Essays on Labor and Development Economics Edwin Antonio Goñi-Pacchioni

128 Pages·2011·2.09 MB·English

Department of Economics

Essays on Labor and Development Economics

Edwin Antonio Goñi-Pacchioni

Thesis submitted for assessment with a view to obtaining the degree of
Doctor of Economics of the European University Institute

Florence, June 2011
EUROPEAN UNIVERSITY INSTITUTE
Department of Economics

Essays on Labor and Development
Economics

Edwin Antonio Goñi-Pacchioni

Thesis submitted for assessment with a view to obtaining the degree of
Doctor of Economics of the European University Institute

Jury Members:

Prof. Massimiliano Marcellino, EUI, Supervisor

Prof. Luigi Guiso, EUI

Prof. Christian Dustmann, University College London

Dr. William Maloney, The World Bank

© 2011, Edwin Antonio Goñi-Pacchioni

No part of this thesis may be copied, reproduced or
transmitted without prior permission of the author
Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
Contents
1 TradeLiberalization,LaborReformsandFormal-InformalEmploymentDynamics 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 DataandContext . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2.1 Decomposinggrossflows . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 PolicyInnovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.3.1 TradeLiberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3.2 Constitutionalchanges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.4 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.5 ExplainingtheRiseinInformality . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.7 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.8 AnIllustrativeModel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.8.1 EquilibriumandEffectofPolicies . . . . . . . . . . . . . . . . . . . . . . . 29
2 Formality,LaborProductivity,WageSettingandIncomeRisk 31
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.2.1 Laborallocationandwages . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.2.2 FirmsProductivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.3 Newhires,jobstayersandjobmovers . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.4 Wagesandproductivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.4.1 InstitutionalBackground . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.4.2 EstimationMethodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2.5 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.6 IncomeRisk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3 R&DandDevelopment. AnInstrumentedSemiparametricalApproach 55
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.2 R&DandHeterogeneity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.2.1 Previoustheoreticalcontributions . . . . . . . . . . . . . . . . . . . . . . . 57
3.2.2 Previousempiricalcontributions . . . . . . . . . . . . . . . . . . . . . . . . 58
3.3 Dataandsomestylizedfacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.3.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.3.2 Stylizedfacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
3.4 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.5 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.5.1 NonVaryingCoefficient(ParametricalBenchmark) . . . . . . . . . . . . . . 65
3.5.2 VaryingCoefficient(VC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.5.3 InstrumentalVariablesVaryingCoefficient(IVVC) . . . . . . . . . . . . . . 68
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
3.5.4 BandwidthSelection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.6 Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.6.1 VaryingCoefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.6.2 InstrumentalVariablesVaryingCoefficients . . . . . . . . . . . . . . . . . . 71
3.7 ComplementarityeffectsandRobustnessCheck. Adjustmentbylaborquality. . . . . 74
3.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.9 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.9.1 TwoStepsinIVVCestimation . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.9.2 OptimalBandwidthEstimation . . . . . . . . . . . . . . . . . . . . . . . . 80
