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Labor productivity is generally seen as bringing
wealth and prosperity; but how does it vary over the business cycle?
Aggregate labor productivity is a central
indicator of an economy’s economic development and a wellspring of living
standards. Somewhat controversially, many macroeconomists see productivity
as a primary driver of fluctuations in economic activity along the business
cycle. In some countries, the cyclical behavior of labor productivity seems
to have changed. In the past 20–30 years, the US has become markedly less
procyclical, while the rest of the OECD has not changed or productivity has
become even more procyclical. Finding a cogent and coherent explanation of
these developments is challenging.
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Whether social security programs reduce
inequality is not related to the amount they redistribute
Social security programs generally seek to
provide insurance and to reduce poverty and inequality. Providing insurance
requires little redistribution. But reducing inequality and alleviating
poverty do require redistribution. To reduce inequality, programs must
redistribute income, but redistributing income is not the same as reducing
inequality. While some programs redistribute large amounts of income without
noticeably reducing inequality, others reduce inequality with less
redistribution and fewer labor market distortions. A non-contributory tier,
which provides benefits without requiring contributions, is a key component
for reducing inequality.
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Cash transfers can reduce child labor if
structured well and if they account for the reasons children work
Cash transfers are a popular and successful
means of tackling household vulnerability and promoting human capital
investment. They can also reduce child labor, especially when it is a
response to household vulnerability, but their efficacy is very variable. If
not properly designed, cash transfers that promote children's education can
increase their economic activities in order to pay the additional costs of
schooling. The efficacy of cash transfers may also be reduced if the
transfers enable investment in productive assets that boost the returns to
child labor. The impact of cash transfers must thus be assessed as part of
the whole incentive system faced by the household.
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Uncoordinated unemployment insurance and
severance pay do a poor job of insuring against losses resulting from job
displacement
Job displacement poses a serious earnings threat
to long-tenured workers through unemployment spells and lower re-employment
wages. The prevailing method of insuring job displacement losses involves an
uncoordinated combination of unemployment insurance and severance pay. Less
developed countries often rely exclusively on public mandating of employer
severance pay due to the administrative complexity of unemployment insurance
systems. If both options are operational, systematic integration of the two
is important, although perhaps not possible if severance pay is voluntarily
provided.
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For unemployment benefit programs, the key policy
issues are the level of benefits and subsidies and the types of taxes used
to finance them
In reforming unemployment benefit systems, the
policy debate should be on the appropriate level of benefits, the subsidies
needed for people who cannot contribute enough, and how to finance the
subsidies, rather than on whether unemployment insurance or individual
unemployment savings accounts are better. Unemployment insurance finances
subsidies through implicit taxes on savings, while individual savings
accounts with solidarity funds finance subsidies through payroll taxes.
Taxes on certain consumption goods and real estate could be considered as
well and could be less distortionary.
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Payroll tax cuts in developing economies might
be beneficial to the formal sector, even when the informal sector is
large
Informal employment accounts for more than half
of total employment in Latin America and the Caribbean, and an even higher
percentage in Africa and South Asia. It is associated with lack of social
insurance, low tax collection, and low productivity jobs. Lowering payroll
taxes is a potential lever to increase formal employment and extend social
insurance coverage among the labor force. However, the effects of tax cuts
vary across countries, often resulting in large wage shifts but relatively
small employment effects. Cutting payroll taxes requires levying other taxes
to compensate for lost revenue, which may be difficult in developing
economies.
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Unemployment insurance can protect against
income loss and create formal employment
Unemployment insurance can be an efficient tool
to provide protection for workers against unemployment and foster formal job
creation in developing countries. How much workers value this protection and
to what extent it allows a more efficient job search are two key parameters
that determine its effectiveness. However, evidence shows that important
challenges remain in the introduction and expansion of unemployment
insurance in developing countries. These challenges range from achieving
coverage in countries with high informality, financing the scheme without
further distorting the labor market, and ensuring progressive
redistribution.
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Wage losses upon re-employment can seriously harm
long-tenured displaced workers if they are not properly insured
Job displacement represents a serious earnings risk to
long-tenured workers through lower re-employment wages, and these losses may persist for
many years. Moreover, this risk is often poorly insured, although not for a lack of
policy interest. To reduce this risk, most countries mandate scheduled wage insurance
(severance pay), and it is voluntarily provided in others. Actual-loss wage insurance is
uncommon, although perceived difficulties may be overplayed. Both approaches offer the
hope of greater consumption smoothing, with actual-loss plans carrying greater
promise.
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In transition economies, better property rights
protection and rule of law enforcement can boost job creation and growth
In the transition from central planning to a
market economy in the 1990s, governments focused on privatizing or closing
state enterprises, reforming labor markets, compensating laid-off workers,
and fostering job creation through new private firms. After privatization,
the focus shifted to creating a level playing field in the product market by
protecting property rights, enforcing the rule of law, and implementing
transparent start-up regulations. A fair, competitive environment with
transparent rules supports long-term economic growth and employment creation
through the reallocation of jobs in favor of new private firms.
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