor market clears continuously, so that U2 = U2. rom this condition and equation (6), the equilibrium nominal wage is thus given by W2 = 72X, ( 2s ) x~ DY2,7 (25) where y2j is average income (before trarsfers) in the informal economy. The supply of unskilled labor in the urban sector, Ut, grows as a result of "natural" urban population growth and nigration of unskilled labor from the rural economy, as discussed earlier. Moreover, some urban unskiled workers, SKL, acquire skills and leave the unskilled labor force to augment the supply of qualified labor. All individuals are born unskilled, and thus naeLural urban population growth (not resulting from migration or skills acquisition factors) is represented by urban unskilled population growth only, at the exogenous rate gu. Thus, the urban unskilled labor supply evolves according to UU = Uu-1(1 + gu) + MIG - SKL. (26) 2.2.3 Urban SkiRned Wages and Empoymet As noted earlier, the employment levels of both skilled and unskil.ed workers in the public (urban) sector are taken as exogenous; the lack of tuznover is in part due to the fact that working for the government provides a nonpecuniary benefit, which takes the form of greater job security. The real wage rate that skilled workers receive in the public sector, WSG, is also taken as g;ven. With WSG denoting the nominal wage, and Pus the consumption price index for urban skilled workers (defined below), full indexation therefore implies that WSG = WSGPUS. (27) 14 From (8), the demand for skilled labor is, noting that PX3LX3L =1 O'X3L: PJJ L X3r JL 1-X3L OJX3L S3 = W{ L LX L }JL AX 3 PX3L (28) k')I~~~A 3L) LV~~~~~ ~ X3L) Two alternative specifications are used for determining wages for skilled labor in the private sector, Ws. The first approach is based on the "monopoly union" framework, and is derived as follows (see, for instance, Agenor (1999), Devarajan, Ghanem, and Thierfelder (1997), and Thierfelder and Shiells (1997)). Let w' denote the consumption real wage, that is, the nominal wage earned by skilled workers deflated by the cost-of-living index that these workers face in the urban sector, Pus. A centralized labor union sets wl with the objective to maximize a utility function that depends on deviations of both employment and the consumption wage from their target levels, sub- ject to the firm's labor demand schedule.8 Specifically, the union's utility function is given by U (WC WCT)(S3 -=S3 I O < V < 1, where S3 is given by equation (28). The quantities w'T and S3T measure the union's wage and employment targets, respectively, and are both assumed predetermined with respect to wc. The parameter v reflects the relative im- portance that the union attaches to wage deviations from target, as opposed to employment deviations. The union's problem is thus maxU = (wM - wAT)v(sd _ ST)l-V. 8Alternatively, one could assume that firms and the union bargain over wages (through a generalized Nash bargaining process), with either firms determining employment (the so-called "right to manage" approach) or that firms and the union bargain over both wages and employment. In the former case, the firm and the union would determine ws by max- imization of the product of each party's gains from reaching a bargain, weighted by their respective bargaining strengths, and once wages are set, employment would be determined by the firm. As shown by Creedy and McDonald (1991), for wage determination, it does not make much difference whether bargaining is over wages only, or over wages and em- ployment. However, as is well known (see for instance Booth (1995)), the equilibrium outcome in the case of bargaining over both wages and employment is such that firms would not in general be on their labor demand schedule. 15 Using (28), the first-order condition is given by v S3 -S3T S3d ST 1 3 c CT ~;~--.T d X3L( )C, lwcs WsT s WWs-S 3 3XWs or equivalently S3_ -_S _ (I -1V)OxLSd WUs - VSl Ws - Solving this condition yields Ws-WCs ^ 33 _ 3S = r 3 Ws ( -V)O'X3L S3 X which indicates that percentage deviations of the optimal wage from its target value are linearly related to percentage differences of employment from its target level. The union's target real wage, wT, is assumed to be related pcsitively to skilled wages in the public sector (meast,red in terms of the relevant price index), WSG, and negatively to the skilled unemployment rabe, UiVEs, and the real firing cost per skilled worker, fs, measured in terxns of the price of valued added in the private formal sector, PV3 (defined below). Wage-setting in the public sector is assumed to play a signaling role for wage setters in the rest of the economy. When unemployment is high, the probability of finding a job (at any given wage) is low. Consequently, the hig;her the une=ploymnent rate, the greater the incentive for tahe uion to moderate its wage deman6s in order to induce firms to increase employment. As noted earlier, firing costs do prevent excessive job losses in bad times (thereby preventing the loss of firm- specific human capital if downturns are temporary) but they also discourage new hires-namely because reversing mismatches is costly if workers prove to be inadequate matches with their job requirements. The union katernalizes the disincentive effect of severance payments on labor demand. As a result, the higher the firing cost, the greater the incentive for the -Lmion to -reduce its wage demands, in order to encourage fErrs to hire. Normalizing tI-e target level of employment to zero (S3T = 0) the above expression ca7 thus be rewritten as S = Pus UNE-' f024G (29) 6- V/( - 16 where UNEs is defined below and the 0, coefficients are all positive. This equation implies, in particular, that a higher level of unemployment lowers the level of wages, as predicted by various efficiency wage theories.' The second approach to determining skilled wages assumes direct bargain- ing, in each period, between producers and workers over the product wage, WS5 = Ws/PL. If a bargain is reached, each worker receives ws = WS/PJL, whereas the producer receives ms - ws, where ms = &JL(S3, K3)/0S3 is the marginal product of the worker, given by (using equation (8)): ms - (O3X L )(JL 1+X 3L (30) aXL The worker's "fallback" position is denoted Qs, which may represent an unemployment benefit (if one exists). The firm's fallback position is assumed to depend on firing costs in the following way (see Coe and Snower (1997)). In case of bargaining disagreement, the worker engages in industrial action that is costly to the firm (but not to himself). The greater is the level of industrial action, the lower will be the producer's fallback position and thus the higher will be the wage that the worker can achieve, up to a limit, beyond which the firm has an incentive to fire him. Producers face a firing cost of fs per worker (measured now in terms of the price of the composite output JL, that is, PL), and for simplicity all workers become eligible for severance payments immediately upon hiring.'0 If the cost of the industrial action to the firm exceeds the firing cost fs, the worker will be replaced by another one. Consequently, the worker will set the level of industrial action so that its cost to the firm is exactly fs, making the firm indifferent between retaining him and replacing him. Thus, the worker's bargaining surplus is ws - Qs, whereas the firm's bargaining surplus is ms - (ws + fs). The Nash bargaining problem can be formulated as max(ws - Qs)rms - (ws + fs)]l-v, 0 < v < 1, Ws 9Note that, in general, on would expect the optimal wage to be also be an increas- ing function of union density. Here, it is implicitly assumed that all skilled workers are members of the union. In addition, note that the target wage could also be specified as increasing in the income tax rate, itxs, implying that the union would demand higher wages to compensate for a decrease in after-tax income. I0In practice, redundancy payments are only made to workers with some minimum period of continuous service with the firm. 17 where v measures the bargaining strength of the worker relative to the IE£m. The first-order condition is given by Ms {S (Ws fs) _ ) {ms (WS+ fs) _ that is, -ms- (Ws+ fs) _ _ WS - n RFom this equation, the equilibrium negotiated wage can be de:ived as Ws = v(ms - fs) - (1 - )s Suppose that there is no unemployment benefit, so that Qs = 0, and that the bargaining strength of a skilled worker, v, varies inverse;.y with the rate of skilled unemployment, UNE3. 7he wage-setting equatior can thus be written as" WS = PLJ UNEI j (ms - fs), (31) which implies again that the level of wages and the rate of unemployment are inversely related, and that an increase in the firing cost reduces the skilled wage. The skilled open unemployment rate, UNEs, is given by the ratio of skilled workers who are not employed e.ther oy the private or the public sector, divided by the total popuiation of skilled workers: UNE5s (A +5G) (32) where SG is the total number of skilled worlkers in the lpublic serctc, engaged in both the production of public services, S4, and education, SQ (s5e below): 'SG = S4 + S. (33) Skilled workers who are unable to find a Job in the formal economy opt to remain openly unemployed, instead of enering the informa, eco2aoy (ir, contrast to unskilled workers), as a result oF eitther a reservation wage that systematically exceeds the informal sectcr wage, or concerns about adverse "lWith an unemployment benefit proportional to the wage, so that 32s - U,J the coefficient v in the negotiated wage should be replaced by vl/[l - (I - )t. signaling effects to potential future employers, as argued in a different setting by McCormick (1990) and Gottfries and McCormick (1995). The evolution of the skilled labor force depends on the rate at which unskilled workers acquire skills: S = (1 - 6s)S-1 + SKL, (34) where 0 < 6s < 1 is the rate of depreciation, or "de-skilling", of the skilled labor force. The size of the urban population, URB, is thus URB = UU + S, that is, using (26) and (34): URB = (1 + gu)U6,-j + MIG + (1 - 6s)S-1. (35) 2.2.4 Skills Formation The acquisition of skills by unskilled workers takes place through an educa- tion system operated (free of charge) by the public sector. Specifically, the flow of unskilled workers who become skilled, SKL, is taken to be a CES function of the "effective" number of teachers in the public sector, SGE, and the government stock of capital in education, KE (defined below): SKL = [iEE(pSGE)PE + (1 - OE)KEP]PEX, (36) where o measures the productivity of public workers engaged in providing education. fo is assumed to depend on the relative wage of skilled workers in the public sector, WSG, relative to the expected wage for that same category of labor in the private sector, which (in the absence of unemployment ben- efits) is given by one minus the unemployment rate, 1 - UNEs, times the going wage, Ws.'2 Assuming a simple logistic form (as for instance in Maech- ler and Roland-Holst (1997, p. 492)), and a one-period lag, this function can be written as13 12For simplicity, it is assumed that all skilled workers in the public sector earn the same nominal wage. 13Wages in equations (37) and (38) are specified in nominal terms, because they are assumed to be both deflated by the same price index-the price of the consumption basket for skilled workers in the urban sector. 19 so = {1 +xexp [ ( - UNEs,1) s, }c>O. 0 (37) WSG,1l This equation shows that the higher the public sector wage relative to its opportunity cost, the greater the level of effort by teachers in the public sector, and thus the greater the nrumber of slilled workers produced by the system. Alternatively, the effort :Eiction derived by Ag6nor and Aizenman (1999) could also be used: y7 =-(P. [( WS G5 I ] [ > 0, (38) and where 0 r O< = 1. As noted below, these indexes are used to update the rural and urban poverty lines in simulation experiments. 25 Firms' profits are defined as revenue minus total labor costs. 12 the case of the agricultural sector firms, and urban informal sector firms, profits are simply given by PR, = PV V,-W EJ, for i = 1, 2. (66) Profits of urban private sector firms account for both working capital costs and salaries paid to both categories of workers, as well as payroll taxes and firing costs, FC, for both categories of workers:15 PR3 = PV3(V3- FC) - [(1 + ptxu)WM - ESU]U3- WSS3, (67) where total firing costs are given by FC = fu max(O, U3,_1 - U3) + fs max(O, S3,1 - S3), (68) with fs, fu denoting the fixed fring cost per worlker (skilled and uskilled, respectively). Household income is based on the return to labor (salaries), distributed profits, and government transfers. Households are defined according to the level of skills of its members and their sector of employment. There is one rural household, (indexed by a) comprising all workers employed in agricul- ture. In the urban sector there are two types of unskilled househoids (denoted by b and c), those working in the informal sector and those employed in the formal sector ((both public and private). The fourth household (denoted by d) consists of skilled workers employed in the formal urban economy (in both the private and public sectors). Finally, there is a capitalist-rentier household (denoted by e) whose income derives mainly from firms' net earnings in the urban private sector. Households in both agriculture and the infcrmal urban economy own the firms in which they are employed. Encome of agricultural and informal sector households is given by, with h = a,b and i = 1,2: YHh = (PR, + WAUJ) + -YhTR = PVVi + YhTR, (69) 15Note that payroll taxes are assumed to be levied on the total wage bil excluding interest payments, that is, Wm U3 instead of (1 + iL)WM U3. Note also that azing costs are assumed to be paid on the total reduction in the number of workers, thereby neglecting t"natural" attrition (retirement) and voluntary quits. 