Structural Reform Packages, Sequencing, and the Informal Economy
55 Pages Posted: 9 Aug 2017
Date Written: May 2017
This paper explores the macroeconomic impacts of labor and product market deregulationusing a small open-economy model with formal and informal markets. We examine both thelong-run effects and the transition towards the post-reform equilibrium, while our main focusare 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, isconsidered when Bayesian estimating the model. Regarding the long run, both labor andproduct market reforms considerably increase output, although labor market reforms aremore successful in decreasing unemployment. Nevertheless, there are short-term costs, forexample, a decrease in household consumption, net exports or output, or a decrease incompetition. Combining reforms, especially with product market deregulation, are good atreducing short-term costs. Finally, concerning the speed of adjustment, it is usually better tostart with a labor market reform.
Keywords: Shadow economy, structural reforms, labor market deregulation, product market deregulation, unemployment, hiring costs, endogenous firm entry, informal employment, small-open economy, reform packages, sequencing, General, Labor Economics Policies
JEL Classification: E60, E26, J08, E6
Suggested Citation: Suggested Citation