3.9.3 Depreciated(net)investmentinphysicalcapitalandR&D. . . . . . . . . . . 82
3.9.4 ValuesofInducingVariables . . . . . . . . . . . . . . . . . . . . . . . . . . 83
4 FiscalredistributionandincomeinequalityinLatinAmerica 84
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.2 IncomeinequalityandfiscalredistributioninLatinAmerica . . . . . . . . . . . . . 87
4.3 WhatlimitsfiscalredistributioninLatinAmerica? . . . . . . . . . . . . . . . . . . 90
4.3.1 Taxcollection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.3.2 Taxincidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
4.3.3 Theredistributiveeffectsofpublicspending . . . . . . . . . . . . . . . . . . 96
4.4 Concludingremarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.5 DataandMethodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
4.5.1 DataforLatinAmerica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
4.5.2 DataforEuropeancountries . . . . . . . . . . . . . . . . . . . . . . . . . . 104
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
List of Figures
1.1 SizeandRelativeInformalityFlows: Brazil1983-2002 . . . . . . . . . . . . . . . . 6
1.2 EffectiveTariffProtectionandImportPenetration . . . . . . . . . . . . . . . . . . . 11
1.3 EffectiveTariff1988and2000byIndustry . . . . . . . . . . . . . . . . . . . . . . . 12
1.4 UnconditionedCorrelations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.1 GrossWorkerFlows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.2 LaborForceCompositionaccordingtotransitiongroupsbyEmploymentSector . . . 40
2.3 Cyclicalrelationbetweenunconditionalwagesandaggregatemanufacturingproduc-
tivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.4 Cyclicalrelationbetweenconditionalwagesandaggregatemanufacturingproductivity 42
2.5 WagesDistribution’sSupport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.1 R&DandDevelopment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.2 R&DandDevelopment. Somespecificcases. . . . . . . . . . . . . . . . . . . . . . 61
3.3 TwinPeaks,KernelSmoothedBivariateDensity . . . . . . . . . . . . . . . . . . . . 62
3.4 VaryingCoefficientsinducedbytheDistancetotheEconomicFrontier. . . . . . . . 70
3.5 VaryingReturnofR&DInvestment . . . . . . . . . . . . . . . . . . . . . . . . . . 72
3.6 VaryingCoefficientsinducedbytheDistancetotheEconomicFrontier(controlling
byLaborQuality) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
3.7 VaryingReturnofR&DInvestment(controllingbyLaborQuality) . . . . . . . . . . 77
4.1 Centralgovernmenttaxrevenuevs. percapitaGDP . . . . . . . . . . . . . . . . . . 91
4.2 Personalexemptionlevels(multiplesofGDPpercapita) . . . . . . . . . . . . . . . 94
4.3 Taxationbyincomequintiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
4.4 Transfersbyincomequintiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
List of Tables
1.1 ChangesinInformalitybysector1983-1988and1988-2000 . . . . . . . . . . . . . 5
1.2 ContributionsoftheRelativeInflowsandOutflowsintoSteadyStateInformalityRate 8
1.3 UnitRootTests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.4 EffectsoftheTradeLiberalizationandConstitutionalReforms. 1983-2002 . . . . . 17
1.5 RobustnessChecks: DynamicStructure . . . . . . . . . . . . . . . . . . . . . . . . 19
1.6 TradeandConstitutionalInteractions . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.7 ActualandLatentTrends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.8 MeasuresofInformalitybyGeographicalDivision . . . . . . . . . . . . . . . . . . 23
2.1 Wage-ProductivityElasticity. ConventionalAggregateApproach. . . . . . . . . . . 46
2.2 Wage-ProductivityElasticity. AllSalariedWorkersandAllFirms. . . . . . . . . . . 48
2.3 Wage-ProductivityElasticitybyLaborSectorandFirmSize. . . . . . . . . . . . . . 50
2.4 PermanentandTransitoryshocksbyLaborSectorandMobilityGroup . . . . . . . . 52
3.1 SummaryofIndicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.2 ImpactofR&Dintogrowth. ANonVaryingParametricalApproach . . . . . . . . . 65
3.3 ImpactofR&Dintogrowth. ASemiVaryingParametricalApproach . . . . . . . . . 66
3.4 ImpactofR&Dintogrowth. ANonVaryingParametricalApproachcontrollingby