26 where aYh is the portion of total government transfers (TR) each group re- ceives. Income of the urban formal unskilled, and skilled households, depends on government transfers, salaries, and possibly redundancy payments; firms provide no source of income, because these groups do not own the production units in which they are employed: YHc = WMU3 + WuGU4 + PV3fu max(0, U3,_1 - U3) + ycTR, (70) YHd = WSSP + WSGSG + PV3fS max(O, S3,-1 -S3) + YdTR, (71) where SG is the total number of skilled workers in the public sector, engaged in both the production of services and training (see (33)). Firms in the private urban sector pay income taxes, and interest on their foreign borrowing, FL3. Their net (after-tax) profits, NPR3, are thus NPR3 = (1 - itXf)PR3 - i*ER * FL3,_1, (72) where itxf is the corporate income tax rate and i* is the interest rate paid on foreign loans, taken to be exogenous. A portion of these net profits, X, are retained for the purpose of financing investment; the remainder is transferred to the capitalist-rentier household. Thus, total income of that group is given by YHe = (1- X)NPR3 + yeTR. (73) 2.7 Private Consumption and Savings Each category of household h = a, ...e saves a fixed fraction, 0 < srh < 1, of its disposable income: SAVh = srh(l - itXh)YHh, (74) where 0 < itxh < 1 is the income tax rate applicable to household h. The portion of disposable income that is not saved is allocated to con- sumption: COh = (1 - Srh)(1 - itXh)YHh. (75) 27 20g Private rnvestmat Capital accumulation occurs only i' the urgan 6orTaal privato C.cr. To examine the decision to invest, defne Izrst- t'c after-tax rate ^l ,cW-- on private physical capital, IK, as the ratio of net profits to th2e sto'COk f c apptal: IxK (i-itZf)P_3 (73) PIKK3 The desired capital stock by firms ir the private cor.ai -: ban sxctor is determnined so as to equate the after'tax rate of returzn on. ca- taI plu.s the rate of capital gains due to changes iE the price of capi'c., and mnus depreciation (at the rate 63) to the opportunity cost of ingEcstTr-<.t, which (assuming the absence of "effective" restrictions to capital mobil ,y) is here taken to be the world interest rate, adjusted for the rate of cen:--.ation of the nominal exchange rate, e: IK -63 + p =i- E,(.) where 0 < 63 < I. One could also add to the marginal cost offor&gn caoitai on the right-hand side of this equation a risk premikim, to re..c_t 'type of imperfections that developing count:res face on wo-ld cakts maar-kets. Such a premium could be specified, for instance, as a convex f Lr of the difference between the value of tbe private capital stoc!<, P'KK3, -rlative to firms' foreign borrowing, ER * FL3, WhSci in the prese nt setting e-resents a measure of firms' net worth. Using equation (76), and setting E = 0, tais arbitrage condt:;'-.- y-Ilds16 PR3 (1( - tf K3 = PK iC + 63- APK/IPK-1 (78) Actual investment in each period is determined by a paotial g .j-kStM ent process, and is given as a functioD of the ratio between t7ne &esirzA capital stock and last period's capital stock: Z4 J Ki, K3,_1 Ko 0. This investment function is, of course, very simple and does not account for a variety of other factors that have been shown to be im- portant for developing countries-such as inflation, macroeconomic volatility, public capital in infrastructure, and possibly foreign borrowing."7 Some of these modifications can easily be introduced. Note also that, although there is no direct effect of the public capital stock in infrastructure, KR, on private investment, KR does affect the overall stock of public capital, KG (defined below), which in turn affects the production process-and thus indirectly the desired capital stock, through profits. The capital stock depends on the flow level of investment, Zp, and the depreciation rate: K3 = K3,1(1 - 63) + ZP-1. (80) The net worth of private urban firms in nominal terms, NW3, is defined as the value of physical capital, net of foreign borrowing, FL3: NW3 = PKK3 - ER - FL3, which changes over time according to NW3 = NW3,-1 + PKAK3 - ER * AFL3 + APKK3,-l The last term on the right-hand side of this expression represents capital gains associated with changes in the price of capital. Note that changes in NW3 have no feedback effects on the economy, unlike what happens in the "full" IMMIPA model of Agenor, Izquierdo and Fofack (2003), in which banks charge a risk premium on their loans that is inversely related to the borrower's net worth. In the present setting, a feedback effect could be introduced by adding a risk premium to the marginal cost of foreign capital, as noted earlier. The ex post aggregate identity (or ex ante equilibrium condition) between savings and investment is specified as follows. Total gross investment in phys- ical capital measured in nominal terms, which is equal to PK(ZP + ZG), is financed by firms' after-tax retained earnings, total after-tax household sav- ings, "primary" government savings (that is, before investment), and foreign 17See Agenor (2000, Chapter 1), Agenor and Montiel (Chapter 3), Agenor, Izquierdo, and Fofack (2003), Jimenez (1995), and recent studies by Sanchez-Robles (1998), Ahmed and Miller (2000), Ghura and Goodwin (2000), Hendricks (2000), and Wang (2992). 29 borrowing by firms and the govermnent. Given the definition of the over- all government fiscal balance given below in (84), GBAL, this identity can therefore be written with private investment only on the left-hand side: PKZP = XNPR3 + Z SAV, + GBAL + ER(AFL3 + AFLG), (82) h where FLg is foreign borrowing by the government. In the simulations re- ported below this equation is solved residually for the savings rate of ren- tiers and capitalists, sre. In thats sense, then, the basic model is "investsment driven", although of course other closure rules are possible. For instance, one could solve "backward" for the government budget balance and deternmine the level of current public expenditure that is consistent with (82). Alterna- tively, one could drop purely and simply the investment equatior (79) and solve (82) instead for Zp. ln that case, then, the model would be "savings driven" (see Dewatripont and Michel (1987)). 2.O PubHc SeteO c r Government expenditures consist of final consumption, which only has demand- side effects, and public investment, which has both demand- and supply-side effects. Total public investment, ZG, consists of investment in infrastructure, IR, education, IE, and health, IH,which are all considered exogenous policy variables:18 ZG = IR + IE + IH. (83) Investment in infrastructure consists of the accumulation of public capital such as roads, power plants and railroads. Investment in educatio.. consists of the accumulation of assets such as school buildings and other infzastructure affecting the acquisition of skills (for instance, research institutions), out does not represent human capital. In a similar fashion, investment in health adds to the stock of public assets such as hospitals. Rom (13), PV4V4 - (WUGU4 + WSGS4) = 0, that is, all va2.e added generated by the production of public goods is distributed as wages. The '8See Jimenez (1995), Tanzi and Zee (1997), Sanz and VelAzquez (2001), and Webber (2002), for a discussion of the links between thle composition of public investment and growth. It should be noted that this treatment of public investment differs from standard data classification reported in national accounts; in many instances these investments are classified as current expenditures. 30 government fiscal balance, GBAL, is thus defined as GBAL = TAX - TR- WSGSGE - ESUU3 - PC3(Gc + ZG) - icER * FLG,1. (84) where TAX denotes total tax revenues, TR government transfers to house- holds, WSGSGE the wage bill on school teachers, ESuU3 total employment subsidies to firms in the private formal sector, Gc other real current expendi- tures on goods and services, ZG real investment spending, and iaER- FLG,_ is interest payments on foreign borrowing. Total tax revenues consist of revenue generated by import tariffs, sales taxes, income taxes, and payroll taxes on unskilled labor: TAX = Z itm,(ER * wpm,M1) +ptxUWMU3 (85) X=1,3 4 +itxf PR3 + E atx,PX1X, + E itXhYHh + E stX"PQAQ1, 1=1 h =1,3 with atxrr = 0. Public investment in infrastructure, health, and education, determines the rate at which the stock of each type of public capital, K3, with j = E, H, R, grows over time. Accumulation of each type of capital is thus defined as: Kj = K3,1(l - (53) + I3,-,, where j = E, H, R. (86) where 0 < 63 < 1 is a depreciation rate. Infrastructure and health capital are combined through a CES function to produce the stock of public capital, KG: KG = aG{/GKR G± (1-3G)KHPG} PG . (87) 2.10 Balance of Payments The external constraint implies that any current account surplus (or deficit) must be compensated by a net outflow (or inflow) of foreign capital, given by the sum of changes in net foreign borrowing by the government, AFLG, and private firms, A\FL3: , (wpe,E, - wpmzM1) + i*(FLG,_l + FL3,_1) + L\FLG + AFL3 = 0. (88) i=1,3 31 In the simulations reported below, E assume that public foreign borrowing is exogenous, and that private foreign borrowing adjusts to ecq-Sribrate the balance of payments. Figure 3 summarizes the structure of the labor market in nini-iMMPA, whereas Figure 4 captures overall linkages. Appendix A provides a complete list of equations, Appendix B varia70le definitions, and Appendix C discusses calibration and solution proceduzes, as well as parameter values.19 2O.L1 PrDety and1 ]$,Z E (COa The procedure followed in mini-IMMPA to assess the poverty a2d distribu- tional effects of exogenous and policy shock6s is similar to the one in VMMPA, which is described at length in Ag6ncr, Lzqnierdo, and Fofack (2003) and evaluated against several alternatives by Ag6nor and Grimm (2003). This procedure assumes that initial rural and urban poverty lines are exogenously set in real terms and involves linking the "structural" component described earlier to a household income and expenditure survey, organized along the household structure described earlier. Specifically, the calculation of poverty indices-the poverty headcount index (the proportion of individuals earning less than the poverty line) and the poverty gap (the average shortfall of the income of the poor with respect to the poverty line, multiplied by the head- count index)-as well as distributional indicators (the Gini coefficient and the Theil inequality index) involves the following steps: o Step 1. Classify the data in the household survey into the categories of households contained in the structural component of the model. Here, as noted earlier, there are .five categories of households-workers in the rural sector, those in the urban (unskilled) informal economy, urban unskilled workers in the formal sector, urban skilled wo:rkers in the formal sector, and capitalists-rentiers. o Step 2. Following a policy or exogenous shock, generate real growth rates in per capita consumption and disposable income fo6 all 'ive cat- 19As implied by Walras' Law, one equilibrium condition may be droppe6 because it can be deducted from the other equilibrium conditions. Instead of dropping one equation, the computer program checks numerically for continuous equality between savings and investment, as given in equation (82), by ensuring that a residual variable is continuously equal to zero. 32 egories of households, up to the end of the simulation horizon (say, T periods) . * Step 3. Apply these growth rates separately to the per capita (dispos- able) income and consumption expenditure for each household in the survey. This gives a new vector of absolute income and consumption levels for each group, for periods 1,...T. * Step 4. Calculate poverty and income distribution indicators, using the new absolute nominal levels of income and consumption for each in- dividual and each group, and after updating the initial rural and urban poverty lines, using the prices indexes generated by the structural com- ponent of the model, to reflect changes in the price of the consumption basket and purchasing power of income. * Step 5. Using the rates of growth of employment generated by the structural component of the model, adjust the relative weights of each household group in the urban sector (as given in the survey) and calcu- late the reweighted poverty and distributional indicators for that sector as a whole.20 * Step 6. Compare the post-shock poverty and income distribution in- dicators with the baseline values to assess the impact of the shock on the poor and the degree of inequality for periods 1, ...T. The household survey that I use to perform the policy experiments re- ported below is an artificial survey, constructed as follows. First, a sample of 5,000 observations was produced, with the share of each household group cor- responding exactly to that in the structural component of the model.2' Each observation was considered to represent one household. Second, using a ran- dom number generator and a log-normal distribution, values for disposable income and consumption expenditure were drawn for each household. As pa- rameters for each group, the initial values for average disposable income and 20The same reweighting procedure would need to be applied to the rural sector if there was more than one category of households there. 2 These shares are 28.2 percent of workers in the rural sector, 45.3 percent of workers in the informal urban sector, 13.7 percent of unskilled workers in the formal urban sector, 9.9 percent of skilled workers in the formal urban sector, and 3 percent of capitalists and rentiers. 33 average consumption expenditure (which are taken from the caiTbrated data- base) are imposed as mean and as standard deviation. For skille-& workers in the formal urban sector and for capitalist and rentiers, a standard deviation of 0.8 times the mean is assumned. Figure 5 shows the distribtion of con- sumption in each group. Third, the incorne poverty line for the rural sector is set (somewhat arbitrarily) such that the percentage of rural houiseholds in poverty is 50 percent. The poverty line in urban areas is then assumed to be 15 percent higher. The rural and urban poverty lines for consumption expenditure are calculated in the same manner. This procedure produces an economy-wide, income-based headcount poverty index of 38.6 percent and an economy-wide consumption-based headcount index of 41.1 percent. For income distribution, the overall Gini index is 0.48 (consumption based) and 0.49 (income based).22 The within-group Theil inequality decomposition is 78 percent (consumption based) and 73 percent (income based). 3 Nhcy Mxp'men(t Mini-IMMPA can be used to analyze a variety of policy ana exogenous shocks. For illustrative purposes, the growth, unemployment and poverty effects of two types of labor market policies are examined in this section: a cut in the minimum wage and a reduction in the payroll tax rate on unskilled labor.23 Both experiments relate to critical policy issues in developing coun- tries. Economists have long debated the roie of minimnum wage legislation in labor market adjustment. Advocates have oLten viewed minimum wages as being beneficial in various ways-through its positive effect on- nutrition or productivity, or as an instrunent of income redistribution and social justice. By contrast, opponents argue that minimum wage legislation, bI preventing wages from adjusting downward to excess supply of labor, impos^-s an implicit tax on employers in the formal economy, leads to misallocation of labor (by preventing wages from adjusting downward to excess supply of ala nr) ad cre- ates unemployment (particularly for unskilled workers), induces .labor market 22The income-based Gini coefficients are 0.45 for the rural sector, 0.48 for the urban sector, 0.44 for the informal sector households, 0.43 for urban unskilled households, 0.38 for urban skilled households, and 0.39 for capitalists and rentiers. 