Regional Unemployment Disparities: An Evaluation of Policy Measures

This paper analyses the efficacy of regional and federal government policies in reducing inter-regional unemployment disparities. We use as our framework a two-region general equilibrium model with a given freely-mobile supply of labour. We assume interregional migration to occur in response to inter-regional utility differentials. Each region has households, firms and a regional government. In addition to regional governments, there is a federal government. The firms in a region use a single factor, labour, to produce a single good which we assume to be different to that produced in the other region. It is supplied to households and to the regional government in the form of payroll taxes. Households consume some, trade some with households in the other region and give some up to the federal government as income tax. Firms and households bargain over wages and firms then choose employment to maximise profits. The resulting equilibrium will generally not be a full-employment one. We simulate a linearised numerical version of the model. We examine seven alternative policies, six carried out by a regional government and one by the federal government. In the first group there are traditional tax/expenditure polices as well as policies which might be seen as attacking the natural rate of unemployment: changes in unemployment benefits, changes in union power, changes in the labour force and changes in labour productivity. The federal government policy is a regionally- differentiated fiscal policy. Contrary to expectations, many policies which have traditionally been recommended to alleviate unemployment, are found, in fact, to exacerbate the unemployment problem.

The US-China Trade Imbalance: Will Revaluing the RMB Help (Much)?

The large US-China trade imbalance is a common cause for concern and regularly blamed on the undervaluation of the RMB. We estimate a simple model of the trade balance and simulate the long-run effects on the trade balance of RMB revaluations in the range of 10-50%. We find that improvements in the trade balance following plausible revaluations are likely to be modest.

Regional Equality and National Development in China: Is There a Trade-Off?

Despite high economic growth over the past 30 years, China’s substantial and persistent regional disparities have been the subject of continuing concern to policy makers, as well as the target of a wide variety of policies. An important issue in the policy debate about whether and how best to attack these disparities is whether measures designed to improve regional equality come at a cost to national development, i.e. whether there is a trade-off between the level of national output and the equality of its distribution across the regions. There is little analysis of this issue in the literature. We help fill this gap by setting up a two-region model designed to capture some of the salient features of the Chinese economy. We subject this model to a number of policy shocks and assess the effects on regional disparities in per capita output, on the one hand, and on aggregate output on the other to investigate the trade-off. We also consider income and welfare as alternatives to output. We find that disparities in per capita output, income and welfare often move in different directions so that it is important to specify which disparity is being targeted. Moreover, since both disparities and aggregate outcomes are endogenous, how they move together depends on the nature of the shock driving the model. Thus, some policies designed to reduce disparities face a trade-off and others do not. Only a reduction in internal migration restrictions unambiguously reduces all three disparity measures and increases aggregate output, incomestock prices, output, China

Reducing Regional Disparities in China: An Evaluation of Alternative Policies

Regional disparities in output per capita and income in China are large and persistent. They have been the subject of considerable concern to policy-makers at the highest level for decades, yet little is known about the effectiveness of various alternative policies which may be used to combat them. In this paper we address this issue by analysing the effectiveness of a range of policies by both regional and central governments. We use a small model with various features of the Chinese economy: two regions (the interior and the coast), two industries (agriculture and manufacturing), inter-regional capital mobility, internal migration subject to the hukou system of household registration and some features of the Chinese tax and expenditure system. The model is calibrated to Chinese data and simulated to analyse the effects of a number of policies on a range of variables but focussing on per capita output disparities and welfare. We find that a policy reducing internal migration costs is effective in reducing the per capita output gap but does so at a substantial cost to the coast. Policies which improve agricultural productivity in the interior region are most likely to both reduce the gap and make both regions better off. Changes in government consumption expenditure, central government fiscal redistributions and tax cuts, on the other hand, are less effective and have their long-run effectiveness reduced by migration.regional disparities, China, numerical modelling, hukou