LaborQuality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.1 Ginicoefficientsofthedistributionofdifferentincomedefinitions . . . . . . . . . . 89
4.2 ComparativeperspectiveonTaxRates . . . . . . . . . . . . . . . . . . . . . . . . . 92
4.3 TaxCollectionandTaxproductivity . . . . . . . . . . . . . . . . . . . . . . . . . . 93
4.4 Ginicoefficientofthedistributionofdifferentincomedefinitions(consideringboth
cashandin-kindtransfers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
Tomyfamily. Tothosewhowere,areandwillbethere.
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
Acknowledgements
The author wants to thank to an extensive group of persons and institutions who in different ways
guided,sponsoredorsupportedthiswork:
to his parents Edwin and Neri and to his grandparents Antonio and Neri for the permanent and
unconditionalsupportandmostvaluableeducationineveryimportantaspectoflife;
to his closest family for continuous presence and strong empathy in his multiple visits to Lima,
NJ, NC, London, especially to the Tello Pacchioni family and to his cousin Paul for opening their
homesandhostinghimasasonorbrothereverytimehewasaround;
toUniversidaddelPac´ıfico,UniversityofCalifornia-LosAngeles,theEuropeanUniversityInstitute
andtheLondonSchoolofEconomicsfortheacademiceducationintheprofessionofEconomics;
to his friends and professional mentors Carlos Casas and Humberto Lo´pez who at different stages
enlightened his academic and professional paths and very especially to Bill Maloney who, on top,
providedcontinuoussupportandadvicefarbeyondacademicandprofessionalrealms;
tohisacademicadvisorsLuigiGuiso,AlanManningandespeciallytohisprincipaladvisorMassim-
ilianoMarcellinoforfruitfulconversations,valuablesuggestionsandbeneficialacademicguidance;
tohiscoauthors,fordeterminantcontributionsintheproductionofsomechaptersofthisdocument;
to the Economists of the Research Center of Universidad del Pac´ıfico and of the Research Depart-
ment of the Peruvian Superintendency of Banking and Insurance for having initiated him in the
endeavorsofappliedresearch;
to the officers of the Latin America and the Caribbean Chief Economist Office and the Develop-
mentEconomicsResearchGroupofTheWorldBankforhavingstrengthened,shapedandoriented
hisinterestsineconomicresearch;
to the London School of Economics, to the European University Institute and to Universidad del
Pac´ıficoforgrantinghimtheopportunityofteachingduringthetimethisthesiswasinproduction;
to the Spanish Government and the Agencia de Cooperacio´n Internacional for the doctoral grant
sponsoringthefirstthreeyearsofdoctoralstudiesandtotheEuropeanUniversityInstituteforpar-
tialfourthyearsponsorship;
toallhisfriends,colleaguesandcollaboratorsforprovocativediscussions,pleasantteamworkand
fraternalcomplicity;
toGod,ingeneral,foreverything.
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
Abstract
This work comprises four essays in two related areas: labor and development economics. On the
laborside,twoessaysstudy(i)theeffectsofsizeablepolicyreformsoverlaborinformalityand(ii)
therelationbetweenproductivityandwagesinacontextofsubstantialinformalityandhighturnover
rates. On the development side, two essays provide a comparison between developed and devel-
opingcountriesinthefollowingaspects: (iii)thedegreeofcomplementarityofproductionfactors
andtheircapacitytotranslateR&Dinvestmentsintoeconomicgrowthand(iv)theeffectsoffiscal
redistributionoverincomeinequality.
Within the context of Latin America - the most income-unequal and labor-informal region in the
world-thisworkintendstoaugmenttheunderstandingofthebehavior,dynamics,interactionsand
contributionsofproductivefactors(laborandinnovativecapital)andtheeffectsthatpoliciesaimed
at formalizing labor, innovating capital or redistributing factors retributions may have. The study
appliesrecentmeasurementtechniquesandexploitsrichnoveldatasetswhichcombinedwithrefor-
mulatedmodelshelpustoproposealternativeappealingexplanations.
Lessons learnt from these four essays suggest that (i) job dynamics play a fundamental role in
the success (or failure) of policies aimed at promoting labor formality. Against the conventional