231n these simulations, PD3 is assumed to be fully flexible, the skilled wage-setting equation (29) and the effort function (38) are used, and both the unskilled public sector wage and the minimum wage are taken to be fixed in nominal terms (idxu idxM = 0). 34 segmentation, and depresses wages in the informal urban sector-which has an adverse effect on the poor. By increasing the relative cost of employing unskilled workers, a high minimum wage may also accelerate the substitution of capital for unskilled labor and reduce profits-and thus firms' capacity to invest. As a result of both factors, high minimum wages may restrain the expansion of labor demand over time. Thus, a government-mandated in- crease the minimum wage (assuming that it is binding) may not only reduce employment but also raise poverty, because the increase in the marginal cost of labor will lead firms to scale back hiring-forcing the unemployed to en- ter the informal sector and depressing wages there.24 Thus, changes in the minimum wage are likely to have important distributional effects among (un- skilled) workers, notably between those employed in the formal sector and those in the informal sector. Similarly, in both industrial and developing countries, a flat payroll tax is often imposed on employers to finance gen- eral government expenditure, or more specifically the pension system or the unemployment benefit scheme.25 The conventional, partial equilibrium view suggests that the incidence of such a tax-its actual burden-depends on the elasticity of labor supply and the degree of wage rigidity. But it is also important to account for general equilibrium effects. The effect on wages depends on the structure of the labor market. For instance, an increase in employers' social security contributions may initially cause an increase in la- bor costs and lower employment; but the ensuing increase in unemployment may drive wages down over time, thereby offsetting the higher non-wage costs. In addition, the effect of a reduction in payroll taxation depends to a very significant extent on how the cut is financed; with a binding budget constraint, reducing the payroll tax requires shifting the tax burden to some other tax base. Thus, it is important to consider alternative financing rules in evaluating the effect of a cut in the payroll tax. 24If a binding minimum wage does not reduce employment among the poor, it will also reduce poverty if a large number of poor households consist of low-wage workers. However, in many poor households, no one may be employed in a formal sector job. If indeed low- paid workers axe not in poor households, much of an income gain that may come from an increase in the minimum wage would benefit those that are not poor to begin with. 25Financing of unemployment benefit schemes is in general usually shared between em- ployers and employees-but the employers' contribution is usually substantially higher than employees' contribution. 35 3.1 Fldcto kU^Wa the Mfin=m Wage^L A.af The simulation results associated with a permanent, 5 percent rcd-iiction in the minimum wage are illustrated in Tables 1 and 2, which display relative and absolute percentage changes from the baseline sol.ution, respcctively, for the first 10 periods after the shock. This time period is referred to below as the "adjustment period." The experiment assumes that the government borrows domestically to finance its deficit-implying therefore (as discussed earlier) an offsetting adjustment in the savings rate of capitJalists a.rd rentiers, in order to maintain the aggregate bala-ace between savings and 'nvestment (equation (82)).26 Table 1 provides data on national accounts, fiscal accounts, and the labor market, whereas Table 2 sHows changes in prices, consumption and income for each household group, and poverty and distributional indi- cators, both income- and consumption-based. Also shown in TLable 2 is the real exchange rate, defined as a weighted average of the domest c-currency price of exports and imports (with weights based on initial volumcs of trade), divided by a weighted average of the price of domestic sales of agricuJ.tural and private sector goods. The impact effect of the reduction in thhe minimum wage is an increase in the demand for unskilled labor in the private sector of the ^rcder of 4.3 percent in the first year. The increase ir demand is met by the existing pool of unskilled workers seeking employment in the urban sector. As a result, the unskilled unemployment rate drops sigrificantly, by 2.8 percentage points in the first year.27 The cut in the minimuum wage, by reducing the r_eiative cost of unskilled labor, leads to substitution among production factors not only on impact but also over time. Because unskilled labor has a relatively high elasticity of substitution with respect to the composite factor consisting of skilled labor and physical capital, the -lower cost of that categcry of labor gives private firms in the formal sector an incentive to substitute away from skilled labor and physical capital. In tmrn, the fall in the demand for that category of labor puts downward pressure on skilled wages, which drop by 1.6 26How this "transfer" of private savings to the government takes place is not explicitly specified; one can think of a "pure" financial ;ntermediary operating in the background. Note that a more elaborate approach would involve accounting explicitly fe: the issuance of government bonds, and thus portfoiEo decisions on the part of savers. 27Note that, from equation (23), the initial change in unskilled unemployment is given by AUNEu,o = -AU3dO/U;. It therefore depends on the initial number of workers seeking employment in the formal sector. Similarly, from (32), AUNEs,O = -AS3,G/S. 36 percent in the first period. On impact, labor supply is fixed in agriculture and the informal economy, so the level of employment does not change in either sector-and neither does the level of activity (real value added in both sectors is constant). The rise in real disposable income (by 1.1 percent and 1.5 percent, respectively) and real consumption of rural and informal sector households leads to higher value added prices and higher wages in both sectors. But value added prices go up by slightly more than wages in the second and subsequent periods, implying a fall in the product wage in both sectors and a rise in employment. Over time, changes in wage differentials affect both rural-urban and formal- informal migration flows, and therefore the supply of labor in the various production sectors. The expected unskilled wage in the formal economy is constant on impact, as implied by (17) and (18). Despite the increase in unskilled employment in the private sector in the first period (and thus the increase in the probability of finding a job), the fall in the minimum wage is such that the urban expected wage falls. Moreover, because agricultural sector wages rise, the expected urban-rural wage differential (measured in proportion of the rural wage) falls by 8.7 percentage points in the second period, with this differential narrowing over time. As a result, the inflow of unskilled workers into the formal sector (measured in proportion of the total formal urban labor supply) falls by about 1.2 percent in periods 2 and 3. The reduction in the inflow of labor leads to an increase in informal sector wages throughout the adjustment period, by 2.6 percent in period 2, 1.6 percent in period 3, and so on. This increase in the informal sector wage, coupled with the reduction in the minimum wage (as well as the expected wage in the urban formal private sector, despite the higher employment probability) leads to a sharp fall in period 2 in the expected formal-informal wage dif- ferential. This tends therefore to reduce (by 1.2 percent in period 2, and about 2 percent over the entire adjustment period) the number of workers willing to queue for employment in the urban private sector. This, coupled with the sustained effect of the cut in the minimum wage on labor demand, explains the large effect on unemployment, which averages about 5 percent in the long run. Note also that throughout the adjustment period, despite significant fluctuations in the expected formal-informal wage differential and formal-informal migration flows, the supply of unskilled labor in the formal private sector remains systematically lower than its baseline value. Although the behavior of nominal wages in agriculture reflects essentially changes in value added prices on impact (as noted earlier), over time it is 37 also affected by changes in labor elemand -induced by changes in holuseholds' disposable income and expenditure-and migration flows. Aftef an initial increase in nominal wages, lower migration flows to urban areas begin to put downward pressure on rural wages, which end up faling (in nominal terms) by 1.6 percent in period 9 and 1.8 percent in the last period. As also indicated earlier, the reduction in the cost of unskilled labor induces a substitution away from skilled labor, which brings a sustained fall in skilled wages in nominal terms (by about 1.3 percent in the long run). Hlowever, the overall effect on labor demand is not large; skilled employment ir. the private formal sector falls in the long run by only about 0.1 percent. And because the supply of skilled labor remains roughly constant t-I^oughout (public investment in education and the number of school teachers are held constant at their baseline values), the skilled unemployment ra..e rises by about the same amount (in percentage points).28 The reason fCr the small effect on skilled employment is that the direct substitution effect associated with the reduction in the minimum wage is offset by a fall in the skilled wage, resulting from general equilibrium effects-the drop in the nominal skilled wage is less than the fall in the value added price of the urban private formal sector, implying a rise in the product wage, and thus dampening tbae demand for labor. For instance, the nominal skilled wage drops by 1.6 percent in period 1, 2.4 percent in period 2, 1.4 percent in period 3, and 0.7 percent in period 4; at the same time, the price of value added in the private formal sector drops by 2.4 percent in period 1, 3.1 percent in period 2, 2.0 percent in period 3, and 1.4 percent in period 4. The long-run effect on aggregate output (or real GDIP) is slightly positive, at about 0.3 percent.29 Changes im real output (as measured by real value added) are also positive and small in the urban informal sector, b-ct between 0.7 to 1 percent in agriculture and the urban formal sector, which reflects here essentially changes in private activity. ,The impact on agricultural output tends to grow slightly over time, as a result of the gradual fall in agricultural wages, as noted earlier. 28As implied by equation (38), the level of e.Fort of skilled workers changes as a result of variations in the skilled unemployment rate. H1owever, given the magnitude of these variations, and the elasticity of the effort function with respect to relative wages, the impact on the supply of skilled labor is negligible relative to the baseline. 29Note that this analysis of the growth effects of a cut in the minimum wage does not account for the possible negative externality that may arise if such a cut reduces incentives for human capital accumulation, as emphasized by Cahuc and Michel (1095). 38 On the fiscal side, tax revenue falls by about 0.2 percentage points as a share of GDP during the adjustment period, mostly as a result of indirect taxes changing at a slower pace than nominal GDP. Because public invest- ment falls by about 0.1 percentage points of GDP (reflecting a lower price of capital, that is, because PK = PV3, a fall in the value added price in the urban private formal sector), the increase in the overall deficit is about 0.1 percent of GDP. This deficit is financed by domestic borrowing. From the aggregate balance between investment and savings, and given the closure rule discussed earlier, this means that the savings rate of capitalists and rentiers has to increase to maintain equilibrium. Given the small size of that group (about 3 percent of the total number of households), this increase turns out to be quite large-between 5.8 and 6.6 percentage points in the long run.30 Despite relatively large changes in real consumption and disposable in- come (mostly in urban areas), overall poverty indicators for the rural and urban sectors change relatively little during the adjustment period. This is, of course, related to the fact that the aggregate growth and income effects of the shock are fairly limited and involve essentially a re-allocation of re- sources across sectors. In addition, however, there are significant differences among household groups within the urban sector. In particular, although real consumption of the capitalists-rentiers group drops significantly, and the incidence of poverty (as measured by the consumption-based headcount in- dex) increases slightly toward the end of the adjustment period, the depth of poverty (as measured by the poverty gap) is barely affected in either the short or the long run. By contrast, income-based poverty indicators barely change. This difference in behavior of the two sets of indicators is, of course, related to the fact that the savings rate of capitalists and rentiers is endogenously determined, thereby affecting directly expenditure patterns, rather than the level of income (see (75)). For unskilled workers engaged in the informal and formal sectors, both measures of poverty indicate a slight improvement in the longer run, regardless of whether the consumption- or income-based measure is used. This is also the case in the short run for informal sector workers. However, for unskilled workers in the formal sector, poverty increases slightly on impact-by about 0.1 percentage points when the income-based headcount index is used-and so does the skilled poverty 30It is worth noting that, if instead a "classical closure" had been chosen (with private investment determined residually), the government deficit would have had a direct crowd- ing out effect on private capital formation. See, for instance, the discussion by Agenor and El Aynaoui (2003) of the case of Morocco in a similar setting. 39 rate in the longer run. There is therefore a potential trade-off emerging between unemployment and poverty: although the reduction in the mini- mum wage raises unskilled employment in the formal sector, it also mncreases poverty (albeit slightly) in the short term for that category of households, whereas the poverty rate for skilled workers in the formal sector r.ses both in the short and the long run. Changes in the consumption-base& Gii co- efficient indicate that income distribution is effected quite significantly by a cut in the minimum wage; the degree of inequality falls by more than one percentage point in the long run. This effect is directly related to the sharp reduction in consumption experienced by capitalists and rentiers, .elative to other household groups. 