The Regional Economic Effects of Immigration

The effects of immigration on the host country are pervasive and long-term. It is not surprising that they have been extensively analysed, not least the economic effects which have been the subject of both theoretical and empirical research. While some of the empirical research has had a regional dimension, this has often been incidental to the analysis of the labour market – the effects of immigration on wages and employment prospects of the native-born depend on the regional migration response. In contrast, there has been little analysis of the general effects of immigration on regional economies per se. This paper contributes to the filling of this gap by constructing a small two-region computable general-equilibrium (CGE) model which is used to analyse the effects of various immigration shocks on regional variables such as output, employment, the labour force, unemployment, wages and welfare. We simulate the effects of different types of immigration shocks and distinguish between short-run and long-run effects. We also consider the effectiveness of government intervention designed to alleviate the adverse regional effects of immigration including the possibility that regional governments behave in a welfare-maximising way.immigration, regional, labour market

An Analysis of the Effects of Fiscal Equalisation in a Two-Region Simulation Model

This paper is concerned primarily with the economic and welfare consequences of federal redistributive grants. We use a model which has two regions, each with households, firms and regional governments as well as a federal government. The households, firms and regional governments are all optimizers – households maximize utility, firms maximize profits and we assume that regional governments are empire-builders in that they choose their expenditure and tax levels so as to maximise total expenditure – the size of their empire. Labour is free to move between regions in response to utility differences and does so until such differences have been eliminated. Inter-regional migration, interregional trade flows and federal government redistribution are the main sources of interconnectedness between the two regions. The model is linearised in log-differences and simulated using a calibration based on Australian state-level data. We find that the welfare effect of intergovernmental transfers is trivial but that all other variables of interest change substantially – consumption, employment, prices, taxes, wages, output and government expenditure. Finally, the signs of the effects of a federal transfer are not affected by the empire-building behaviour of regional governments although the magnitude of the effects is generally dampened.

Killing the Goose that Lays the Golden Egg: a Time-Series Analysis of Institutional Change and Economic Growth in Hong Kong

This paper examines how the rule of law and democratic accountability have affected Hong Kong’s GDP growth rate in the past 20 years. We find that democratic accountability has deteriorated substantially since the changeover of sovereignty in 1997, while the rule of law has remained strong and stable. Empirical results from ARDL bounds tests show a strong positive long-run relationship between growth and democratic accountability, and Granger causality tests reveal that democratic accountability causes the growth rate of GDP in the short run. These conclusions are robust to controlling for the effects of investment and the Asian financial crisis in 1997. Our results suggest that the deterioration in democratic accountability following the handover in 1997 has come at the expense of a considerable decline in economic growth, and controverts popular arguments in Hong Kong that improving democratic accountability will harm economic growth.Institutions, growth, democratic accountability, rule of law, Hong Kong

House Prices, Non-Fundamental Components and Interstate Spillovers: The Australian Experience

Using Australian capital city data from 1984Q3-2008Q2, this paper utilizes a dynamic present value model within a VAR framework to construct time series of house prices depicting what aggregate house prices should be given expectations of future real disposable income – the ‘fundamental price’ – and continues by comparing capital city fundamental prices with actual prices. The extent to which revealed capital city ‘non-fundamental’ components spillover from state to state, as well as their long-term impact is also investigated. Results provide evidence of periods of sustained deviations of house prices from values warranted by income for all state capitals with the greatest deviations arising in the NSW market and starting around 2000. In general NSW is relatively more susceptible to spillovers transmitted from other states while ACT and WA are most isolated from the rest of the country.house prices, present value model, house price fundamentals, house price-income ratio, VAR/VEC modelling

Regional Output Spillovers in China: Estimates from a VAR Model

Interregional spillover effects are central to China’s growth policy; yet relatively little is known about the strength and duration of these spillovers and whether their characteristics have changed over time. This paper examines the spillover of output between the three commonly-used regions of China: coastal, central and western regions. We find that there are strong spillovers from the coastal region to both other regions, from the central region to the western region but that shocks to the western region have no flow-on effect for the other two regions. Thus a policy of developing the coastal region is likely to indirectly benefit the other two regions.Regional Spillovers, China, regional growth