Structural Reform Packages, Sequencing, and the Informal Economy

Zsuzsa Munkacsi () and Magnus Saxegaard

No 2017/125, IMF Working Papers from International Monetary Fund

Abstract: This paper explores the macroeconomic impacts of labor and product market deregulation using a small open-economy model with formal and informal markets. We examine both the long-run effects and the transition towards the post-reform equilibrium, while our main focus are reform packages and sequencing. The unofficial sector is a major determinant of the sign, and, in particular, the magnitude of responses. South Africa, an emerging country, is considered when Bayesian estimating the model. Regarding the long run, both labor and product market reforms considerably increase output, although labor market reforms are more successful in decreasing unemployment. Nevertheless, there are short-term costs, for example, a decrease in household consumption, net exports or output, or a decrease in competition. Combining reforms, especially with product market deregulation, are good at reducing short-term costs. Finally, concerning the speed of adjustment, it is usually better to start with a labor market reform.

Keywords: WP; product market; labor market; physical capital; shadow economy; structural reforms; labor market deregulation; product market deregulation; unemployment; hiring costs; endogenous firm entry; informal employment; small-open economy; reform packages; sequencing; hiring cost; product market reform; firm exit; export price elasticity; exit rate; value function; Wages; Commodity markets; Labor market reforms; Employment; Africa; Global (search for similar items in EconPapers)
Pages: 54
Date: 2017-05-26
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Citations: View citations in EconPapers (8)

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