3.2 Out 2ln PayroHR tas an U k%lild1 laba:r The simulation results associated with a permanent, 5 percentage-point re- duction in the payroll tax rate on unskilled labor are illustrateed in Tables 3 to 8. The results correspond to three alternative budget financing rules: domestic borrowing (that is, an endogenous adjustment in the capitalists- rentiers savings rate, as in the previous case) with no offsetting t?x change; an offsetting, revenue-neutral increase in sales taxes on private forraal sector goods only; and a revenue-neutral increase in income taxes.31 3.2O . EDomestic E1orc>winng Consider first the case of domestic borrowing (7ables 3 and 4). Tne impact effect of a reduction in the payroll tax rate is qualitatively similez to a cut in the minimum wage, as discussed earlier: by reducing the effectfve cost of unskilled labor, it tends to increase immediately the demand for that category of labor-in the present case by 3.4 percent in the first year, anc by about the same amount on average during the adjustment period. Thie unskilled unemployment rate drops by 2.2 percentage points in the first year as well, and in the long run by an average of 1.4 percent. And the reduction in the 31A potential problem with these simula-tions, as in othex studies along the same line- such as Dreze et al. (1984)-is the failure to distinguish between changes in average tax rates, and changes in margznal tax rates. The effects could be very different. .Por instance, a reduction in the average payroll tax rate might reduce "wage-push" press-as, whereas a cut in marginal rates might reduce the unemployment cost of achieving a higher net income, thereby influencing trade unions' bargaining strategies. 40 "effective" cost of unskilled labor leads firms in the private formal urban sector to substitute away from skilled labor and physical capital, leading to a reduction in skilled wages in nominal terms (by 1.4 percent in period 1, 2.5 percent in period 2, 1.9 percent in period 3, and 1.1 percent in period 4) and a reduction in the price of capital (that is, the price of the private formal good) by about 1.2 percent on impact. In the present case, however, the skilled nominal wage falls by more than the price of value added in the private formal sector (which drops by 1.2 percent in period 1, 2.1 percent in period 2, 1.4 percent in period 3, and 0.7 percent in period 4), implying a fall in the skilled product wage and stimulating the demand for that category of labor. Thus, the adverse impact of the substitution effect induced by the reduction in the cost of unskilled labor on the demand for skilled labor is dampened. Overall, skilled employment falls by about 0.1 percent on impact and 0.2 percent in the longer run, bringing with it a concomitant increase in the skilled unemployment rate. The behavior of the (expected) urban-rural wage differential follows a pattern qualitatively similar to the one described in the previous experi- ment, although the magnitude of the initial effects are not as large. The expected formal-informal wage differential, however, increases now in the second period. The reason is that the minimum wage does not change this time around, and the increase in unskilled employment raises the probability of finding a job in the private sector, thereby increasing the expected formal sector wage. As a result, therefore, there is an increase in the number of unskilled job seekers in the formal economy (by 0.6 percent in period 2), which therefore mitigates the initial reduction in unemployment. In the sub- sequent period, however, because of the sharp increase in the informal sector wage (itself due to the reduction in labor supply in the informal economy), the formal-informal wage differential moves in the opposite direction and by about the same amount (1.8 percentage points)-thereby reducing the num- ber of unskilled job seekers in the formal sector. These fluctuations in wage differentials, migration flows, and labor supply in the formal and informal sectors continue throughout the adjustment period. The overall effect on aggregate real output is, again, fairly small-given that this is also a shock that fundamentally entails a change in relative prices as the initial impulse (in both cases, a change in the relative price of unskilled labor). An important feature of the long-run adjustment process, however, is a reduction in the size of the informal sector and an expansion of the private formal urban sector, which essentially results from the transfer of 41 unskilled labor across these two sectors. This result is therefore consistent with the. widely-held view (discussed in the introduction) that reducing the tax burden on the formal sector is essential to limit the growth of the informal sector, although in the present case the "disincentive' effects of taxation are indirect and captured at the level of firms, and do not account explicitly for the propensity to evade income taxes by individuals. The government budget is of course more significantly affected, with indirect tax revenue falling by about 0.4 percentage points of GDP. Despite the drop in the price of capital (which tends to raise the desired capital stock, as implied by (78)), the drop in profits-resulting from the reduction in private consumption by capitalists and rentiers, and to a lesser extent by skilled households in the formal sector-private investment drops significantly in the first 2-3 periods following the shock, recovering partly thereafter. Because the current account improves (by about 0.6 percentage points of GDP in the long run), private capital inflows fall. Despite the initially large reduction in private investment, borrowing by the government and the reduction in foreign savings lead to a fairly significaiit increase in the savings rate of capitalists-rentiers relative to its baseline value (about 8 percentage points during the adjustment period). Poverty and distributional indicators are affected in the same direction as before. In particular, after increasing during the first part of the adjustment period, the consumption-based headcount index for capitalists and rentiers shows a slight increase toward the end of the adjustment period, whereas the poverty gap barely changes. And because the drop in consumption for that category of households is larger than in the case of a cut in the minimum wage, the degree of inequality (as measured by the consumption-based Gini coefficient or the Theil index) falls by a larger amount. In addition, in the present case, the poverty rate for unskilled households in the formal sector drops on impact, with no significant long-run effect, whereas skilled poverty rates increase throughout the adjustment period. 3.2.2 Revenue-Neutral Change Consider now the case where the effect of the cut in payroll taxes on overall tax revenue is offset by either an increase in sales taxes on private formal sector goods (Tables 5 and 6) or an increase in income taxes (Tables 7 and 8). In the latter case, the increase in the tax rate is assumed to be propor- tional across all households-except of course for informal sector households, who are not subject to direct taxation to begin with. Put differently, the 42 offsetting effect in both cases implies a constant level of total tax revenue, after accounting for general equilibrium effects. In both cases, the impact and longer-run effects of the shock are quali- tatively similar to those described earlier, although their magnitude differs. In particular, movements in the informal sector wage are less pronounced, in part because changes in rural-urban migration flows are not as large. By contrast (or, rather, by implication), movements in the expected formal- informal wage differential during the first part of the adjustment period are larger, implying more pronounced movements in the number of job seekers in the formal sector. Compared to the case of private sector borrowing, the reduction in the unskilled unemployment rate is less pronounced with an offsetting change in the sales tax, and of about the same magnitude when the income tax is adjusted, with also similar effects on overall real GDP and private investment. When the sales tax is adjusted, the fall in total private consumption is more pronounced than in the case of domestic borrowing or with an offsetting adjustment in the income tax (see Table 5). The reason, of course, is that the increase in the sales price reduces the purchasing power of income (everything else equal) and tends to reduce demand, particularly in urban areas (see Table 6). In both cases, the offsetting changes in the bud- get imply that domestic borrowing by the government does not change as a result of the reduction in the payroll tax; thus, the increase in the savings rate of capitalists and rentiers is much less pronounced that in the case in which the government finances its deficit through the private sector. In both cases, changes in the poverty and distributional effects (as mea- sured by the consumption-based indicators) are also less pronounced initially than in the case of a non-neutral shock, although the income-based poverty gap for formal skilled workers displays slightly larger and more persistent fluctuations in the case of an offsetting income tax change (see Table 8). This is obviously what one would expect given that disposable income for this particular group falls by a much larger amount compared to the non- neutral case-by about 2 percent for skilled workers in the formal sector between periods 6 and 10 (see Table 8), compared to about 0.8 percent with a non-neutral policy shock (see Table 4). As a result, the income-based Gini coefficient falls by more (by about 0.4 percentage points in the long run, com- pared to 0.2 in the non-neutral case), despite the fact that changes in the consumption-based measures of inequality are less pronounced. Overall, the results indicate that there are some significant differences in economic and poverty outcomes, depending on the offsetting change in the budget that 43 accompanies the reduction in the payroll tax. 4 (CaU$CS$ The purpose of this paper has been to present the structure of fir.-7MPA, a specialized version of the Integrated Macroeconomic Model f.or Poverty Analysis developed by Ag6nor, Izquierdo and Fofack (2003), and Ag6nor, Fernandes, Haddad and van der Mensbrugghe (2003), w.hich is particularly suitable for users interested mainly in assessing the quantitative efects of fiscal and labor market reforms on unemployment and poverty. Although Mini-IMMPA focuses only on the "real"' side, it offers a more detailed treat- ment of the labor market than KMMPA. (by accounting for features such as public education, employment subsidies, and firing ccsts) &nd the tax structure. The first part of the paper described in detail the st7ucture of Mini-IMMPA. In the second part the model was used to analyze the growth, unemployment and poverty effects of two types of labor market policies: a cut in the minimum wage and a reduction in the payroll tax rate on unskilled labor. In particular, the results (which arc obviously highly dependent on the selected closure rule) indicated that a reduction in the mi-mmum wage may have a sizable impact on unskilled unemployment, and that the extent to which a reduction in payroll taxes on usllaed labor lower une.mployment for that category of labor depends on how they are financed. More generally, the foregoing analysis suggests th2at the fiscal implications of labor market reforms have to be carefully analyzed 'n order to assess the potential im- pact of these reforms on unemployment and poverty. Labor mairket rerorms may end up having a limited overall elfect on unemployment and poverty, depending on how they are financed. Another important implication of tae roregoing analysis-which is dis- cussed in more detail in Agenor (2C03a)-is thaSt labor rnark-et reKrms aimed at reducing unemployment may end up increasing poverty, if they are imple- mented in a context in which fiscal constraints impose offsetting changes in financing. Consider, again, a reduction i-a payroll taxation on unskilled labor. Despite stimulating employment for that category of labor (as mentioned earlier), this policy measure may also lead to higher poverty, depending on how it is financed. An offsetting, across-the-board reduction in transfers, for instance, would have an immediate adverse effect on the poor. Financing through an increase in consumption taxes may raise the price of the con- 44 sumption basket of the poor and reduce their real income to a level below the poverty line. Financing through higher income taxes may reduce dispos- able income and the ability to spend; it may also drive over time activity underground, leading to a fall in the overall tax ratio, which in turn could force cuts in expenditure (including transfers to the most needy). Financing through a tax on capital (usually a limited option for governments, due to concerns about capital flight) may lower private investment capital; as noted earlier this may reduce skilled employment and mitigate the overall, positive effect on total employment. Finally, financing through a cut in government spending on infrastructure may affect aversely the overall productivity of pro- duction factors in the private sector (including labor) and lead to a reduction in wage income; it may also have a negative impact on private investment. This, in turn, will have an adverse overall effect on the demand for labor (due to the negative effect of investment on growth) as well as an adverse effect on the demand for skilled labor through the complementarity relation- ship between human capital and physical capital. Thus, although the direct effect of the reduction in the payroll tax rate on the demand for unskilled labor may well be positive (both in the short and medium run), overall em- ployment (and thus unemployment) may not change much, as an increase in the number of unskilled jobs is offset by lower employment of skilled la- bor. In all of those cases, again, unemployment may fall, but poverty may increase-because of adverse effects on income, due either to lower after-tax wages or lower public transfers. There may therefore be a trade-off between unemployment and poverty goals. In addition, of course, labor market reforms may themselves be comple- mentary, if labor market institutions are complementary as well. As empha- sized by Coe and Snower (1997), this implies that partial or piecemeal labor market reforms are unlikely to achieve significant and persistent reductions in unemployment rates or poverty. For instance, active labor market policies (such as retraining schemes) may not be very effective in the presence of sub- stantial passive policies (such as stringent job security provisions). Reform programs must be sufficiently broad (in the sense of covering a wide range of complementary policies) and deep (of substantial magnitude) to have much of an effect. In addition, these reforms may also need to be combined with measures that address more efficiently the distributional objectives of the pre-reform policies, such as the imposition of high minimum wages. The Mini-IMMPA prototype developed here can be used to analyze a variety of additional labor market policies. First, it can be used to analyze a 45 reduction in union bargaining pawer. To the extent that this translates into lower wages for skilled workers, this may afect incentives to ac3iuire skills. As noted by Lindbeck and Snower (2001), firing costs can increase a union's bargaining power, and help to explain excessive real wages and resultant in- voluntary unemployment. Second, the model can be used to analyze changes in employment subsidies for unskilled labor. ln general, the employment ef- fects of an increase in employment subsidies and reductions in payroll taxes are different, as can be inferred from the results of Pisauro (1909) and Ras- mussen (1998). Third, one could study the impact of a reductica in public unskilled employment in the production of government services, coupled with a deficit-neutral increase in subsidies to u-nskilled employment in the private formal sector.32 The prototype presented in this paper can also be extended in a variety of directions. First, to the extent thaat patL o47 the job problem is a shortage of skilled workers, the model can be extended to account for subsidies to skills acquisition and/or on-the-job training. Second, labor taxation and labor market regulations may encourage firms to go informal.33 This is captured only indirectly in the present version of the model. But changes in income taxes may have a direct effect on the prope.