Wages and Productivity: The Three Wedges

My weekend reading:

The Three Wedges That Separate Workers From Their Pay

Economists assure us that rising worker productivity is the key to better living. When workers produce more per hour of work, their earnings should go up correspondingly.

Since 1973, that hasn’t been happening. Productivity has risen at a healthy clip, but the pay of the average worker has stagnated. That simple fact explains why younger Americans today aren’t doing any better than their parents’ generation, and sometimes worse. A sense of the part of Americans that they’re not reaping the rewards of hard work fuels the Occupy movement and the cries of “We are the 99 Percent.”

Evaluating Public Policy: Dreaming of Parallel Earths

How do you decide if a public policy that’s been implemented is actually working? It’s unfortunately quite a bit harder than it looks.

You could take a simplistic approach and just look at what happens – if the desired outcome is reach, you declare victory and move on. Much of public policy evaluation, at least as politicians and the man on the street are wont to take it, tends to be of this variety.

And if things don’t turn out as well as expected, that’s when the fingers start pointing and public discussion heats up again.

The problem is that, from an economics standpoint it’s really not that simple.

Incentives Matter: Insurance, Banking and Performance Based Pay

One of the causes identified for the meltdown in the US property securitisation market – those CDOs, CDOs squared and the CDSs used to back them up – is that even when it was obvious that the US housing market was in trouble, commercial banks continued pushing for higher originations, and investment banks kept pushing out synthetic products to securitise them.

And the reason for that was simply because pay was tied to performance, which in this case involved pushing product out the door, whether or not it was in the long term interests of the employees and the financial firms doing the pushing, much less the investors doing the buying. As Charles Prince of Citi put it, “…as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

March 2012 CPI: What Inflation?

For the third month in a row, the price level hasn’t budged. Not that this means that there isn’t any inflation, it’s just that there’s been no movement in the general price level in the past three months (log annual and monthly changes; 2000=100):

IMF Upgrades 2012 Global, Malaysia Forecasts

It was just a few short months ago – January to be precise – that the IMF cut the 2012 GDP forecast for Malaysia down to just 4.0%. The latest edition of the World Economic Outlook, released yesterday, is a mite more optimistic.

Unemployment Insurance Under Study

Last week, the World Bank issued its latest Economic Monitor issue for Malaysia, subtitled “Modern Jobs” (you can get a copy here). The issue makes a point of calling for going beyond “quick wins” and getting on with implementing the harder but more important structural reforms required (i.e. the SRIs). Their forecast for Malaysia’s GDP growth this year has been cut from 4.9% to 4.6%.

Ordinarily, I wouldn’t bother covering something like this, except for what was mentioned in the press conference afterwards (excerpt; emphasis mine):

Malaysia's GDP growth seen at 4.6%

…As Datuk Dr Rahamat Bivi Yusoff, director-general of the Economic Planning Unit (EPU) in the Prime Minister's Department, saw it, “the next structural evolution will happen to the labour force”…

ADB Gives Warning On Rising Income Inequality

From the Beeb (excerpt):

Asia's rapid growth fuelling inequality, the ADB warns

Asia's rapid economic growth may undermine stability because the gap between the rich and poor is widening, the Asia Development Bank has warned.

Releasing its annual report, the bank said a key inequality measure increased to an average reading of 38 in Asia.

And while that is less than the average found in Latin America and Africa, Asia's figure is climbing as it declines in the other regions.

China, India and Indonesia have seen significant growth in inequality.

February 2012 Industrial Production

Much like the upside surprise in trade, the IPI also showed some surprising strength (log annual and monthly changes; seasonally adjusted):

February 2012 External Trade: Looking Up

So much for trade continuing to be depressed. How much of this is simply trade orders pushed back because of CNY, I don’t know, but based on Tuesday’s external trade report, things are perking up on the external front (log annual and monthly changes; seasonally adjusted):

The International Drivers Of Corruption

The OECD has a new publication looking at corruption at an international level and its causes:

International Drivers of Corruption
A Tool for Analysis
OECD Publishing

Corruption and other governance problems result primarily from processes generated within the domestic political economy. There are major international factors, however, that interact with domestic processes: international drivers of corruption. This report introduces an analytical tool to help readers understand how these international drivers of corruption affect governance and corruption at the country level. It provides a means for identifying those drivers that matter most for domestic governance, as well as opportunities for international actors to work more effectively to improve governance in specific country contexts.

I have no idea what's inside the book, but it's supposed to provide an analytical toolkit to identify corruption emanating from international sources and what can be done about it. Unfortunately the OECD, unlike most other multilaterals, tends to charge for their publications (this one’s USD29). Anybody want to buy the book and tell the rest of us what it actual says?

Malaysian Fiscal Multipliers

New on the World Bank Policy Research Working Paper Series (abstract; emphasis added):

Fiscal multipliers over the growth cycle : evidence from Malaysia
Rafiq, Sohrab; Zeufack, Albert

This paper explores the stabilisation properties of fiscal policy in Malaysia using a model incorporating nonlinearities into the dynamic relationship between fiscal policy and real economic activity over the growth cycle. The paper also investigates how output multipliers for government purchases may alter for different components of government spending. The authors find that fiscal policy in Malaysia has become increasingly pro-cyclical over the last 25 years and establish that the size of fiscal multipliers tend to change over the growth cycle. A 1 Malaysian Ringgit rise in government (investment) spending leads to a maximum output multiplier of around 2.7 during growth recessions, and around 2 in normal times. The returns to government spending in Malaysia are greater when the focus is on public investment, as opposed to consumption. Changes in tax policy are less effective in stimulating economic activity than direct government spending. These results provide empirical backing to conjectures in the recent literature implying that procyclicality in fiscal policy reduces the effectiveness of fiscal actions in emerging markets.

The Nexus Of Corruption And Higher Income Part IV

For all those who are interested in playing around with the dataset I used for the first three parts of this series, I’ve uploaded it to Google Docs. Just follow this link.

In this instalment, I’m going to narrow down the investigation and concentrate on one particular question that seems to be cropping up more frequently. And that’s the idea that if only Malaysia had less corruption, we’d be on par with countries like South Korea and Taiwan.

ETP and GTP Annual Reports [UPDATED]

The PM will be unveiling the annual reports for the GTP and ETP live on RTM1, TV3 and Astro Awani tonight at 8.30pm. If you’re interested in the progress of these two programmes, don’t miss the show!

[UPDATE]

The pdf versions of the reports are now available online:

1. 2011 ETP Annual Report
2. 2011 GTP Annual Report

The Nexus Of Corruption And Higher Income Part III

[I’ve been working on this for over a week now, hope you enjoy it. Since this is a very long post, I’ve split it into three parts. This is Part III]

Continued from Part II

Conclusion

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

Here’s some of the reasons why I think the results came out the way they do:

The Nexus Of Corruption And Higher Income Part II

[I’ve been working on this for over a week now, hope you enjoy it. Since this is a very long post, I’ve split it into three parts. This is Part II]

Continued from Part I

Analysis

We should start off first by formalising the correlation into a regression. Using an unbalanced panel estimation with fixed effects on the sample data above (translation: we do a regression that covers all countries simultaneously over time), we get the following results (standard errors in parenthesis):

Ln(GDP) = 8.49 (0.06) + 0.26*Ln(CPI) (0.04)

What this says is that a 1% increase in the CPI score is associated with a 0.26% increase in the level of income.