Debt Sustainability, Investment, and Growth with Segmented Labor Markets
This paper introduces a new suite of macroeconomic models that extend and complement the Debt, Investment and Growth (DIG) model
Abstract
We introduce a new suite of macroeconomic models that extend and complement the Debt, Investment and Growth (DIG) model, widely used at the IMF since 2012 (Gurara et al., 2019; Melina et al., 2016). The new DIG-Labor models replace the assumptions of perfect wage flexibility and integrated labor markets with segmented labour markets; efficiency wages and the prospect of open unemployment; and an informal non-agricultural sector. These features allow both for a deeper examination of macroeconomic and fiscal policy programs and their impact on labour market outcomes, inequality and poverty. In this paper, we illustrate the model鈥檚 properties by analysing the growth, debt and distributional consequences of big-push public investment programs with different mixes of investment in human capital and infrastructure. We show how investment in human capital is much more effective that investment in infrastructure in promoting long-run economic development when investments earn their average estimated returns. However, because investment in education affects labor productivity with a long lag, it takes 15+ years before net national income, the private capital stock, real wages for the poor and formal sector employment surpass their counterparts in a program that invests mainly in infrastructure. The ranking of alternative investment programs depends on policymakers鈥� social discount rate and on the weight of distributional objectives in the social welfare function.
This work is part of the 鈥楳acroeconomics in Low-income countries鈥� programme
Citation
Edward F. Buffie, Luis-Felipe Zanna, Christopher Adam, Lacina Balma, Dawit Tessema, and Roland Kpodar. Debt Sustainability, Investment, and Growth with Segmented Labor Markets. IMF Working Paper No. 20/102