-sity to go informal; account- ing for this effect may lead to an inverted U-shape curve between taxation and the size of the informal sector, depending on the use of tax revenues. Suppose, for instance, that revenues are used to finance higher spending on infrastructure. An increase in inzome taxes may well have a ocsitive effect on growth initially (by stimulating private production), but a negative ef- fect afterward, as further increases tend to drive activity underground and reduce overall revenue. Finally, the model caTn be extended to consider the impact of the introduction of social insurance on savings, labor supply, and unemployment.34 32Several of these shocks are analyz^d by Ag6nor, Nabli, Yusef, and Ecyniung (2003), in a variant of the present model. Note that a meaningful analysis of public employment and wage shocks requires the introduction of a oroduction function for pubL;c services, in order to break the equality between the wage bill and the production of value added. 33See for instance Sarte (2000) or 'hi-ig and Moe (2001) for a model wit& transitional dynamics, and Schneider and Enste (2000) for a more general discussion. KXugler (2000) develops a model in which job security regulations provide incentives for nigh turnover firms to operate in the informal sector. 34See Karni (1999) for a thorough discussion of analytical issues in the design of unem- ployment benefit schemes. 45 Appendix A Equations of Mini-IMMPA PRODUCTION 4 Xi = V, + E a.lXl (Al) i=1 V, = [o.xi{I3x1 uPx1 + (1 -,fx3)KGPx1} PX1 ] (A2) XI CtED1 [1ED, El + (1 - 3EDI)Dl PED (A3) 4 X2 = V2 + Z a22X2 (A4) X=1 V2 = Ux2 (A5) 4 X3 = V3 + E a23X3 (A6) JL(S3, K3) = aX3L 0X,LS3 + (1 - OX3L)K3 3L] PX3L (A7) JH(JL, U3) = CX3H{fX3HJL + (1 -)fX3H)U3 3 }PX3H (A8) V3(JH, KG) = °X3 [3X3JPX3 + (1-3X3){ d }cPX3] (A9) X3 = 3]ED3 [/ED3E3 )DP (A10) X4 = V4+ E at4X4 (All) t=1 V4 = (WUGU4 + WSGS4)/PV4 (A12) WAGES AND EMPLOYMENT I1+ 1PI - ,7x1 o3x,1+ Uld = {V 1 W7X .XI (A13) 47 UR = U (V1 PTWi) (A14) UR = UR-1(i + gR) - MIG (A15) We = OUVM,-1 + (1 - OU)71X22,-1 (A16) PUU,-1 ou = U3S-l _U41(A17) W = ' (A18) MIG Gj~~I (A19) UR,-1 (We 3 (P P (+XsH 17X3H U ~ FUJH -PU-I E(A20) /3,l \PUU,-l U; = UF,- Pb - vjD >GF (A22) UNEu1 U- (U4) (A23) 29 =6 U UF (@A24) qX ( p VP7 W ) (A25) U2 UU = UU,-I (1 + gu) + MIG - SKL (A26) URB = UU + S (A27) Wi = wP = UG,M (A28) vvzg =wSGPUs (A29) S3 = JL X3L | (A30) (/S aX3L 48 UNEj-1 f-02 03 WS= PUS1 - V/(l - (A31X) 1-IJ L)1+Px3L 3L WS PLb - UNE;"l (X, -3 fS (A32) I. X3L UNES =1- (S3+ SG) (A33) S SG = S4 + SGE (A34) S = (1 - 5s)S-l + SKL (A35) SKL = [3E(PSGE)PE + (1 - E)KEPE] PE1 (A36) {1+ [ (1-UNESi)Ws]} -1 (A37) 1 [(- UNEs,-1)Ws,-1g (A38) SUPPLY AND DEMAND X2 = Qs (A39) X4 = Qs (A40) 1= aQ1{/Q1M1~Q' +(1- Q.)D-PQ1 PQl (A41) Q` = aQ3{Q3M3 P3 + (1 - Q3)D 3}Q3 (A42) Q = C±+INT1, fori=1,2,4 (A43) Q = C3 + G3 + Z3 + INT3 (A44) 4 INT=Z aaXZ, for j=1,...4 (A45) G3 = GC + ZG (A46) C1h = X,h + CCh(COh - ,=1 PCX,h) (A47) PC, 49 Ci =T>C,h, i=L,....... (A48') h Z3 = ZP (A49) El = PE iEl |-r 3T aT' (A5,0 E3 = (:E3 . L 3)UT3 (A51) D3 PD3 1T3I Ml = DI P)D, 3Q- ) (A52) M3 = D3:(j p3 I ¾-3) (A53) PRCES 4 Pi= Vi-l PX1(1-atxc)- aj,iPC. jXi fori=1, ... . (A54) PE, = wpe1ER (A55) PE3 = Wp83ER (A55) PM1 = wp1n, (1 + itm )ER (A57) PM3 = wUW3 (a -+ itm3)ER (A58) PXJ = P1D1 + PE1E1 (A59) pX 3 = ?D3D3 + PE3E3 (A60) PQ1 = FMPM + 1DPD, (A61) PC1 = (1 + stxl),PQ1 (A62) PQ3 = M3PM3 + D3PD3 (A63) PQ3=~~~~~ PC3 = (! + SiX3).PQ3 (A64) PQ2 = PD2 = PX2 = PC2 (A65) 50 PQ4 = PD4 = PX4 = PC4 (A66) PJ PL JL + [(1 + ptxu)WM-ESU]U3 (A67) JH pJ PR3 + WSS3 (A68) JL PK = PC3 (A69) z PR = O 9XPQ1 (A70) i PUU= ZOpCi, PUS= LOisPCi (A71) ~~~~~~~~~~~t INCOME PR1 = PV1V1 - W1U1 (A72) PR2 = PV2V2 - W2U2 (A73) PR3 = PV3(V3 - FC) - [(1 + ptxu) WM - ESu]U3 - WsS3 (A74) FC = fu max(O, U3,_1 - U3) + fs max(O, S3,1 - S3) (A75) YHa = PV1Vi + -yTR (A76) YHb = PV2V2 + YbTR (A77) YHC = WMU3 + WUGU4 + PV3fu max(O, U3,1 - U3) + -yeTR (A78) YHd = WSS3 + WSGSG + PV3fs maX(O, S3,-1 - S3) + YdTR (A79) NPR3 = (1 - itxf)PR3 - i*ER - FL3, l (A80) YH, = (1- X)NPR3 + ,yTR (A81) SAVh = srh(l - itXh)YHh (A82) COh = (1 - srh)(1 -itXh)YHh (A83) = PR3 (1 - itxf) (A84) PK i* + 63 -APK/PK,-1 ZP Z K * erZ 4P = Zo 3 } (A85) K3,-1 K3,-l K3 = K3,-1(1 - 63) + ZP,-1 (A86) 51 PKZp = XNPR3 + E SAVp, + GBAL + ER(AFL3 + AFLc) (A87) h NW3 = NW3,-1 + PKAK3 - ER - AFL3 + APKK3,-1 (A88) GBAL = TAX - TR - WsGSG - ESuU3 - PC3 (Gc + ZG) - iER * FLG,-1 (A89) TAX = , itm2(ER - wpmiMi) +PtxUWMU3 + itxfPR3 (ADO) i=1,3 4 + Z atx:PXiXi + E itXHh + stxiPQQ, i=l h i=1,3 ZG = IR + IE + IH (A91) Kj = Kj,(I- 6,) + 4j,-,, j = E, H, R (A92) KG = aYG{1GKR` + (1 -)3G)KH C} PG (A93) 3BALANCE F PAY TS Z (wpeiE, - wpmnMi) - i°(FLG,-1 + FL3,_1) + AFLG + AFL3 0 (A94) i=1,3 52 Appendix B Variable Names and Definitions Endogenous Variables34 Name Definition in text AVC3 Average variable cost in private production C,h Consumption of good i by household h C. Aggregate consumption of good i (by all households) COh Total consumption by household h D, Domestic demand for good i = 1, 3 E., Exports of good i = 1, 3 ESu Nominal employment subsidy on unskilled labor FC Total firing costs fs Real firing cost per skilled worker fu Real firing cost per unskilled worker G3 Government spending on private urban goods GBAL Overall government fiscal balance IK After-tax rate of return on private physical capital INTi Intermediate good demand for good i JH Composite input from JL and unskilled labor JL Composite input from capital and skilled labor KE Public capital in education KG Stock of public capital (infrastructure and health) KH Public capital in health KR Public capital in infrastructure K3 Private physical capital K3* Desired stock of private physical capital Ml Imports of good i = 1, 3 mS Marginal product of a skilled worker in private production MIG Rural-urban migration flows NPR3 Net (after-tax) profits of private urban formal sector firms NW3 Net worth of private urban formal sector firms Qs Unemployment benefit for skilled workers 34The index i (respectively, h) is used below to refer to all production sectors (household groups, respectively), that is, 1, 2, 3, 4 (a, b, c, d, e, respectively), unless otherwise indicated. 53 'p Productivity of public sector workers in education Wpm Minimum effort level of Public sector workers in education PR Rural price index PC, Tax-inclusive domestic sales price of good i = 1, 3 PD, Domestic price of domestic sales of good i PE, Export price for good i = 1, 3 PK Price of capital PMi Import price for gcod i = 1, 3 PQi Composite price of good i PR, Profits by firms produci-ng good i PHJ Price of JH PLJ Price of JL Pus Urban skilled price index Puu Urban unskilled price in6ex P14 Value added price of good i PXi Gross output price of good i Qid Aggregate demand. for good i Qis Quantity supplied of good i S Stock of skilled worlkers S3 Skilled labor employed in the private urban formal sector S5T Union's skilled employment target SAVh Saving by householc h srh Saving rate for household h SKL Change in the number of skilled workers TR Public transfers to households TAX Total tax revenues TVC3 Total variable costs in prIvate urban production Uh Stone-Geary utility function for household h Ui Unskilled labor employed in sector i UF Unskilled labor supply ir the urban formal sector UR Unskilled workers in rural sector Uu Total supply of anskilled workers in the urban sector Uid Demand for labor in sector i = 1, 2,3 U28 Supply of labor iz the informai sector UR, Labor supply in the rural sector UNEu Unskilled unemployment rate in the urban formal sector UNES Skilled unemployment rate '541 URB Total urban population (skilled and unskilled) VI Value added in sector i WI Nominal wage in sector i = 1, 2 W, Real wage rate in sector i = 1, 2 WA e Expected rural consumption real wage A Expected real wage in the formal economy wl e Expected real wage in the informal economy w e Expected unskilled urban real wage WM Minimum wage (nominal terms) Ws Nominal skilled wage in the private formal sector WS Real skilled wage in the private formal sector WSC Consumption real wage WCT Union's real consumption wage target WSG Nominal skilled wage in the public sector WSG Real skilled wage in the public sector WUG Nominal unskilled wage in the public sector XCth Subsistence level of consumption of good i by household h X., Gross production of good i YHh Income of household h Y2 Average income in the informal sector (before transfers) ZG Real public investment expenditure Zp Real private investment expenditure (= Z3) 55 Exogenous Variables Name Defimition in text atxi Indirect taxation rate of output in sector i E Rate of depreciation of the nominal exchange rate ER Nominal exchange rate FL0 Foreign borrowing 'by govern-ment FL3 Foreign borrowing by private urban formal firms Gc Goverinent cor-smptioz (excluding wages and salaries) gR Population growth in rural sector gu Population growth in urban sector i* Interest rate on private foreign borrowing iG Interest rate paid on public foreign borrowing IE Public investment in education IH Public investment in health IR Public investment in infrastructure itkf Corporate income tax rate itXh Income tax rate for household h mk Markup rate, private urban formal firms ptxu Payroll tax rate on unskilled laoor, private formal urban sector x Rate of retained net profits, private formal urbian sector 54 Skilled workers in productio. of nubic services SG Total number of skilled workers in the public sector SGE Skilled workers in poublic production of education stx, Sales tax rate on good i (sMX2 = O) tmi, Import tariff on good i = , 3 U4 Unskilled workers in public sector wpe2 World price of exports, i = 1, 3 wpmi World price of imports, i = 7, 3 Parameters Name Definition in text a,j Input-output coefficients aeG Shift parameter for public capital aEQ, Shift parameter in composite good i = 1, 3 CrED1 Shift parameter in agricultural production function aED3 Shift parameter in CET function for private formal urban good ax. Shift parameter in production of i = 1, 3 aX3H Shift parameter in unskilled, skilled/capital composite input (YX3L Shift parameter in skilled/capital composite input 13E Weighting parameter in the skills acquisition function fG Shift parameter for public capital fQ% Shift parameter in composite good i = 1, 3 OED1 Shift parameter in agricultural production function OED3 Shift parameter in CET function for private formal urban good 13xi Shift parameter in production of good i = 1, 3 fX3H Share parameter in unskiUed, skilled/capital composite input 1X3L Share parameter in skilled/capital composite input CCih Shares of good i in household h's total consumption dc3 Congestion parameter, private formal urban good 63 Depreciation rate of private capital 6E Depreciation rate of public capital in education 6H Depreciation rate of public capital in health 6R Depreciation rate of public capital in infrastructure Es Rate of depreciation or "de-skilling" of the skilled labor force 1lxi Coefficient of returns to scale 7lX2 Parameter in the value added function for urban informal good 'Yh Share of public transfers allocated to household h ¢3 Parameters in skilled target wage equation, j = 1, 2,3 PE Parameter in the skills acquisition function PG Substitution parameter for public capital pQ, Substitution parameter in composite good i = 1, 3 PED1 Parameter in agricultural production function PED3 Substitution parameter between exports and domestic sales Px1 Substitution parameter in production of good i = 1, 3 57 PX3H Substitution parameter between unskied, and skilled/capital comxposite input PX3L Substitution parameter between skilled labor- private capital UF Elasticity of unskilled labor flows with respect to t7ne expected formal-informal wage differential am Elasticity of migration flows to rural-urban wage dierentials aQi Elasticity of compcsite good i = 1, 3 aEDi Elasticity of transformation between expoxrs and domestic sales, i = 1, 3 'X3H Elasticity of substitution between unskilled workers and composite input of silled workers and private capital aX3L Elasticity of substitutionT etween skilled workers-private capital Cz Parameter in the investment function for the priveae sector ou Share of urban unskilled workers employed in formal sector aOR~ Weight of good i in the price idex of the rural sector i5 Weight of good i iin the ioce index for ur-ban skiled workers Azu Weight of good i -iz the pTice index for urban unskied workers v Weight of wage deviations in Union's utility funcLon ZO Shift parameter in the investment function in the private sector 58 Appendix C Calibration and Parameter Values This appendix presents the characteristics of the data underlying the