LABOR MARKET REGULATIONS AND REDISTRIBUTIVE POLICIES FOR INCLUSIVE GROWTH IN AN OPEN ECONOMY AGENT-BASED MACROECONOMIC MODEL

Lilian Nogueira Rolim; Carolina Troncoso Baltar; Gilberto Tadeu Lima

Título do Trabalho

Autores

Lilian Nogueira Rolim
Carolina Troncoso Baltar
Gilberto Tadeu Lima

Modalidade

Resumo Expandido (associados AKB)

Área temática

Área 2. Crescimento econômico, desenvolvimento e distribuição de renda

Data de Publicação

02/12/2024

País da Publicação

Brasil

Idioma da Publicação

Português

Página do Trabalho

https://www.even3.com.br/anais/akb2024/893603-labor-market-regulations-and-redistributive-policies-for-inclusive-growth-in-an-open-economy-agent-based-macroeco

ISBN

978-65-272-0872-3

Palavras-Chave

income inequality, growth, labor market flexibility, redistributive policies, agent-based models

Resumo

The economic policy debate often contrasts different conceptual economic structures with respect to their implications for key economic variables. While for a long time there was a focus solely on the output dynamics, more recently there is a growing concern with the harmful effects of income inequality. This has been especially the case since the 2007/8 economic crisis, which exposed the negative consequences of income inequality and fostered the economic debate on the topic (Berg et al., 2018, Ostry et al., 2019, IMF, 2014). Yet, even if there is a growing concern with income inequality and even an emerging consensus acknowledging that inequality can be harmful for economic growth (Berg et al., 2018), there is much less consensus with respect to what type of economic policies and institutions should be used to alter the income distribution and even less consensus with respect to what extent income inequality should be reduced. Arguably, there are numerous ways by which the government can affect the income distribution, be it through redistributive policies or regulations. Yet, since these policies and regulations are interpreted as sources of rigidities, inefficiencies, or misallocations, many authors believe that they may prevent the economy from reaching an optimum market equilibrium. This view has largely derived from contributions that argued in favor of labor market flexibility, such as the OECD’s (1994) Job Study Report. Proponents of labor market flexibility argue that any rigidity caused by regulations or institutions prevents adjustments in the labor market that would reduce unemployment rates. As argued by Berg (2015), this interpretation is based on the understanding that unemployment is a problem that arises (and can be potentially solved) in the labor market. Yet, from a Keynesian perspective, the level of employment is not determined in the labor market, but rather by the level of aggregate demand. This opens the possibility that policies that help to sustain aggregated demand can be useful to sustaining employment, without the need of removing or reducing regulations in the labor market. Nevertheless, even from this perspective there is still little investigation with respect to the effectiveness of the different tools in redistributing income and to whether the type of policy matters for how changes in inequality affect growth. Inspired by this debate, this article compares different structures characterized by different degrees and types of policies and regulations on the distribution of income and analyzes what are the implications of such policies and regulations for the output and employment dynamics. The analysis is undertaken within the open-economy agent-based (AB) model developed by Rolim et al. (2023) so the effects on the domestic economy’s international competitiveness are also captured. Our analysis of the contribution of each tool reflects our understanding that these tools cannot be categorized individually as either good or bad, since their effects depend on their interaction with other tools and on the specific economic context. The complexity economics approach provided by the AB framework employed in this research has the advantage of capturing the immediate and feedback effects of altering each labor market institution and redistributive policy. This provides more precise information about the effect of such policies on the output dynamics and means that the overall comparison between the scenarios is composed of two sets of effects: a) the direct effect of the policy on macroeconomic variables, and b) the effect of the policy on inequality, which then affects these macroeconomic variables once again. In addition, this framework allows us to identify and differentiate what is the relationship of the macroeconomic variables with income distribution measured through different variables, thus offering important insights into the role of the personal and functional income distribution. In this sense, our results also relate to the literature that stresses the importance of the personal income distribution to output dynamics (Carvalho and Rezai, 2016). We are also able to provide an overall assessment with respect to the effectiveness of redistributive policies and labor market regulations in achieving more equality. Our results are thus in line with empirical works that measure the effectiveness of specific policy instruments to reduce income inequality (Causa and Hermansen, 2017). The experiments explore the effect and interaction of labor market regulations and redistributive policies. The article starts by discussing the transition from a pro-market scenario, wherein the government does not rely on any policy tools to influence the ncome distribution, towards a redistributive scenario, wherein redistributive policies (unemployment benefits and progressive taxation) are progressively added with the aim of reducing the inequality levels generated by the (unregulated) bargaining