Regional unemployment and welfare effects of ... - TU Berlin · INFRADAY Conference, Berlin,...

Regional unemployment and welfare effectsof the EU transport policies:

recent results from an applied general equilibrium model

Artem Korzhenevych, Johannes Broecker

Institute for Regional Research, Kiel University, Germany

INFRADAY Conference, Berlin, 06-07.10.2006

Regional unemployment and welfare effects of the EU transport policies:

Motivation

I Current paper resulted from authors’ involvement in recentresearch projects concerning the EU transport policy

I Specifically, in GRACE project (Generalisation of Researchon Accounts and Cost Estimation), the policy focus is onproper (marginal cost) pricing in transport

I Political concern here: possibly, higher transport costsinduce undesirable unemployment effects in the peripheralareas of the EU

I Idea: to find a possibility to answer this question in thescope of a multiregional general equilibrium model

Motivation

Modelling framework

General equilibrium framework

I A general equilibruim model is a large system ofequations, describing equilibrium on many markets in theaggregated version of the whole world

I Model is based on assumptions about the behaviour ofeconomic agents, and the structure of the markets

I Inference method is comparative statics: a before-shock(benchmark) solution is compared to an after-shock(scenario) solution

I The basis for comparison is some generallyunderstandable indicator, like GDP or real income

Modelling framework

CGEurope model

I A shock in our case is the change of interregional transportcosts due to certain policy measures

I A distinctive feature of CGEurope model is ability toanalyse the effect of interregional transport cost changes

I The regional system depends on data availability. In thelargest version, we work with 1372 European regions +rest of the world

I Given the main task, do not need much sectoral detail.Assume only two sectors of economy: tradable andnon-tradable (local) goods

Modelling framework

CGEurope model

Modelling framework

CGEurope model

Modelling framework

CGEurope model

Modelling framework

Assumption about labour supplyI In real world, and as implied by efficiency wage theories,

labour market participation decision depends on wages

I However, in large applied GE models labour supply isusually asumed to be vertical, suggesting traditionalnatural rate of unemployment

I To specify an upward-sloping labour supply curve,knowledge of many parameters is needed, e.g. disutility ofeffort, unemployment benefits, quit rate, probability to behired, etc.

I These are hard to be specified for hundreds of regions.I As shown by Blanchflower and Oswald (1994), an

upward-sloping labour supply curve may be replaced by anempirical wage curve

Modelling framework

labour market participation decision depends on wagesI However, in large applied GE models labour supply is

usually asumed to be vertical, suggesting traditionalnatural rate of unemployment

Modelling framework

I These are hard to be specified for hundreds of regions.

I As shown by Blanchflower and Oswald (1994), anupward-sloping labour supply curve may be replaced by anempirical wage curve

Modelling framework

Formulation

Parametrization of the wage curve

I To start, need to know position of the wage curve for 268NUTS2 regions representing 34 countries in Europe

I As first approximation, take estimates from the literatureI Estimates come from the regressions of log(real wage) on

log(unemployment), regional dummies and controls.Usually, of dimension -0.1

I Assumed functional form: WCPI = δ · URζ

I After fixing benchmark prices, position parameter iscalibrated such that benchmark regional unemploymentrate (Eurostat) is reproduced

Formulation

I As first approximation, take estimates from the literature

I Estimates come from the regressions of log(real wage) onlog(unemployment), regional dummies and controls.Usually, of dimension -0.1

Formulation

Firms technologyI Technology for production of local goods is Cobb-Douglas.

GDP is equal to primary factor income.

I Extension: Assume a CD nest for choice between land,capital and labour

I Share parameters come from the GTAP data onvalue-added structure

I Productivity parameters are calibrated such that w0 = 1

CD cost functionp = 1

µwαpβqγ ⇒p = νwηq1−η

CD composite factor pricew = ω1

ϕ1ω2ϕ2ω3

Formulation

GDP is equal to primary factor income.I Extension: Assume a CD nest for choice between land,

capital and labour

I Share parameters come from the GTAP data onvalue-added structure

ϕ1ω2ϕ2ω3

Formulation

capital and labourI Share parameters come from the GTAP data on

value-added structure

ϕ1ω2ϕ2ω3

Formulation

capital and labourI Share parameters come from the GTAP data on

value-added structureI Productivity parameters are calibrated such that w0 = 1

ϕ1ω2ϕ2ω3

Solution

Parameters calibration

I Prices of import (p) and export (q) are calibrated:Broecker(1998)