cal- ibration procedure for the Mini-IMMPA prototype described in the text.35 The basic data set consists of a Social Accounting Matrix (SAM) and a set of initial levels and lagged variables. The mapping between Mini-IMMPA variables and the SAM data framework is set out in Table Cl. The SAM en- compasses 27 accounts including production and retail sectors (4 accounts), labor production factors and profits (3 accounts), enterprises (1 account), households (5 accounts), government current expenditures and taxes (9 ac- counts), government investment expenditures (3 accounts), private invest- ment spending (1 account), and the rest of the world (1 account). The ac- tual SAM data are presented in Table C2. The data satisfy the double-entry accounting principle and can therefore be used to initialize model variables and calibrate level parameters, such as effective tax rates. The characteristics of the SAM data and other data (including initial labor market quantities and debt and capital stocks) are summarized in the following. On the output side, agriculture and the informal sector account for respectively 12 and 35 percent of total output. On the demand side, private current and capital expenditures account for 78 percent of GDP, whereas overall government expenditures account for 18 percent of GDP. The economy has a balanced current account but runs a trade surplus, amounting to 4 percent of GDP, to finance foreign interest payments. This structure of production and final demand characterize fairly well a lower middle-income economy with moderate potential for agricultural production. Total investment expenditures amount to 22 percent of GDP, and the private sector account for two-thirds of these outlays. This implies that in- vestment spending accounts for 19 percent of private expenditures, and 40 percent of public expenditures. The public sector investment budget allo- cates 30 percent of expenditures to investment in the health sector, 30 per- cent to investment in the education sector, and 40 percent to investment in infrastructure. Furthermore, the public sector wage bill makes up 30 percent of overall public sector expenditures. In the base period the government is assumed to run a balanced budget, and therefore does not resort to domes- tic or foreign borrowing. Sales taxes and import tariffs make up for more 35This Appendix was drafted by Henning Jensen. 59 than 70 percent of total government revenues, whereas private income and corporate taxes account for less than 20 percent of revenues. This structure of tax revenue is a common feature of many developing economies, low- and middle-income. The trade balance is dominated by non-agricultural imports and exports. Agricultural exports account for only 8 percent of total export earnings, whereas non-agricultural imports account for 92 percent of total imports. The level of trade openness, measured by the ratio of the sum of imports and exports to GDP, amounts to a moderate 40 percent. Because the economy runs a balanced current account in the base period, there are no private and public foreign borrowing. Nevertheless, the stock of external debt in the base period amounts to 51 percent of GDP (or 233 percent of export earnings), whereas foreign interest payments amount to 4 percent of GDP (or 18 percent of exports earnings). The hypothetical country considered has therefore a significant debt burden initially. Looking at the labor market, 29 percent of the total labor force is living in rural areas, whereas the rest is concentrated in urban areas. Altogether, 47 percent of the workers are employed in some kind of urban informal occu- pation, whereas only 22 percent of the labor force is employed in the urban formal sector. Open unemployment among formal urban workers amounts to 2 percent of the total labor force. The formal labor force consists of 58 percent of unskilled workers and 42 percent of skilled workers, and unemploy- ment rates are 10 percent among formal unskilled labor and 8 percent among skilled labor. Migration from rural to urban areas amounts to 1.3 percent of the rural population, and the urban-rural wage differential amounts to 54 percent of the rural wage. In comparison, unskilled labor migration from the informal to the formal sector amounts to 0.8 percent of the informal sector labor force, whereas the formal-informal wage differential amounts to 106 percent of the informal wage. A set of 17 elasticity parameters has to be estimated (or "guesstimated"), as they cannot be derived from the calibration procedure. These parameters include CES substitution elasticities in rural agricultural and private formal production (4 parameters); CES Armington elasticities and CET transforma- tion elasticities for aggregating domestic composite goods and transforming domestic production (4 parameters); elasticities related to rural-urban, and formal-informal sector migration (2 parameters); elasticities related to the computation of ordinary and congested government capital (2 parameters), the elasticity of effort by teachers and the elasticity of substitution between 60 labor and capital in skill upgrading (2 parameters); the elasticities related to determination of skilled labor wages (2 parameters); and the elasticity of investment with respect to the desired private capital stock (1 parameter). In addition, a set of minimum consumption levels (15 parameters) has to be determined, because they cannot be derived from the calibration procedure either. The substitution elasticity between labor and government capital in rural production is set at 0.7, whereas elasticities in the nested private formal sector production structure ranges from 0.7 between skilled labor and capital to 1.2 between the skilled labor-capital bundle and unskilled labor. Import and export elasticities are uniformly set at 0.7 for agriculture and 1.5 for the urban private formal sector. This is again meant to reflect a lower middle- income economy with low agricultural potential. The elasticity of rural-urban migration with respect to the relative rural-urban wage-differential is set at 0.4, whereas the elasticity of formal-informal migration with respect to the formal-informal wage ratio i5 set at 0.8. In relation to the computation of public sector capital, the substitution parameter between infrastructure and health capital stocks are set at 0.5, whereas congestion is assumed to be absent by setting the elasticity to zero. The substitution elasticity between teachers and public capital in education in the production of skilled labor is set to 0.3, whereas the effort elasticity with respect to the relative wage ratio (using the specification in Agenor and Aizenman (1999) ) is set to 0.8. Furthermore, skilled labor wages in the urban private formal sector is only assumed to be affected by the skilled unemployment rate. Accordingly, the private skilled wage elasticity with respect to unemployment is set at -2.0, whereas the elasticity with respect to the skilled labor-capital bundle is assumed to be zero. Turning to the specification of private capital formation, the investment elasticity with respect to the desired growth rate of the private capital stock is set at 0.3. This reflects an economy facing structural difficulties in the process of capital accumulation. Finally, minimum household consumption levels were uniformly assumed to amount to 10 percent of initial good-specific consumption levels. Among the remaining set of parameters, the foreign interest rate on pri- vate borrowing is calibrated to 3.8 percent, whereas the public foreign in- terest rate is calibrated to 4.9 percent. In addition, the initial depreciation rates are calibrated to 6.4 percent for private capital and 3.9-5.8 percent for public capital (depending on whether investment is in education, health, or 61 infrastructure). Thrning to the government budget, output and value added tax rates range from 3.0-3.7 percent, whereas the tax rate on sa-les of the urban private formal sector and the payroll tax rate paid by firEns in that sector are calibrated to respectively 12.1 and 20.1 percent. l7mpo:t tariffs range from 34 percent on private formal sector goods to 167 percert on agri- cultural goods, reflecting a country with si"icant protection on agriculture. 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Venezuela Ecuador o ~~~~~~~~~~~~~~~~~~~~~~~~Fiji CD Indonesia C * Kenya Bostwana 6 aL - Philippines Morocco Panama Tunisia Mexico 0 Chile Brazil Colombia X 4 r Cote d'lvoir -Iran Mauntius Uruguay India Peru C r Pakistan E 2 0 0 *aun usCameroonS o° Costa Rica Madagascar 0 o I . Argentina Bolivia* Myanmar 0 20 30 40 50 60 70 Urban informal sector employment (in percent of urban employment) Source: World Bank and Intemational Labor Organization. 68 Figure 2 Developing Countries: Informal Sector Size and Poverty (averages, in percent) 90 Zambia S 80 Madagascar 70 r *0 60 Guatamala * G m 60 c ~~~~~~~~~~~~~Peru *@ 50 -Honduras * * * Tanzania .' Bangladesh Kenya ' 40 Panama Ecuador Pakistan Philippines * India Ecudo (D 30 _ Venezuela4 e . 3 Mexico O 20 _ Argentina @* 40 Paraguay Thailand 2L Indonesia Chile * Colombia 10 0 Mauritius Mexico 0 I , I . I . I , I , I , I , I 0 10 20 30 40 50 60 70 80 90 Urban informal sector employment (in percent of urban employment) Source: World Bank and Intemational Labor Organization. 69 Figure 3 Production Structure and the Labor Market in MiniH M?AAF Production Rural sector Uro6n scCtor Informal sector Form21 sector v ~~~~~~~~~(nontraded) Labor demand Pnvate secor good Agricultural sector wage :Publc Sector SKILLED j4 Unskilled labr dsmand F TRA PUBLIC Rural labor supply informal sector UNSKILLED MINIMUM WAGE UNIONS VWAGE Labor / `~~~~~~~~~~~~~~~~~~~~~~~' ~~~~Pdrite LaborL Unskilled labor dzmand | S!illed labor demand -ski!lad wga Eupectl d Sive a s urban waga TEACHERS IN Public captal THE PUBLIC stock SECTOR 70 w Z n- a)~~~--------U L.~~~~~~~~~~~~~~~~~9--- m L.~~~~~~~~~~~. 0~~~~~ 0 x IL W 0~~~~~~~~~~~~~ A~~~~~~~~~~~~~~~~~~~~ I LU ~ ~ ~ _ 0 _ 0 0. C W~~~~~~~~~~~~~~~~~~~ 0 W 9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 C ~ ~~~~~~~~~~~ -4 <0z W E wr it u~~~~) 0= 0 0~~~~~~~~~~~~~~~~~~~~~~~l 00 L 0 li~~~~~~~ Z~~~~~~~~~~~~~~~~ __________________I C 71 MiniHMMPA: Initia Distridbution of Uncoms, 13aazd an Lo rG naD Ac xO on (obs denotes the number of households in each group) 3.0 Workers in the Agricultural Sector 2.0 Workers in the Informrl Urba.r Setor 1.8 2.5 . 2.0 1.4 1.2 1.5 obs= 136 1.0 t obs =334 1.0 0.1| 0.4~~~~~~~~~~~. - 0 0 0.5 0.4 0000 0.2 0 0 0.0 00 1 0 2.0 30 4.0 4.0 0.0 0 10.2 03 0.4 0.5 0.6 0.7 0.8 5 Unskilled W7orkers in the Formal Urban Sector 2 S%:d Workers in tha Fomr Urben S"ctor 4.5 -01' 0.8 3.5- 3.0 0.5 2.5 obs=363 0.4 obs 533 1.5 0.2 1.0 0.5 0.1 0.0 00 0 0.0 1 0 20 3.0 40 5.0 0.0 2.0 4.0 3.0 8.0 10 0 O.S. Capitelists and Rentiere 0.4 0 0.3 - 0.3 0 oba.1e 0.2 - 0 0.2 - 0 0.1 0.1 cz-0 0 0~ o o 0 0.0 o o o 0.0 2.0 4.0 6.0 8.0 10.0 12.0 72 Tgable I Mlnl-IMMPA: Simulation Results 5 Percent Cut In Unskilled Labor Minimum Wage (Percentage deviations from baseline, unleos otherwise Indicated) Periods 1 2 3 4 5 6 7 a 9 10 Real sector Totalreaorrca 0.2 0 0 0 3 0 4 0.2 0 1 0.2 0 2 0.2 01i Grosadwmestopmroduc 0 3 0 3 0.5 065 0 3 0 3 0 3 0 4 0 3 0 3 Imports ofgoodesealnd1FS -0 7 -13 -0.5 00a -05 -0 9 -07 -0 5 -00a -09 Total epaped,hmr 0 2 0 0 0 3 0A 0 2 a01 0.2 0.2 0.2 01i Toted .teumptof 0 0 0 7 0 5 0 0 -01 0.2 0.2 0 0 -01 0 0 privte vonsumPt00n 00 09a 0 6 0 0 -01 0.2 0.3 0 0 -01 0 0 Pubk consumlption 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 a00 0 0 Tolallrwomeotw -0 9 -41 -16 0.9 -01 .1 9 -16a -056 -05 -1.2 Private lnwsOruft -1 0 -6 6 -21 1.5 0,1 -2.4 -21 -0 5 -0.4 -1 4 pubSliclnvestmleflt -0 7 -0 9 -0 6 -0 4 -065 -0 7 -0 7 -0 6 -06 -0 7 Exrportsof goods WO NFS 1 7 1 6 1 5 1 4 1 6 1. 1 7 1 6 1 7 16a External Sector (% of GOPI' Currenlacoounl 06 0 6 0 4 0 4 056 0 6 006 0 6 06a 0 7 Export of goodsand NFS 0 3 0 3 0.3 0.2 0 3 0 3 0 3 0 3 0 3 0 3 imports ofgoods ard NFS -0.2 -0 3 -0.2 -01 -0,1 -0.2 -0.2 -0 1 -0.2 -012 FaCto services 0 0 0 0 -01 - 01 -01 -01i -01 -01 -02 -0 2 Cepitdoalouuo -05 -0 6 -0OA -04 -0 9 -0.8 -06 -0 6 -0 6 -0 7 Perto lborrosol -0.0 -06a -0OA -04 -065 -0 6 -0 6 -068 -06a -0 7 Purbk bormwAng 0 0 0 0 0 0 0 0 0 0 00a 0 0 0 0 0 0 0 0 secrn.r t Sor (% of GD) Total mvenue -0.2 -0 3 -02 -01 -0.2 -0.2 -02 -0 2 -02 -0 2 Dlreclbutes -01 -01 0 0 00a 0.0 -01 0 0 0 0 0 0 0 0 Indibs taxsa -0.2 -0 3 -2 -01 -0.1 -0.2 -02 -01 - 01 -0 2 Total euendi0br -01 -0 1 -02 -0 2 .01 01 I 01 .0.1 .01 -01 Consumrption 0 0 00 0 0 -01I 00 0 0 0 0 00 00 0 0 Im,esorrent -01 -01 -01 -01 - 01 -01 - 01 -01 - 01 -01I Trarofemltlrhousaoodda 00 0 0 0 0 a 00 0 0 0 0 00 0 0 00 0 0 For-eigntnemel payonts 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Totedfirtanclng 0 1 02 0 0 -01 0 0 0 1 0 1 0 0 0 1 0 1 Foreign fiuanclng 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 DorrrWsbffcorweing 0.1 02 0 0 -01 0 0 0 1 0 1 0 0 0 1 0 1 LaSer Market Norigrina wages AgrO.rlIwaltDor 10a 2 0 1 4 0.3 -0.3 -0 4 -06a -1.2 -1 6 -16a lnformutel ector 2 0 26 16a 1 3 2 2 2 7 205 2 3 2 6 2 9 Private tfornal sco Unskl4led -50 -600 -50 -5 0 -5 0 -6 0 -s0 -0 0 -5 0 - 00 Sildflad -1 6 -2 4 -14 -0 7 -12 -1 7 -1 5 -1.2 -1.2 -1 4 public secto UnslOuled 0 0 0 0 0 0 0 0 0.0 0 0 0 0 0 0 0 0 0 0 SkIlled 0 1 0 1 0 1 0 0 0.1 0 1 0 1 0 1 0 1 0 1 Employrrent Agrwloumltrsector 0 0 02 0 4 056 0 7 0.8 06 1I1 1 2 IS3 Inrformral sector 0 0 02 0 4 02 -01 -0 I 0 0 0.0 -02 -0 2 Private formal sector Unskilled 4 3 32 4 7 0 8 5 0 42 4 5 5 1 6 0 4 7 Skrilled -01 -0 2 -01 -01I -01 -0.2 -01 -01 -01 -01I UnakllOed 0 0 0 0 0 0 0 0 0 0 00a 0 0 0 0 0 0 0 0 SIdleod 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0.0 0 0 0 0 Lab5or supply (urbanl formal soctor) Unoldrled 0 0 -12 -2 3 -19a -12 -1 5 -2.2 -2 3 -2 0 -21 Skilled 00 00 00 00 00 00 00 00 00 00 Unemloyent tot (urban frmai sector)' Unskilled -268 -3 3 -5A4 -5 7 -4A5 -4 3 -52 -568 -84 -5 2 Sodloed 0 1 0 1 0 1 0 0 0.1 0 1 0 1 0.1 0 1 01I Rteal wage difternOalse' Euoected urbn-nual(I% otrurarlwag) 0 0 -6 7 -99a 89a -7 6 -995 -623 -6 2 -5 6 -5 0 Eopectodfoml-rnwwormal(%ofhnIornulwege) 00 -3 1 -3.2 12 19 -08a -17 -0.3 0 6 -01 Runed-urbanI% of urbanlSbor suppIy) 0 00 -009e -0 09 -0 09 -007 -0 06 -008s -0 0 -005 -0 04 FomaI-lrforal (%of formal urban tasoesupply) 000 -1 16 .120 0 44 0 71 -0 32 -065s -010a 023 -0 02 Memorandum ltem GDP atmarketapfcea 0 3 02 0 4 0. 0 3 023 0.3 0 4 0 4 0 3 Valueadded at facrw 00 0 3 0 3 04 0.5 04 0 3 04 0 4 04 0 4 Value addedIn mraleedor 0 0 0.1 0 3 0 4 0.5 0 7 0.6 0 9 0 9 1 0 Valaeadded lnurban hfortlal sector 0 0 02 0 3 02 -01 - 01 0 0 0 0 -01 -02 Value aeddeInurban formalIsect 08a 0 6 06a 0 9 09a 0 7 0 7 098 09 0 7 PrltyatConwsrmptlDn -04 023 0 3 -0 2 -04 -01 0 0 -0.2 -03 -0 3 PrlvaleInves0tment -03 -4 6 -16 1I9 09 -1 7 -1 4 0 1 02 -0 7 OraposableInomme 0 3 04 0 5 0 5 0 4 0 0.5s 0 6 0 6 0 6 Capstal anrd mtem5rsavings ram' 69a 09 1I9 5 9 66 4 7 42 6 8 66a 62 'Absolute OtvIStioO from bowe line 'real Wems 73 YL::0 a Pow-I.V cr. 0!