Structural Reform Packages, Sequencing, and the Informal Economy

55 Pages Posted: 9 Aug 2017

See all articles by Zsuzsa Munkacsi

Zsuzsa Munkacsi

International Monetary Fund (IMF)

Magnus Saxegaard

International Monetary Fund (IMF)

Date Written: May 2017

Abstract

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

Munkacsi, Zsuzsa and Saxegaard, Magnus, Structural Reform Packages, Sequencing, and the Informal Economy (May 2017). IMF Working Paper No. 17/125, Available at SSRN: https://ssrn.com/abstract=3014036

Zsuzsa Munkacsi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Magnus Saxegaard

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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