I Given benchmark GDP level Y0 the equilibriumemployment of factors in benchmark year is calculated(accounting for unemployment in case of labour)

I Endowment of land Ω1 is fixed. Capital is perfectly mobile.Initial price of capital is set at ω2 = 1

I Productivity parameters are calibrated such that w = 1 inthe benchmark

I Price index is fixed to keep trade deficit constant in nominalterms

Solution

Solution algorithm

I A shock to transport costs changes tradables price q

I Commodity prices p and q are updated to keep price indexconstant)

I Price of land ω1 is determined through ω1 = ϕ1YΩ1

I Composite factor price w is determinedI Price of labour ω3 is calculated

Composite factor pricew = ν−1/ηp1/ηq1−1/η

Price of labourω3 = w1/ϕ3ω

ϕ1/ϕ31

Solution

Solution algorithm

I A shock to transport costs changes tradables price qI Commodity prices p and q are updated to keep price index

constant)

I Price of land ω1 is determined through ω1 = ϕ1YΩ1

ϕ1/ϕ31

Solution

Solution algorithm

constant)I Price of land ω1 is determined through ω1 = ϕ1

ϕ1/ϕ31

Solution

Solution algorithm

I Composite factor price w is determined

I Price of labour ω3 is calculated

ϕ1/ϕ31

Solution

Solution algorithm

ϕ1/ϕ31

Solution

Solution algorithm cont’d

I Unemployment rate is updated through wage curve

I Corresponding demand for labour Ω3 = (1− UR) · LI GDP is determined through Y = ω3Ω3

I Final demand = GDP + Trade deficit + Capital incomeI Iteration until equilibrium condition for tradables market is

achieved

Solution

I Unemployment rate is updated through wage curveI Corresponding demand for labour Ω3 = (1− UR) · L

I GDP is determined through Y = ω3Ω3ϕ3

achieved

Solution

I Unemployment rate is updated through wage curveI Corresponding demand for labour Ω3 = (1− UR) · LI GDP is determined through Y = ω3Ω3

achieved

Solution

I Final demand = GDP + Trade deficit + Capital income

I Iteration until equilibrium condition for tradables market isachieved

Solution

achieved

Solution

Data description

I International trade and national accounts: GTAP

I Regional data (GDP, area, population, unemploymentrate): EUROSTAT REGIO

I Elasticity parameters of the wage curve: 15 empiricalpapers

I Some estimates: Germany (-0.08), UK (-0.12), Poland(-.13), Sweden (-0.06), Russia (-0.18)

I Distance and transport cost matrices are received fromproject partners

Solution

Data description

I International trade and national accounts: GTAPI Regional data (GDP, area, population, unemployment

rate): EUROSTAT REGIO

I Elasticity parameters of the wage curve: 15 empiricalpapers

Solution

Data description

rate): EUROSTAT REGIOI Elasticity parameters of the wage curve: 15 empirical

papers

Solution

Data description

papersI Some estimates: Germany (-0.08), UK (-0.12), Poland

(-.13), Sweden (-0.06), Russia (-0.18)

Solution

Data description

papersI Some estimates: Germany (-0.08), UK (-0.12), Poland

(-.13), Sweden (-0.06), Russia (-0.18)I Distance and transport cost matrices are received from

project partners

Results and conclusions

Modelling results: infrastructure scenario

Modelling results: infrastructure and pricing scenario

Modelling results: Unemployment rate response

Discussion

I Introduction of wage adjustment matters for the inference

I Allowing for certain degree of wage rigidity makes welfareand employment effects of transport policies stronger, bothpositive and negative

I The effects are not correlated with benchmark regionalGDP and GDP per capita: no evidence for violation ofcohesion course

I The effects on unemployment are moderate: mostly notlarger than ±0.5%

Discussion

I Introduction of wage adjustment matters for the inferenceI Allowing for certain degree of wage rigidity makes welfare

and employment effects of transport policies stronger, bothpositive and negative

Discussion

Remaining issues

1. Revenues from transport pricing are to be taken intoaccount

2. Some estimates for elasticity in the wage curve equationare missing and were approximated

3. Consistent reestimation only possible for EU15 (ECHPdatabase)

4. Sensitivity and correlation analysis

Remaining issues

Thank you for attention

Questions and comments are welcome

Regional unemployment and welfare effects of ... - TU Berlin · INFRADAY Conference, Berlin,...

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