-_Wl_,Cr7.fJ %-.121caZZ70 0 Pcic=,l Cul In Ur:M!ccil Lc::or C_'I.I!,mum t,-,Co -U:o puzueo 3 4 5 0 7 10 C Pd- :I Q. D=:._ ac-! F-d CPI MO 0.7 OLS 0 3 03 0 3 03 0.2 ti 0.1 Ulb CPI 0.3 0 4 0 3 02 02 0.3 0.3 0.2 02 0.2 u 0.3 0.2 0 I 02 02 02 02 02 02 E%C--d 0.1 0.1 MI 0 0 0 1 0 1 0 1 0.1 0.1 0 1 Rc:J E=k-,Y P-- 42 4.2 _M2 -01 .01 .01 .01 -01 -ai Ql vc!= At-_d Fe- R.d I 0 2.0 1 a 0 4 .01 .02 -MA -0.0 .14 .10 Ltb- P:h hw=J 2.0 2.7 1 7 1 3 2.1 17 2.5 2 3 ZG zo u,,.- F. ftmj -2A -&I 11-0 4A .1Z 4.4 -Li -1.0 -1.0 .20 Lbt=, p,---.z 00 00 0 0 0.0 0.0 0 1 0 0 010 MO 0 1 P=j =-, t= , Ft.d h.--Wd3 I 1 lx 12 010 0 1 0 1 0 0 .02 .01, W LM= hwl MI 02 013 0 a 0 6 0.0 0 7 0.0 MG OD mnxmd 1.5 Li 1.5 12 1 7 2.1 zi I f) p 1 7-3 F.Irrll ln=d _mT -13 -&a Oll -0.3 .07 .0.0 -&3 -oz -0.0 Fam-,J C=zd 4LO 42 _M7 -0 4 .0.0 .0 a .010 -MG -3 0 .07 C:=:= d -ID -16 -12 -0.2 -0 7 42 -0.7 .0.1 MO 4).I c-_j C_-_-- P-d I I 1 3 1.2 0 G 0 1 0 1 0 0 -0.3 -19 .07 urb:A h= .07 OLI 0 1 -014 .05 -01 0.0 .01 -02 41 bt.Irld 1.5 z I lz 1 2 1 7 7 1 2.1 1.9 ? I 7 3 Fcmt:i C 4LY -13 .06 0 1 .0.3 -0 7 -0.0 -0.3 -sz _M5 Fc,.tzJ CM:zd _&C -1.2 -ml .0.4 -0.0 .0b -00 -010 .0 0 07 cqe== a's t=a as -17 _&G -7 0 -OA .7,0 -01 -71 -70 -?A Rurd 00 02 0.4 0 6 0 7 MO MO I 1 12 1 3 U*--n h.-dtc.t3 0.0 -ml -ai .02 .03 -0.3 -0 4 -OA -0.4 _Q6 UC..Id MO 0-2 0.4 02 .01 -01 MD MO .0.2 -0.2 F.l.d M -1.2 Z3 .10 -12 -1.6 -22 -23 -2D .2.1 F.111J dcd 0 0 0 0 0.0 0.0 0.0 0.0 0 0 010 0 0 0 0 cqa:= d 0 0 MO 0 0 00 0 0 OA 0.0 0 0 ob 0.0 pa=iv =d ottr-_j hc=!,= Rl.d MO a7 0 a 013 0 3 M3 0 3 02 0 1 0.1 Wb 0 4 0.3 02 02 0.3 M3 M2 02 0.2 pvcny K=d=,'M pwj a? -0A -0 0 0.0 OA 0A MG 1 0 1.0 1.0 Lm_ t-  -OA .06 -05 -0 a -0.5 -0 7 -0 7 -07 -0 7 .07 be_=$ 41-0 .00 -as .0.5 -0.0 -1 0 4 0 -ao _i 0 -11 Fomrl -1-:C=d 0.1 0 I -1 0 -1.2 -0.3 .0.1 -0 7 -1 0 -04 -04 Fc.,:) 0.0 0 0 0 a 02 02 0 0 0.2 0.0 02 M4 C,zp crd -C= 0 7 0 0 MO 0 7 0 7 010 0 0 0.0 0.0 0.0 Eow.:W .0.6 -me 410 -0.3 -0 3 -M4 .0.3 -02 -0.2 4)2 PM* a=p Rod ftczhatz -0.3 4).3 -02 0.0 02 0.2 0.3 OA 0 5 0 6 U&=1 h.,= .02 .03 .0 3 -0 3 .0 3 -M4 -M4 -OA _MG -MS blWm_j " -ag 41A -0 3 -MA .0.0 .00 -0.0 -0.0 47 F.-I --Z Mp 0.1 -u .05 .02 .02 -OA -oz -0A 44 Fc=J C-'-'zd 0 1 0.1 0 1 0 0 0 1 0 1 0 1 0 1 0 1 ml cq4_-n= cw 0 1 0.0 0.0 0 1 0 1 0 1 0 1 0 1 0.1 0.1 Ew=.y -0.3 -Ms _M3 -02 -02 -02 _" -02 -0.2 4).2 mt lmazt,. I c1d C=l .1 7 4).9 -00 -1.4 -1 6 -1.2 -1 I 42 -1.3 -13 Thcfl bd- -0.0 .0 a &a -ex -lb -0.0 07 -0.0 pa-V .d Pa=v LW ftd 0.3 0 7 0.5 0 3 0.3 u 0.3 M2 0 1 0.1 LLi- 0.3 014 0 3 02 02 0.3 0.3 02 02 0.2 P.---my x=n--a r-d ftc=U13 .0.6 .0 4 0.0 OA a 4 0.6 0.0 I I I 0 tm h.C=hQ:e3 -0 a .00 -ae .0.0 .1.0 -1 0 -MD -1 0 -11 tean'd -12 -1 4 -at) -0.0 -1.3 -1.0 4 Z -1.4 -1.6 -1 7 F..:nl m I 0.0 .04 -0.0 .0 I .0 I -M4 _M4 4L3 -0 3 F-.-d c:Czd 0.2 MO 0 0 0.2 0 0 0.0 0.2 0.4 v 0 0.2 C*:L-= =d 0.0 0 7 a? 0 0 0.0 017 0 ? 0.0 0-0 0.0 Eo=wnl -0 7 -0 7 -to -OA -0.6 -0.0 -0.0 4A M4 Pal-* e:p Fbd hM=n= 4.3 -M3 -0.2 0 0 02 0 2 M3 0.4 MO 0.0 Lm -012 4L3 43 -0 2 -0 3 -0 4 .0 4 -Q4 -0.4 4LS b*.1tj 414 410 _M3 .0 3 -0 5 .0 0 .00 -oz -0.0 -MY Fcxl.d 0.2 010 4)A -MA -0.2 -0 1 -03 -0.4 -0.3 .0.3 F.rrcJ C:=d OLO ml 0 1 0 0 0 0 Oll 0 1 0.1 ai 0 1 cu-= w 0 1 0 1 ao 00 0 0 0 1 0 0 0 0 0.0 0 0 E=MCW -0.3 .0 3 4X3 -02 -02 -02 .0.2 4L2 _M2 .02 ":= L, . em cc: 4).S -0 7 -04 -0.2 .02 43 .0.3 -ml -&I Trtzo bld. .03 -04 43 .01 -02 -0.2 -02 41 -01 .01 Pc==p 674:C= flwn w 6= r- am Cm:T. W ThO bC= _ M=_-nv=P Llc4L-_!y 74 Table 3 Mini4MMPA: Simulation Results 5 Percent Cut In Unskfllod Labor Payroll Tax Rate, Non Revenue Neutral (Percentae deviations from baseline, unless otherwise Indlcated) PerIods 1 2 3 4 5 6 7 8 9 10 Real Secter Totalresources 01 -02 00 01 00 -0.2 -01 00 00 -01 Gross domestic pndxuct 02 0 0 01 0.2 01 0 0 01 01 01 0 0 Imports of goods and NFS -06 -15 -10 -04 -07 -11 -10 -0 7 -07 -0 9 Totleopenditure 01 -02 00 01 00 -02 -01 00 00 -01 Totai comumptiOn 00 0.3 02 -0 3 -04 -0.2 -01 -0 2 -0 3 -0 3 Pdvatecosumpoon 00 03 02 -03 -0.5 -0.2 -01 -02 -OA -03 Pubilc conumptbon 00 0 0 0 0 0 0 0 0 0 0 00 0 0 0 0 00 Total nver,tmenl -0 -3 7 -2 2 0 4 0 0 -16 -17 -0 7 -0 5 -10 PdrelnvestInent -0 9 -5 0 -2.9 0 7 0 2 -2 0 -21 -0 8 -0 -12 PubticldvIslmont -08 -09 -07 -04 -06 -07 -07 -06 -06 -06 Euporofi goodsand NFS 1 4 1 5 1 3 1 1 1 3 1 3 1 3 1 2 1.2 1 3 E.temal Sector (% of GODP) Cunrentaocount 04 06 05 04 00 08 .e o 05 06 Expeots of gOOdS and NFS 0 3 0 3 0 3 0.2 0 3 0 3 0 3 0 3 0.3 0 3 Impodt of goodso an NFS -02 -0 3 -02 -01 -01 -02 -02 -01 -01 -02 Factor rsevrJC 0 0 00 00 -01 -01 -01 -01 -01 -01 -02 Capital account -04 -0 5 -04 -0 5 0 6 -0 -0 5 -0 5 -0 6 Pdvate bonroWing -04 - 6 -05 -04 - 05 -0 6 -0 6 -05 - -0 6 Public brrowmg 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 Genmmernt Seetor (% of GOP)' Totalrenoue -04 -05 -04 -03 -04 -04 -04 -04 -04 -04 Directtaxes 00 -01 00 00 00 00 00 00 00 00 Indlirecttnos -04 -00 -04 -03 -03 -04 -04 -03 -03 -04 Totoeirperindllo -01 -01 -01 -01 -01 00 -01 -01 -01 00 Consumption 00 00 00 00 000 00 00 00 00 00 Invastmstr -01 -01 -01 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Trnsfers to housholida 0 0 0 0 0 0 00 0 0 0 0 0 0 0 0 00 0 0 Forlgn Intemsi pooYnits 00 0o 0 0 0 0o 0 0o 0 0 0 0o 0 0 0 0o 0 00 Total nancnsig 03 0S 04 03 03 04 04 03 03 03 Foernnf Onandng 0o0 00 00 00 00 00 00 00 00 00 Domesticbomownlng 03 05 04 03 03 04 04 03 03 03 Ltabo Market Norrinal agesa Agrculturalsecor 15 14 13 07 04 06 0.7 06 04 04 Intorl Secltof 17 Zi 2 0 14 19 2 3 21 18 18 2 0 Pdnse formal ector Umidiled 00 00 00 00 00 00 00 00 00 00 Sidled -1 4 -2.5 -1 9 1 1 -1 4 -1 9 -1 -1 5 -1 5 -1 7 Public sector Unsided 00 00 00 00 00 00 00 00 00 00 Sililed 00 01 01 00 00 01 01 00 00 01 Employment Agtradtsi re ector 00 00 01 01 01 01 01 01 01 01 IniormaloIseclOr 0 0 -0 2 00 -0 2 -04 -04 -0 3 -02 -0 3 -0 4 Pdvalt formel oeetor Unskilled 34 20 30 40 36 28 30 35 35 32 Sidled -01 -0 2 -02 -01 -01 -02 -02 -0.1 -01 -02 PubDic sector Undidiod 00 00 00 00 00 00 00 00 00 00 Skilled 00 00 00 00 00 00 00 00 00 00 Labor supply (urbsn fomal Sector) Unsdled 00 06 00 04 12 12 08 07 10 11 Sidlled 00 00 00 00 00 00 00 00 00 00 Unemploymendt rat (.rban formal rts)' Unskilied -22 -0 7 -2 0 -2 3 -1 3 -0 -1 3 -1 7 -1 4 -1 1 Silled 01 01 01 01 01 01 01 01 01 01 Real "age d _lfeelats ' Expected urbnrural (% of nro rrag) 00 -1 7 1 2 1 3 -0 7 -0 2 -02 -05 -04 -02 Epectedfonrmal-lnforanel(%ofInfomnalmese) 00 17 -18 11 22 01 -12 -02 08 03 Migration I Rurt-urban (% ofudfban tabor supply) 0 00 -0 02 -0 01 -0 1 -0 01 0 00 0 00 0 00 00 0DO0 Formai-nrmal(%Offrormalurbanlborsupply) 000 065 -058 OAI 083 002 -045 -008 028 013 Memorandum Items' GOPelmerketpdices 02 -01 01 02 01 00 00 01 01 00 Vahe added at tforcort 02 01 01 02 01 00 01 01 01 01 Value added In nunrmsctor 00 00 00 01 01 01 01 01 01 01 Value added n urban iodnnal sKetor 0 0 -0 2 0 0 -01 -03 -0 3 -02 -02 -0 3 -0 3 Valumadded In urban rmnalsecor 06 03 04 0 6 05 04 04 0 5 05 0 4 PdvtaeConsumption -03 -01 -01 -06 -0.8 -06 -04 -05 -06 -06 PdsvalllInerettnt -03 41 -22 12 08 -13 -18 -02 01 -06 Disposable Income 05 04 0 S 05 05 05 05 0 5 05 0 5 Capotalists and nrrfsavip ntorS ' 7 5 51 54 87 98 82 73 82 69 8S 'Absolute denoortin from base line 'real temis 75 0 Pc-o,zcr Ctl In Umnt.z-.10zs Lc4ow Poymf3 Yc= n~_,Nn 02 - (AtLsocIv~ cdjvtz41o-t frooo bc2cl0, wozt= Cfl cmo tiz- 0 43 0 0 10 Fb.3tlCp 02 0 0 0.6 0.3 0.3 0.4 0 4 0 3 LI2 0.3 LLO=A CP1 0.3 0.4 0.3 0.3 0.2 0.3 0.3 0.3 W.2 0.3 wlnL~~~~~~~d ~0.3 03 0.3 0.1 0.3 0.3 0. 0.2 02 0.3 Sl74d 0.0 0.1 0 1 00 0.0 0.1 0. 00 0.3 0.1 RcZ1EWCI1 PRt3 .0.3 .0.2 .0. -0.1 .01I .01 -01 .0.1 .7,1 4011 Vah0 e", Pd=o R~J cV0tL33 1 14 I 1 3 0.7 014 0.0 07 00 04 0.4 Ulbt 3t1b0ml1t21 1.7 2.0 2.0 1 4 1.0 2.3 2.1 1.0 10a 2.0 ulb0 ww:1 2zA .1.3 .21 .14 .0.7 .10 .1 a -IA -1 0 -10 -1.2 L00zp.2n 0.3~c L 0.0 0.0 0.0 0.0 0 0 0 0 0.0 0.0 0.0 Rwr10z140oM3 LI 0.7Y 0.0 0.4 (LI 0.2 04 0. 0.2 0.2 L0lb.-tlO343~ 0.4 04 026 00 00 0 0. 0 O 00 0. 0 0 IJ 1 0 103 029 I 1 1 1 2 1 1.3 Fwn,d InC-d ~~~~1.0 021 41 2.0 17 1.3 1A 17 17 125 Fcmld c%~~~~:g AT4 .12 -0.0 -0 0 AT. .0 0 -0 0 -0.7 -0T -0. co0_= drco74o -I? .20 .17 A0. A0. -1.4 -11 .02 -0.4 -04 FWad lIfI0..4O14 0.0 0 7 0.0 04 0 1 02 0A 003 02 02 IJlr~ oIlo10.30 -00 -03 .03 -0 0 -10 O.?. -00 _07 -00 -0. bbOmld 1.3 1.0 105 020 11 1.0 1.4 1.2 1 1 1.3 FomdrJw.%: 10G 0.0 14 2.0 17 1.I3 1A 17 17 12I F~~_J C~~~~~ AT4 -1.3 -00 40 47 0.0 A0D 47 -0.7 .0. cq,,I:~~~= c-A -C= ~-110a -0.4 40 .12.0 -13.2 .110 - 10.1 -100a -11 .10-2D Rwd ~~~~~~~~~0 0 0.0 0.1 0.1 01 0.1 0 1 0.1 0.1 0.1 10bm hc dtZ1c= 0.0 0.0 0.0 0 0 0.0 0.0 00 0.0 0.0 0.0 0 -030.0 -0 .2MO-04 -04 -024 -023 .0. 3A .0.4 3.0 0.0, 0.0 04 1.2 1.2 0 0 0.7 1.0 I1I FolIr-I CL~~~~~~ .0 0.0 0.0 00 02 0 0 0.0 00 0.0 00 cOc;L 2013740 0 0 0 0 0.0 00, 0.0 0.0 00 0.0 0.0 0.0 Fll-l ~~~~~~~~0.0 00 0.0 023 00 0A 04 0.3 0.3 03 L0b,i 0.3 0.4 0.3 02 0.2 0.3 0.3 0.2 0.2 02 Rwd hmx=hcld3 4)S~~-0 -OA -00 -03 0.0 .01 -0.2 .01 -0.1 0.0 lOOc_ It1o-hx 40. -00 -0. 44l .0 4 -020 .04 .02 44 43S b~~~~~wnc,1 -~~~~~~~~~~~~~02 .00 -07 -00 .07 -0 0 .07 40O 2.7 -07 Fem,zl ~~~~~~.12 0.0 .10 -0 7 .01 0.0 -0I -0A 41 0.0 PenTcj Cc:d ~~~~~0.0 0.0 0 0 0.4 0.3 02 0.3 0.0 0.2 120 Cc7743 old ra2-%3 0.7 0.7 0 7 0 7 0 7 0 7 0 0 0 0 0 0 0 0 em_~~~~.7 AD~~4 ..0 -026 .0.0 .03 04W -0.4 -0.4 .0.3 432 Rwd t=.:N~~~~~~ 43 40 -0.2 -0.1 0.0 0.0 -01 -01 0.0 0.0 Uibcn h=r4%l -0 3 -04 43a -0.3 -0 3 .0.3 43 -0.3 403 -0 3 01107r4d 44A 40 -0.0 .0.3 .0.4 .00 40a -04 44 .023 F-d w=~~~~~~ .0.4 00 a 43 .0.4 .01 0.0 41 432 4 41l F033:4d 0.1 0.1 0.1 01 01 0.1 01 0 1 0.1 0.1 0.2 0.1 0.1 0.2 0.2 0 1 01I 0.1 0.1 0.1 Oooooow 43~~~~~~~~~~~~~~~~~- .0.3 -023 -0.2 402 -0.2 43 -0.3 43 -0.2 02Cm 43 -2.0 -17 -10 41 3 4 -13 -12 .1.02D.. 1.12 Thz3 wt-, ~~~~~-1I -10 -00 -.12 1.14 -12 .11I -1.2 -1_3 -13 Flwd MD~~~~~~~0 0.0 00s 0.3 0.3 04 0O 0. 0.3 0.3 W203 0.2 0.4 0 3 0.2 0.2 0.3 02 02 02 0.2 R.t3703h=.=t0 .02 .04 44 4a2 -01 .0.1 -01 -0.1 41I ..1 L,b~003:l 0!4 407 40 417 -00 -07 .02G .07 .00 47 C.02 h?womci .120 -10 -11 .02 .1I -13 -1.2 -1I .11 .1.2 I'031 103740, 44A 00 404 -04 0110 0.0 02 0.0 41l 43 Fci,d dLd 0.2 0 0 I2 0.2 02 00 02 0.4 0.0 OA cp== c-A =C= Ob~~~0. 07 0.7 00 0 0 0.7 0.7 0.7 0 0 0.0 Et=x.7 AQ~~~4 47 40c .02 40 40 -0 0 40 403 40 P0oO I,o00. 3 .02 40. 41l 0.0 020 -01 41i 020 0.0 U.I.co0o~~~~~~~~~~~~~0' ~~~~43 44 - .0 . 2 AD .0.3 .02 .03 40 .0 3 b~~~~~oo,Z1 4~~~~~~~~~~~~~4 40O 44 -023 .014 -02. -02. -0.4 .74 .0.0 Fc.d _0~~~~~~3 0.0 402 -03 410A1 -034l0 F!a.d f=d ~~~~~00 0.1 0 1 0 0 0 1 01 -001 -0.11 0.1; -0.1 CC 4)40037 MI 0.1 01 0 0 0 0 0.1 00 00 0.0 0 0 0~~~~~~oo317 4~~~~~~~~~~~~~03 43 -0.3 -0.2 -0.2 .02 -0.3 43 43. -0.2 023 CocOlOc, 40 A7 40Z -.0 .023 -0.4 -04 403 432 42 Th404 4'=.3 44 4.3 -02 40 -0.2 -0.2 43 41 41i 76 Table 5 Mlnl4MMPA: SImulation Results 5 Pemnt Cut In Unskilled Labor Payroll Tax Rate, Sales Tax Revenue Neutral (Pecntae deviations from baseline, unless otherwise Indicated) Periods 1 2 3 4 5 6 7 8 9 10 IRel Sector Total resources 00 . 03 -02 -0 2 0.2 -0 2 -02 -0 2 -0.2 -0 2 Gnms domestic prduct 0 2 -01 0 0 0 0 -01 -01 -01 -01 -01 -01 Imporl of goodo nd NFS -0 8 -1 5 -11 -10 -11 -12 -11 -11 -11 -11 Total oupondiue 00 3 40.2 2 -02 -0 2 -02 -0 2 -02 -0 2 Total nsumpbn -0.2 403 -04 -05 -08 -05 -05 -05 -05 -05 Pdvalooonsumption -0 3 -04 -0 5 -08 -07 -0 6 0 6 -05 - 6 -06 Publicon suntion 00 00 00 00 0o0 0 0 00 00 0 D Total Ivestment 4 0 -2 0 -0 9 -04 -0 7 -0 8 -08 -07 -08 -0 Prnoto invetrlent -0 8 -2 7 -12 -0 5 -09 -11 -1 0 -1 0 -1 0 -1 0 Public investment -0 3 3 -0 3 -0 3 -0 3 -0 3 -0 3 -0 2 -0.2 -0 2 Exportf 0goods and NFS 14 1 5 1 4 13 1 3 13 1 3 1 3 1 3 1 2 External Sector 1% of GDP)' Cuffent account 05 08 05 05 08 06 06 08 08 07 Exports0ofgoods ndNFS 03 04 03 03 03 03 03 03 03 03 imports of goods ad NFS -02 - 2 -02 -02 02 -0 2 -02 2 -02 -0 2 Factor"Mones 00 0 0 0 0 -01 1 .01 01 -41 -02 -02 Capital scuount -0 -08 -05 -0 5 - -0 8 -08 -0 5 -0 6 -0 7 Prnvts bomToing -0 5 -08 -05 -0 -0 8 -08 -0 6 -08 -0 6 -0 7 PubUcbonro*g 00 00 00 00 00 00 00 00 00 00 Ooornmrvnt Soctor 1% of GODP)' Totarevenuoe 00 00 00 0 00 00 00 00 00 00 olecttufts -01 -01 -01 00 00 00 00 00 00 00 lndbmdtaxoS 00 01 01 00 0 1 01 01 01 01 01 Totl exoendiure -01 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 Consumption 000 00 00 00 00 00 00 00 00 00 Invesotnt 00 00 00 00 00 00 00 0 0 0 00 Tronsfer to households 00 0 0 00 0 0 0 O O O 0 0 0 o 00 00 Foreign Interel paymnt 0 0 0 0 O 00 0 0 0 0 0 0 0 0 00 a 0 Totalfinancing 00 0 00 00 00 00 00 0D 0 0 0 Fonoin finndno 00 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 Domesbc bomng 00 00 00 00 00 00 00 00 00 a0 Labor MarWet Nonminal mOges Agdculturai clor 0 9 0 3 0 3 0 1 00 0 0 0 0 0o 0 0 0 0 Informnalsctor 07 t1 09 09 10 10 09 03 09 08 Private formal edor Unidlled 00 00 000 0 00 000 0 00 00 00 Sdled -1 7 -24 -20 .18 -20 -2 0 -2.0 -20 -2 0 -2 0 Public sactor Unsied 00 00 00 00 00 00 00 00 00 00 Silled 00 00 00 00 00 00 00 00 00 00 Employment Agfcultuml sedor 00 00 0o 0 00 0 0 00 00 00 00 Intformal soctor 0 0 -03 -2 -03 4 -04 -04 - 4 -04 -04 Prtuote fomrn sector Unskiled 31 21 27 29 27 27 28 28 28 28 Sidled -01 -02 -02 -02 -02 -02 -02 -02 -02 -02 Pubic sector Unskild 00 00 00 00 00 00 00 00 00 00 Sdilled 00 00 00 00 00 00 00 00 00 00 Labor supply (urban frmal sector) Unskilloed 0 0 0 08 11 1 3 1 3 1 3 1 3 1 4 1 4 Sbibld 0 0 00 00 00 0 0 00 00 00 00 00 Unemployment rate (urban frml setor) Unskilied -2 0 -0 5 -11 -08 -08 -08 -07 -0.8 -08 -08 Skiled 01 01 01 01 01 01 01 01 01 01 Root mage dflenatnaln' Expectod urbanrural (% l nrai ge) 00 -1 1 -02 -0 2 0 0 0 2 02 01 0 2 0 2 Expected forml-Informa (% of hformai raige) 00 28 -0.3 0 8 0 8 0 0 0 0 01 01 01 mrigra3on RuraPurban (% o urban lbor supply) 0 00 -001 0 00 000 0 00 00 0 00 0 00 0 00 0 00 Forma-nfonrmal (% of r urbanlaborsupply) 000 091 -012 030 022 -001 -002 003 004 002 Memorandum Itrn ' GDP at mart =pricol 0 1 -01 0 0 0 0 0 0 -0 0 -0 -0 -01 Valueo adrded a todros 02 0 0 01 01 00 00 00 0 00 Volu added In rural soector 00 0 0 0 0 00 0 0 0o 0 00 0 0 0 0 00 Valueo addod h urbon Iormal sector 00 -02 -2 - 3 -0 3 -03 03 -0 3 -0 3 3 Volueo dded In urban frmia secbr 0 8 0 3 0 4 0 4 0 4 0 4 0 4 0 4 0 3 0 3 Pvata Consumpton -A -0 5 -08 -08 -08 - 7 7 7 -0 7 -0 7 Prvloe Inveosmnt -0 5 -24 -0 -02 -0 -08 -0 7 -0 7 -0 8 -0 8 Disposable ineme 01 -01 00 00 0 0 0 0 0 01 Capfalist end rn)oem oags rota' 8 0 38 52 83 81 50 80 81 81 81 Absoalul deviation from base foe 'rel tanra 77 Y1ZWs 3 PeI. c'A: P00222y 2rr2 o; 2c0. !024 a Pco*cToo Cut0 in~ unzOhiltzo LrL220 P2.0ymu Tc_i 03, ~, ~cr! ~o sooc Lovol I 3 J A a 7 c c__ Pd-4 cnO 0021 0s22 P4--bl4 R-~1 CPI 0 2 0 2 0 2 0 1 0 1 0 1 0 1 21I 1 a21 Lt.0b-2CPI 0 1 0.1 0 1 0 1 0 1 0 1 00i D 01 1 a 01 U,CZ:zd 0 1 0 1 0 1 0 1 0 1 0 1 021 01I c 0 1 SkZA co~~~~~~~~~~0 00 0 0 00 00 00 00 00 2210 00 R23 Ed-03.R4 0.1 0.2 002 02 032 0.2 0 2 0 2 3) 0.2 Vcl,, AdOod P10642 Ft~~~~~d ~~~~~W. ~~009 0.3 03a 0 1 0 0 00a 0 0 00a 30 00M u,-.17041012014 0 7 1 1 009 0.0 009 00 0.0 02 00D 00 ub~~~~~~~~~~ ~~~0.0 0 0 00 0M0 0 0 0 0 0 0 0 0 7 0 0 0 Rco1 D00P64 WO2 hooo R-1 h--h.