wisdom,wecontendthatreductionsinhiringratherthanincreasesinseparationratesarethemain
determinantsofinformalityincreasesfollowingprotectionistpolicies. (ii)Jobdynamicsalsoplaya
differentiatingroleinthedeterminationofwage-productivityelasticitiesandincomerisk(withnew
hires reacting more than incumbents). (iii) Yet, returns of labor and physical capital are constant
across countries and periods regardless the stage of development whereas they exhibit an inverted
U shape for technological capital (this is, highest returns observed for mid developed cases). (iv)
Comparableprivatereturnsofproductivefactorsaremirroredincomparablemarketincomeinequal-
ity measures observed across some developed and developing regions. However, while in Europe
fiscal redistribution helps to achieve better distributed disposable income, in Latin America fiscal
redistributionhasmeagerorevencountervailingeffects.
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875
Foreword
Essays on Labor and Development Economics is the result of a long journey dated back to late
ninetieswhenIstarteddoingappliedeconomicresearch.
Experience gathered doing applied research in the academic and public sectors in Peru and in the
headquartersofTheWorldBankshapedmyacademicandprofessionalinterests,technicalandtopic
wise. Amongothers,theseinterestscomprisethestudyoflabormarketsandeconomicdevelopment
fromanappliedperspective,exploitingnoveltechniquesandrichempiricalsources.
Areasontopursuethisapproachisthatfar-from-orthodoxeconomicoutcomesinemergingandless
developedcountries(LDC)challengecontinuouslytheprescriptionsofcanonicaltheoreticalmodels.
Manyofsuchunconventionaloutcomesweredifficulttoaddressinsideandoutsidethescopeofthe
mainstreamoftheliterature-conceivedasasetoftheoriesandmodelsaimedatexplainingaworld
endowedwithparticulargivens1. Thiswasthecaseuntilrecentemergenceofveryrichsourcesof
informationornoveltechnicalmethodsdevelopedtobetterexploitsuchaninformation. Nowadays
to think outside the box of the conventional mainstream with some grounds stronger than just the-
oretical assumptions is becoming more likely. To this end, empirical sources are proving to be a
nontrivialcomplementaryinputtoproduceknowledgeandunderstandingofseveraleconomicphe-
nomena, especially inthe insufficientlyexploredworld ofLDC, oreven torevisit andreformulate
canonical models that have failed to show a correspondence between predictions of their essential
componentsanditsactualobservedvaluesinthevastlyexploreddevelopedworld.
This work is aimed at contributing to the understanding of some relevant issues in economies that
cannotnecessarilybeseenthroughthelensofthecanonicalmodelsprovidedbythemainstreambut
through the lens of contesting means, namely rich novel data and recent measurement techniques
whichcombinedwithreformulatedmodelshelpustoproposealternativeappealingexplanationsto
suchissues. Asithappenswiththoseendorsingmoreconventionalandtheoreticalapproaches,our
intentionistoseewhatwecanlearnfromtheoutcomesofourapproacheventhoughthecaveatsand
limitationsthateverymethodcomprises.
Theresultofthisresearchispresentedinfouressays(chapters):
Chapter1presentstheresultsofexploitingdenserotationallaborpaneldatasetsinordertounder-
standtheeffectsofradicalpolicyreforms2 onthedynamicsacrossemploymentandunemployment
states3 into a market with high labor informality and within the context of a Search and Matching
model.OurfindingssuggestmeagereffectsofTradeReformsbutnoticeableeffectsofConstitutional
Reforms in the size and volatility of the flows of different labor sectors. Against the conventional
1Initial conditions such as the rule of law, institutional framework, market imperfections, initial quantities of factor
endowments,initialqualitiesoffactorendowments,etc. whichcaninfluencedramaticallythefeasibilityoftheassumptions
imposedinmostofthecanonicalmodelswhengenerallyappliedtoLDC.
2Namely,ConstitutionalReformscomprisingdramaticchangesinlaborregulationandTradeReforms.
3Andconsequentlyonthesizeofdifferentlaborsectors.
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Goñi-Pacchioni, Edwin Antonio (2011), Essays on Labor and Development Economics
European University Institute DOI: 10.2870/27875