process between agents in the labor market. Yet, in such redistributive scenario, the government still does not rely on labor market regulations possibly to avoid efficiency losses. The analysis then moves from the redistributive scenario towards the pro-labor scenario, wherein in addition to the redistributive policies, there are also more regulations protecting workers in the wage bargaining process (downward nominal wage rigidity, an active minimum wage policy, and higher workers’ bargaining power independently from the employment level). The results are supportive of the effectiveness of combining these policy tools to achieve inclusive economic growth: the transition from the archetype of the pro-market scenario towards the archetype of the pro-labor scenario leads to lower inequality in the functional and personal income distribution, lower unemployment rate, and higher output growth rate. In addition to capturing a positive correlation between equality, economic activity, and employment, these results also suggest that labor market regulations and redistributive policies are required to sustain a more equal income distribution that is associated with the better economic performance in terms of employment and output. Nevertheless, the results also reveal the complex nature regulating the relationship between labor market regulations and redistributive policies and income distribution. We find that there is a significant degree of complementarity between the different policy tools, but there is also a significant overlapping of their effects and, in specific cases, even a reversal of their individual effects when they are combined. In general, the addition of strong labor market regulations reduces the actual progressivity of fiscal policy and the marginal effect of each labor market regulation falls with the strength of the other regulations. This confirms our intuition that the effect of these tools depends on their interaction with other tools and on the specific economic context. It also stresses the need of carefully designing and combining regulations and policies targeting more income equality. In addition, we identify a complex relationship between income distribution and the considered macroeconomic variables. Not only there are numerous non-linearities governing the relationship between output and inequality, their overall relationship is also the result of their reciprocal effects on each other. Yet, in general, the results point to a positive association between more equality in the personal income distribution and output levels and growth rates, in particular when labor market regulations are strong. We also find that more equality in the functional income distribution is only associated with output growth when there is a simultaneous reduction in inequality in the personal income distribution. Conversely, the relationship between income distribution and inflation rates is clearer for the case of the functional than for the personal income distribution, since the former is more directly affecting (and being affected by) the pricing decisions decisions by firms. In sum, the results indicate that the type of labor market regulation and redistributive policy matters for how and to which extent income distribution is affected, but there are also more qualitative aspects that are quite relevant. Indeed, each type of policy tool activates different mechanisms in this complex system, so the nature of the distributive changes differs and so does the dynamics of output and inflation, which may result from mechanisms operating through income distribution or from mechanisms that simultaneously affect output and distribution. Despite of the complexity of these relations, the main conclusion derived in this article is that labor market regulations and redistributive policies tend to contribute to inclusive economic growth. References Berg A, Ostry JD, Tsangarides CG, Yakhshilikov Y (2018) Redistribution, inequality, and growth: New evidence. Journal of Economic Growth 23(3):259–305 Berg J (2015) Labour markets institutions: The building blocks of just societies. In: Berg J (ed.) Labour Markets, Institutions and Inequality: Building Just Societies in the 21st Century, Edward Elgar Publishing ; International Labour Office, Cheltenham, UK ; Northampton, MA, USA : Geneva, Switzerland, pp. 1–35 Carvalho L, Rezai A (2016) Personal income inequality and aggregate demand. Cambridge Journal of Economics 40(2):491–505 Causa O, Hermansen M (2017) Income redistribution through taxes and transfers across OECD countries. OECD Economics Department Working Papers 1453:85 IMF (2014) Fiscal Policy and Income Inequality. Policy Papers 14 OECD (1994) OECD Jobs Study. Techinical Report, OECD Ostry JD, Loungani P, Berg A (2019) Confronting Inequality - How Societies Can Choose Inclusive Growth. Columbia University Press Rolim, L. N., Baltar, C. T., Lima, G. T. (2023). Income distribution, productivity growth, and workers’ bargaining power in an agent-based macroeconomic model. Journal of Evolutionary Economics, 33(2), 473-516.

Título do Evento: XVII Encontro da Associação Keynesiana Brasileira
Cidade do Evento: Maceió
Título dos Anais do Evento: Anais do XVII Encontro da Associação Keynesiana Brasileira
Nome da Editora: Even3
Meio de Divulgação: Meio Digital

Como citar

ROLIM, Lilian Nogueira; BALTAR, Carolina Troncoso; LIMA, Gilberto Tadeu. LABOR MARKET REGULATIONS AND REDISTRIBUTIVE POLICIES FOR INCLUSIVE GROWTH IN AN OPEN ECONOMY AGENT-BASED MACROECONOMIC MODEL.. In: Anais do XVII Encontro da Associação Keynesiana Brasileira. Anais...Maceió(AL) FEAC-UFAL, 2024. Disponível em: https//www.even3.com.br/anais/akb2024/893603-LABOR-MARKET-REGULATIONS-AND-REDISTRIBUTIVE-POLICIES-FOR-INCLUSIVE-GROWTH-IN-AN-OPEN-ECONOMY-AGENT-BASED-MACROECO. Acesso em: 23/06/2025