= O-G~~~~~~~0. 0 1 0 1 0 0 -01i -0 1 -01 -0.1 -21I -0m1 um_r---hom3 ~~~~~~~0 0 -0 2 000 0 0 00a 0 0 0 0D 0a 0 1 lo4o,,-Z 0.0 O 0.2 0 .0. 04 04 04 2'. 24 041 F-d I 5~~~~~~~~~~~2 1 0 1.4 10 14e 1 4 14 14 0. IA M A-id k7.22 -0. -I I -0.0 00) -0 -1A0 -00 312 . 21 .00 Cqaj'c= d rW,110 -2.0 -217 -1.0 -1 I -IC -24 .1 2 -1 I 21 O 0441 COI122002101.1' R-,cII-C-o.0ld 0a 0 1 0 1 0.0 -0 i -01I 01I -01I 2 a01 Uo64o hOlcch -0.7 -0 -0 0 -0 0 -0.0 -00 -0 0 " 2.Oa -0 0 bli..d ~~~~ ~~~~~~~0.0 006 00 0 4 0 4 0 4 0.4 2 4 (I'-2 04 F..,U ,,hr~~~~~~~~d 1 I0 1 4 1 0 1 4 1 4 1 4 1 4 1 1 14 Foo,12Cr,021 -0.0 -11i -0 0 4 -0 0 0 -120 .0.0 -2.22 '2 00) Q101001007 -20 -706 -2 -3!)7 .221 -3 7 -22.0 -22 -7 1 RUod hoc440m202 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 03 3 0 UM-- h 2010!31 0.0 02 0 0 0 0 0 0 0 0 0 0 00 2221 0 0 W.-i ~~~~ ~~~~~~~~0.0 -2 3 2.02 -03 -0 4 .0.4 -04 -04 -221 -1 4 Fo,oOl,0-10222 0 0 00a 0 0 1 1 0 3 1 3 1 3 12 12 141 0.1-3 054d0 00 0 0 0 0 0 0 0 0 0 0 0 0 0 a00 a 00 CC,12202000t12102100 0 0 0 0 0 0 0 0 0 0 0 00a 0 0 0 0 0 P644lty 107,1I Ro-l 0 2 02p 0 2 0 1 0 1 0 1 0 1 0a 01 0 1 Ub641 0.1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 RoIm,140030 420 -0 3 -01I -01 0 0 0 1 0 1 0 1 0 1 2 0 0 1 Lhbo 00, 3 0 -04 -0 3 -02 -0.2 -0.2 -102 .02 -212 -02 0 0 546443 ~~~~ ~~~~~~~~~~~~~~~~4C4 .0 3 -01 -0 3 .0 4 .0.4 -0 4 -02 3 2 021 -0.2 Fo.-,, V10:O10 30.0 -12 0 0 04 -01I 0 0 00 0 0 0 O 0 0 0.0 P01010102424 10 7 0.0 0 0 02 a.4 0.2 0 0 0 0 0.2 1 0 Q,Xt- 1d.3 07 0.7 0 7 0 7 0 7 0 0 0 0 02 00 00 E-1,1011010 411 -0 2 .02 I -02 I -01 -01 -I -01I -0 1 .01 a00 P-ooy 0210 Th,,lhooooOolO 200 -0.2 0 0 0 0 0.0 0 0 0 0 a00 0 ~ 20 0 0 LLo,o1024211502 -02 -2.2 .0.1 -01 -01I -01I -0 1 -21i -01I .01I 0,1,1,64 10 3 -0.2 -0.3 -0.2 -0.2 -0 2 -0.2 -0.2 .1 7 02 -0.2 F--116424014 0 -0.3 0 0 -0 1 -01 0 0 0 0 0 0 a7I 00 0 0 F6401020202.0 0 1 0 1 0 1 01i 0 1 0 1 0 1 02 21 021 C~0~L106464,10 4 0 1 0 1 1 0 01 0 1 0 1 0.1 01 41 0 1 E641001 10.0 -0.2 -21 -01 -01 -0 1 -01I -01I -2. -0I -01I 0224C0420W01 21 0 -14 -17 .146 -10G -1.0 -IA, -1. .12 I -1 13 Th02115410 5.7 .00a . -0 / -02 0. -00 -009 -0 0 -2 04 -00 ft'd ~~~~ ~~~~~~~0.2 0.2 02 0 1 0 1 0 1 0 1 0 1 0 1 021 U1b0~ 0 1 01 01I 0 1 0 1 0 1 0 1 21 01 0 1 Ro-416000 s4210 -04 022 .02 0 0 0 1 a01 02 1 V 0 1 0 1 LL,-- ~~~~~~~~321.0 -04 -0 3 -04 -0.4 -014 -0 4 -04 "2I -0 3 .02 l0nt.mz 43.3 -00 -0417 -0 -0 7 .0 7 -06 -0 7 . -0 4 -0 4 Fo,ol-'144032, -04 0.0 -03i 0 0 0 0 a00 0 0 ' 00a -01I Fo10o210212d00 0 0-2 03 0 0 0.2 0 0 0 0 0.2 0 00a 0 4 Ctp:42~ 1d .I.404.0 0 0 0?1 0 00a 0 0 0 / 0 7 2 0.7 0 0 E0001001 3005 -0 4 .0 -0 3 -0 3 .0 3 -02 -02 -2) -0-2 -01 Fb.d hcdl-:~~~~~b 1~I' -02 0.3 0 0 0 0 0.0 a00 0 022 0 0 0 0 00021,ho-.44002 12.7 -01 -0', -01I -01I -0I 01 -01I -C 2.1 -01 hll~~~~~~~j ~~17.4 -0 2 -0 3 -0.2 -02 .2 -0- 2 -012_2 O 22 021 F6454021020 13 1 -0.3 021 -01 -01I 0 0 0 0 00 2. 00 a00 F=1,1.01024 1kdI0 0D cl 01a 0 1 0 1 01 0 1 I I a01 C07(242011070101121010 ~~~ ~~~~ ~~~ ~~~0 4 0.1 0 1 01I 0 1 021 0 1 00 00 00 E64I0o1y 10.4 -0-2 -01I .0 I 01 01I .01I -0 1 -22 -01 .01 OozOlbOoll 00r131- G0b Co4212440 23.1, -04 -0 5 .01 -0 3 -0 3 -0 3 -0-2 . 7 -22 Th0.43010221 7 1 -0 3 .0 3 G.0.. -02 -0 2 -D02 -0 2 -0 -1 P010022400 ll oo,..oao C.64110442G40 0C004202,1101 Th42L.- -b-' 222414442040 41G-p4 I;L-c 1 78 Table 7 Mini-IMMPA: Simulation Results 5 Percent Cut in Unskilled Labor Payroll Tax Rate, Income Tax Revenue Neutral (Percentage deviations from baseline, unless otherwise Indicated) Periods 1 2 3 4 5 6 7 8 9 10 Real Sector Toalresources 01 -02 00 01 00 -01 -01 00 00 -01 Gmoss domes0c product 0 3 0 0 01 0 2 01 0 0 01 01 0 1 0 0 importsofgoodsandNFS -06 -14 -09 -04 -07 .10 -09 -07 -07 -04 Total expenditure 01 -0 0 0 01 00 -01 -01 00 00 -01 Total ens.mp005 00 0 3 0 2 -0 3 -04 -0 2 -01 -02 -0 3 -0 2 Pnvn1e consumption 0 0 0 3 0 2 -0 3 -0 5 -0 2 -01 -02 -0 3 -0 3 Public consumption 0 0 0 0 00 0 0 0 00 00 00 00 00 Total mvestment -0 -3 6 -21 0 3 -01 -1 5 -16 -0 7 -0 5 -1 0 Pd3ate Imnnstment -0 9 4 -2 7 0 6 01 -1 9 -2 0 -0 8 -0 5 -12 Public lvstmenlt -0 6 -0 9 -0 6 -0 4 -0 5 - 7 -0 6 -0 5 -0 5 -0 6 Epoertsof ood1andNFS 14 15 13 12 13 13 13 12 1.2 13 Eatt3mal Sector I% of GOP)' Curentaccount 04 06 05 04 05 06 06 05 05 06 Exports of goods and NFS 0 3 0 3 0 3 0 2 0 3 0 3 0 3 0 3 0 3 0 3 ImportsofgoodssndNFS -01 -03 -02 -01 -01 -02 -02 -01 -01 -02 Factor srvles 0 0 0 0 0 0 -01 -01 -01 -01 -01 -01 -0 2 Capital account -0 4 -0 6 -0 5 -0 4 -0 5 -0 6 -0 6 -0 5 -0 5 -0 6 Pn,ate bomownng -04 -0 6 -0 5 -0 4 -06 -0 6 -0 6 -0 5 -0 5 -0 6 Public bOTomlng 00 0 0 0 0 0 0 00 00 00 00 00 0 Govemment Sector (% of ODP)' Total -evenue -01 0 0 00 0 0 00 00 0 00 00 00 Directtaaes 03 04 03 03 03 04 04 03 03 03 Indirect taxes -04 -05 -04 -03 -03 -04 -04 -03 -03 -03 Total eopendlture -01 -01 -01 01 -01 00 -01 -01 -01 00 Consumption 00 00 00 00 00 00 00 00 00 00 Investment -01 -01 -01 0 0 0 0 0 0 00 00 0 00 Transfe rsto households 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Ftregn lntest paymens 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O 0 0 0 00 Totalfinancing 00 -01 00 00 00 00 00 00 00 00 Foreignfinanang 0 0 0a 0 0 0 0 0 00 00 00 00 0 DomesUc bomowing 00 -01 0 0 0 0 0 0 0 0 00 00 00 0 Laerw Market Nominal wages Aglalturl secter 14 12 1 1 06 03 04 06 05 03 03 InforIsalsevtor 17 2 7 2 0 14 19 2 3 21 18 18 2 0 Prlete formal se.tr, UnsltlIed 00 00 00 00 00 00 00 00 00 00 SOIled -1 4 -2 3 -1 a -1 1 -14 -1 6 -1 7 -1 5 -1 5 -1 6 Public sector Unsdiled 00 00 00 00 00 00 00 00 00 00 Skilled 00 01 01 00 00 01 01 00 00 00 Emptloyment Agrdulnral sector 00 0 0 0 0 0 1 01 01 0 1 0 1 01 01 Informal sector 0 0 -0 2 -01 -0 2 -0 4 -0 4 -0 3 -0 3 -0 3 -0 4 Pn,ate formal sector Unshiled 35 2.2 31 41 36 30 31 35 36 33 skiled -01 -0 2 -0 2 -01 01 -02 -02 -0 1 -01 -0 2 Public soctor Unskiled 0 0 0 00 0 00 00 00 00 00 00 00 Sidled 00 00 00 00 00 00 00 00 00 00 Labor supply (urban formal sector) Unskilled 00 07 01 05 13 13 09 08 11 12 Skiled 00 00 00 00 00 00 00 00 00 00 Unsmploy,unet rate (urban ornmal sector)' Unskilled -2 3 -0 8 -2 0 -2 2 -13 -0 8 -13 -16 -14 -1 1 StDred 01 01 01 01 01 01 01 01 01 01 Real wage dfferentials ' Expected urba-n-nral (% rf ml Wale) 0 0 -15 -0 9 -1 1 -0 -01 -0 1 -0 3 -0 3 -0 1 E.pected tormol-lfrml(% of Ilnfomal wage) 0 0 1 9 -1 6 1 1 21 01 -1 1 -0 2 0 7 0 3 Migrabon ' Rural-urban (% of urban lbor supply) 0 00 -0 01 -0 01 -0 01 -0 01 0 00 0 00 0 00 00 0 00 Formal-mfonmal (% oftfnnal urban labor supply) 000 0 71 -06 1 0 38 0 77 0 02 -039 -006 0 24 011 Memorandum Item ' GDPatmarket pnces 02 00 01 02 01 00 00 01 01 00 Value added at factor ost 0 2 01 01 0 2 01 01 01 01 01 01 Valw added In ual ector 0 0 00 0 0 0 1 01 01 01 01 0 1 01 Value added m urban informal setor 0 0 -0 2 0 0 -01 -0 3 -0 3 -0 2 -0 2 -0 3 -0 3 Vaiue addedm urban fmmal sector 0 7 0 4 0 4 0 8 0 5 0 4 0 4 0 5 0 5 0 5 Pm,ate Consumption -0 3 -01 -01 6 -0 7 -0 5 -0 4 -05 -06 -0 6 Pnote Investment -0 3 -4 0 -21 1 1 0 7 -12 -13 -0 3 0 0 -0 6 Dlsposable inctme 01 -0 2 0 0 01 0 0 -01 0 0 01 01 0 0 Capiartslr and nlenra sann9s rts' 3 9 -0 5 1 3 5 61 3 8 3 3 4 7 5 3 4 7 'Absolute deviaton fmm bas line 'rMal terms 79 Tc-11o o V~oI-IZ'A: Rtc ,-Aoooy cr.4 Dbbi~aajc00 £Ir.V2tam 0 Porecrut Cut In Un3z1dI "- L2~zw Povro4 Tco VUEZ, fa=mo Ton R~zvcnuo ZZcutld LAL=afuol0 d ovictlom o b.m 22002lr, uo ,c3c ..7 In ~d! Loc%i I 0 3 4 0 a 7 0 0 10 R.d CPI 05 00a 0 4 0 3 0 3 0 4 0.4 0., a03 0.3 Ur--n C PI a~~~~~~~02 03a 0 3 0.2 02 0 3 02 0 2 0.2 0.2 0120.2d 0.2~~~~~~~~~~~~~~~o 0 2 02 0 1 02 0.2 0.2 02 0.2 0.2 020 ~~~ ~~~ ~~~ ~~~ ~~~ ~~~~0 0 0 1 0 1 0 0 oo 0 1 0.1 0.0 0 0 0 0 R22jEvt1rV Rct4 -0.1 -02 -0 2 -01 -0I -01 .01 -01 -0. -0.1 V2.! AdCOOO Pe.- R,-J OA-h" ~~~~~~~1.4 1.2 I 0.G 0 3 00 00 0.4z 0.4 0 4 U.±t=1pt,C20lo O41 7 2.7 1 0 1 4 1. 22 2.0 1 7 1.0 1. UlOO.n p4OllOlOlmO -11 .2.0 -1 3 .07 -0 0 .1.4 1.13 -10 -1.0 -II ut- wa~~~~~~~~. ~0 0 0 0 0.0 0 0 0 0 0 0 0 0 0 0 0.0 0.0 lOod 0!0700441 I1OO RI-J h..01-= ~~~~~~~0.4 0.0 02 0 0 -0 3 -0.4 .02 -02 -0.3 .02 U=. 1l,0=d,~ 0 0 -0 3 -01 02 0 1 0 0 0 0 0 1 0.2 0.1 W=d I I~~~~~~~~~1 1I 1.4 0.0 11 1.4 1 4 1 2 1 1 1,2 F-I Ol02240 1I 0.0s 1 2 1 0 12 A 11 1 2 12s 125 14 FOl014C04z .1 7 .0.7 -2-1 .1.4 .1 7 -21 .2.0 .12 .17 .12 Cq~~~L=, nd -W.. ~~~~-2.0 .4 7 -22 -10 .2.2 .2.0 -0.0 -10 .17 -10 IlvOl t1022t10d3 0.4 0.0 02 0 0 -0 3 -0.4 -0.2 -02 .223 -02 UlC011.=ll03d.00 -0. -ml1 -02 -07 -02l .00 -0.4 -0.0 .20 -00 1-2 1.0 1.4 0 0 1 1 1.4 1 4 1.2 1 1 1.2 Fo-OI41 24014 00 1.2 10 1.A 1 12 14 1 'A. F.,d 22±2d -17 .07 -2.1 -14 .17 -2.1 -2.0 -1 0 .1 7 -10 C~~~;,,~~~~ W -ao~~~0. .41 -4 0 -02 .9.0 -7 0 -0. -.72 -0 0 -7 3 H00100244' R-J h-ft47t4 0.0 0 0 0 0 0 1 0 1 0 1 0 1 0 1 0 1 0.1 U-O- h-hd.O0 0.0 00 00 00 0 0 0 0 00 020 0 0 0.0 Ly-d MO~~~~~~~~~~~. .0 2 -01 -0 2 .0.4 -0.4 -03 -0.3 03 .0 4 F.ooolOl±4100 0 0 0 7 01 02 1 3 1 3 0 0 0.4 I11 1.2 F010.41422d 00 0.0 0 0 0 0 0.0 0 0 0.0 0.0 0.0 0 0 Ccp!=-241 .1d -f. 0.0 0.0 00 0 0 0 0 00 00 02 0 0 0 0 U.1"~ ~ ~ ~ ~ ~~~~~0 0203 04,3 0.2 0.4 M 0.4 0.3 032 02 Pboo17 h440101t Ru110110000±04 4201 -02 0 0 -01 0 0 02 0.2 0 1 0 1 0.1 02 Lbb-, h-h.!d~~~~~~ 320 -026 -04 -04 -03 -04 .0 .4 .04 -03 .0. -03 041,01- 40. -00 .009 -07 .00 -07 -00 -07 -0.0 -0. .07 P011002.-0 210 -10 0.1 .07 -00 .0I 01 .-.1 .023 0 0 0.0 F-01112±-!22 107 0.4 1 0 0 0 006 02 02 02 020 0.4 12 c7w r=~~~~~ 1 3 07 0 7 07 07 0 7 0 0 0 0 0 0 0.0 0.0 E1004,0 411 -0 4 .0.3 .03 -0.2 0.02 .0 3 -02 -02 -02 .01 0102111-1 20 0 -0.1 00 0 0 0 0 0 1 0 1 0.1 01I 0.1 0.1 ut=, hw~~~~~~mtb ~10.2 .0 3 .0 4 .03 .02 -02 .03 -0 3 .02 .03 .0 3 mr1100 1023 .04 -0. .0G .0.3 .04 .00 -0.0 -0.4 -0.4 -006 F-) i11 4 0 .0 3 0.1 -0.2 .03 .01 0 1 -01I -0.1 -0.1 00 Fc=o ZL~id 2.0 0.1 0.2 02 0 1 02 02 02 02 0.2 02 C±024410,dooc 0.4 0 1 0.0 01 01I 01 01 0 1 0 1 0.1 0.1 Eo.0447 10.0 .0 2 .02 -0.2 .0.2 .02 .02 -02 .0 2 -02 0.02 C, 1Co414ld41 210 -14 -0. .120 -10G -1 7 1.13 .12 -.12 .1.4 1.32 Th421r244 0.7 -008 -0.0 .02 .0.0 -120 -00a .07 .0. -0 -0.0 P-1111 Old 020130200-00202144 ft=j1 00 02o 0 4 0 3 0 3 0 4 0 4 0. 023 03 Lbb= ~~~~~~~~~0.2 03 02 0.2 02 0.3 03 0.) 02 0.2 o.U.01Iooo0od3 40.0 .03 01 .0.1 0 1 0 3 0 3 02 0 1 02 02 Lkb-- rm=h.%b 345~~~20 .0.0 .00 40 -00 -0.0 -0 7 .006 -.0. -0. -00 lno1,ol_ 4323 .1 0 .1 0 -1I .00 -I.1I -12 .312 .11 -II1 .12 F-,,0100230222 -04 0 0 -0 3 -0 4 00 00) 0.0 00 101 .01 F00221120d 0 00a 0_0 0 4 0.2 00 00 1 I0 1 0 0 0 10O C_-±I4Z0O-d'Ol70' 40 0.0 07 07 00 00 0.7 0 07 . 07 Ec0,0,0 20.0 0 .0 .0 4 -0.0 M .04 -3 -0.4 -0.4 .03 -04 -0.4 P-t4y G000 R=oJ h.=0± 10 0 -01I 00 0.0 0 0 0 1 0 1 0.1 0.1 0 1 0 1 U,oo,Ooool-o±44 137 -03 .03 .0 3 -02 -0 3 .020 -0.3 -0.3 -02 -023 0.!o,0 174 .04 .0a -0 4 -023 -014 .00 -02 -04 .0.4 -02 F.M1o4204131 -03 0 0 -0.2 .012 0 0 0 0 0 0 -0.1 -0. 0 0 F-I C411420I 0 01 02 0 1 01 01 0.2 0.2 021 0.2 02 04, n= 244~ 0.4 0 1 0 2 0 1 0 1 0 1 0 1 0 1 0.1 0.1 0.1 E100004y 10.4 -0.2 -0.2 -0.2 -0.2 .01 .02 -.02 -22 -m1 0.02 C01,±Coofi=do 230 40- -0.0 -0 7 -0.4 .0.0 -0 0 -00s -4 .04 -OA4 1h210,Oo,, 7 1 -04 4as -C4 -0 3 -02 -014 -0 3 .03 -02 -023 80 n r/~~~~U _ __. X, o _ _ _ X _-r I.__ -} _- _ _ JS 00 S X X X 1}1111 i1 Za SX XQ 81 N m OX N a Q nI" _ _ N2 °- _ _ _ l~~~~~~~~ N YO N __ 12 -~~~~~8 Policy Research Working Paper Series Contact Title Author Date for paper WPS3043 The Incentive-Compatible Design Thorsten Beck May 2003 K. Labrie of Deposit Insurance and Bank 31001 Failure Resolution: Concepts and Country Studies WPS3044 Impregnated Nets Cannot Fully Mead over May 2003 H. Sladovich Substitute for DDT Field Bernard Bakote'e 37698 Effectiveness of Malaria Prevention Raman Velayudhan in Solomon Islands Peter Wilikai Patricia M Graves WPS3045 Causes and Consequences of Civil Klaus Deininger May 2003 M Fernandez Strife: Micro-Level Evidence from 33766 Uganda WPS3046 Migration, Spillovers, and Trade Ross Levine May 2003 E. Khine Diversion The Impact of Sergio L. Schmukler 37471 Internationalization on Stock Market Liquidity WPS3047 Comparing Mortgage Credit Risk Robert Buckley May 2003 0. Himid Policies: An Options-Based Approach Gulmira Karaguishiyeva 80225 Robert Van Order Laura Vecvagare WPS3048 Targeted Transfers in Poor Countries: Martin Ravallion May 2003 P. Sader Revisiting the Tradeoffs and Policy 33902 Options WPS3049 Hidden Impact? Ex-Post Evaluation Shaohua Chen May 2003 P. Sader of an Anti-Poverty Program Martin Ravallion 33902 WPS3050 The Changing Financial Landscape: Wafik Grais May 2003 R. Vo Opportunities and Challenges for Zeynep Kantur 33722 the Middle East and North Africa WPS3051 Regional, Multilateral, and Unilateral Glenn W Harrison May 2003 P Flewitt Trade Policies of MERCOSUR for Thomas F Rutherford 32724 Growth and Poverty Reduction in David G. Tarr Brazil Angelo Gurgel WPS3052 Long-Run Impacts of China's WTO Kym Anderson May 2003 S Lipscomb Accession on Farm-Nonfarm Income Jikun Huang 87266 Inequality and Rural Poverty Elena lanchovichina WPS3053 Economic Impacts of China's Elena lanchovichina May 2003 S Lipscomb Accession to the World Trade William Martin 87266 Organization WPS3054 The New Comparative Economics Simeon Djankov May 2003 G Sorensen Edward Glaeser 37088 Rafael La Porta Florencio Lopez-de-Silanes Andrei Shleifer WPS3055 The Global Growth of Mutual Funds Deepthi Fernando May 2003 A. Yaptenco Leora Klapper 31823 Viktor Sulla Dimitri Vittas Contact TiiMEe Auilh¢Dr oaRe for pEpsr WPS3056 Avoiding the Pitfalls in Taxing Patrick Honohan May 2003 A. Yaptenco Financial Intermediation 31823 WPS3057 Teaching Adults to Read Better and Helen Abadzi May 2003 H Abadzi Faster: Results from an Experiment 80375 in Burkina Faso WPS3058 Working for God? Evaluating Service Ritva Reinikka May 2003 H Sladovich Delivery of Religious Not-for-Profit Jakob Svensson 37698 Health Care Providers in Uganda WPS3059 Do Capital Flows Respond to Risk Cesar Calder6n May 2003 T. Tourougui and Retum9 Norman Loayza 87431 Luis Serven WPS3060 World Market Integration through the Rui Albuquerque May 2003 T. Tourougui Lens of Foreign Direct Investors Norman Loayza 87431 Luis Serven WPS3061 Reciprocity in Free Trade Caroline Freund May 2003 P. Flewitt Agreements 32724 WPS3062 Labor Effects of Adult Mortality in Kathleen Beagle May 2003 E. de Castro Tanzanian Households 89121 WPS3063 Trade Liberalization, Firm Paolo Epifani May 2003 P Flewitt Performance, and Labor Market 32724 Outcomes in the Developing World What Can We Learn from Micro-Level Data? WPS3064 Trade Policy, Trade Volumes, and Ana M Fernandes May 2003 A Fernandes Plant-Level Productivity in Colombian 33983 Manufacturing Industries WPS3065 Ghost Doctors Absenteeism in Nazmul Chaudhury May 2003 H. Sladovich Bangladeshi Health Facilities Jeffrey S Hammer 37698 WPS3066 The Potential Demand for and Shreelata Rao Seshadri May 2003 H Sladovich Strategic Use of an HIV-1 Vaccins P. Subramaniyam 37698 in Southern India Prabhat Jha