ΙΜF update

 

Dear maria, We just published a new blog—please find the full text below.  Fed Rate Hikes May Fuel Greater Joblessness In Rural America (Photo: PapaBear/iStock by Getty Images) By Anastasia Burya, Rui C. Mano, Yannick Timmer, Anke Weber Some employers can attract a large pool of job applicants without having to offer higher wages. We call such employers with significant labor market power dominant, and they’re prevalent in many parts of the United States, especially rural areas. Dominant employers are much more likely to respond to rising interest rates by firing workers because they can more easily hire back when the Federal Reserve starts lowering interest rates, our new research shows. Less educated workers in poorer regions tend to be most affected because dominant employers are relatively more prevalent in poorer regions. These findings are especially important amid the fastest interest rate increases in a generation. Elevated inflation is prompting the Fed to act, which will affect employment as businesses reduce investment and payrolls and consumers spend less. In this period of rapid inflation, Fed tightening is appropriate in pursuit of its dual mandate of maximum employment and price stability. Our work suggests that the unemployment rate—which recently reached a half-century low— is now likely to rise, in part because of the role that dominant employers play in the US. And that in turn would exacerbate inequalities between regions. Defining dominant employers Our study relies on data from Lightcast, formerly Burning Glass Technologies Inc., a major provider of real-time US labor market data. To create a new definition of dominant employers, we use the share of vacancies controlled by any given employer in US regional labor markets. Dominant companies typically account for almost 10 percent of open positions in their regional market. The data also shows that dominant employers are mostly located in less densely populated areas of the US, especially in rural areas, where incomes tend to be lower and job-seekers have fewer employers to choose from. Dominant employers are disproportionately in industries like healthcare, agriculture, and mining. Having defined dominant employers, we study how their hiring decisions have varied in response to monetary policy surprises—unexpected interest rate hikes or cuts—over the last 10 years. The analysis shows that dominant employers are more responsive to changing interest rates—they cut back on vacancies much more when rates are rising relative to other employers. Using firm-level data, we confirm that fewer vacancies in turn reduce employment. These effects are particularly important for less educated workers and those with limited IT skills because they cannot easily find new jobs. On the other hand, the analysis shows that all employers cut wages when interest rates are rising, and dominant employers are not different in this regard from other employers. Why would dominant employers fire workers when interest rates go up? When interest rates rise, demand for products declines, production costs rise, and the need for workers is reduced. Because dominant employers can usually hire more easily, they are more likely to fire staff. Implications for taming high inflation To bring down inflation, the Fed needs to raise interest rates. It is, however, difficult to do so without creating higher unemployment. Historically, small increases in the jobless rate have reduced wage and price pressures significantly, but more recently, this relationship has weakened. Our findings point to an important role dominant employers play in this weakening. In regions less likely to have dominant employers or those with low labor market power, even a small increase in the unemployment rate leads to a strong decline in wage growth. However, this is not the case in regions where employers have high market power – dominant employers don’t need to reduce wages because they cut costs by firing workers. In regions with dominant employers, jobless rates increase significantly more as interest rates rise. Since regions with dominant employers tend to be poorer to begin with, rising interest rates will push unemployment up exactly where incomes are lowest. This mechanism would thus lead to an increase in inequality across and within regions as the Fed raises interest rates.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Dear maria, We just published a new blog—please find the revised text below.  Dominant Employers May Add To Unemployment In Rural US As Fed Raises Rates (Photo: PapaBear/iStock by Getty Images) By Anastasia Burya, Rui C. Mano, Yannick Timmer, Anke Weber Some employers can attract a large pool of job applicants without having to offer higher wages. We call such employers with significant labor market power dominant, and they’re prevalent in many parts of the United States, especially rural areas. Dominant employers are much more likely to respond to rising interest rates by firing workers because they can more easily hire back when the Federal Reserve starts lowering interest rates, our new research shows. Less educated workers in poorer regions tend to be most affected because dominant employers are relatively more prevalent in poorer regions. These findings are especially important amid the fastest interest rate increases in a generation. Elevated inflation is prompting the Fed to act, which will affect employment as businesses reduce investment and payrolls and consumers spend less. In this period of rapid inflation, Fed tightening is appropriate in pursuit of its dual mandate of maximum employment and price stability. Our work suggests that the unemployment rate—which recently reached a half-century low— is now likely to rise, in part because of the role that dominant employers play in the US. And that in turn would exacerbate inequalities between regions. Defining dominant employers Our study relies on data from Lightcast, formerly Burning Glass Technologies Inc., a major provider of real-time US labor market data. To create a new definition of dominant employers, we use the share of vacancies controlled by any given employer in US regional labor markets. Dominant companies typically account for almost 10 percent of open positions in their regional market. The data also shows that dominant employers are mostly located in less densely populated areas of the US, especially in rural areas, where incomes tend to be lower and job-seekers have fewer employers to choose from. Dominant employers are disproportionately in industries like healthcare, agriculture, and mining. Having defined dominant employers, we study how their hiring decisions have varied in response to monetary policy surprises—unexpected interest rate hikes or cuts—over the last 10 years. The analysis shows that dominant employers are more responsive to changing interest rates—they cut back on vacancies much more when rates are rising relative to other employers. Using firm-level data, we confirm that fewer vacancies in turn reduce employment. These effects are particularly important for less educated workers and those with limited IT skills because they cannot easily find new jobs. On the other hand, the analysis shows that all employers cut wages when interest rates are rising, and dominant employers are not different in this regard from other employers. Why would dominant employers fire workers when interest rates go up? When interest rates rise, demand for products declines, production costs rise, and the need for workers is reduced. Because dominant employers can usually hire more easily, they are more likely to fire staff. Implications for taming high inflation To bring down inflation, the Fed needs to raise interest rates. It is, however, difficult to do so without creating higher unemployment. Historically, small increases in the jobless rate have reduced wage and price pressures significantly, but more recently, this relationship has weakened. Our findings point to an important role dominant employers play in this weakening. In regions less likely to have dominant employers or those with low labor market power, even a small increase in the unemployment rate leads to a strong decline in wage growth. However, this is not the case in regions where employers have high market power – dominant employers don’t need to reduce wages because they cut costs by firing workers. In regions with dominant employers, jobless rates increase significantly more as interest rates rise. Since regions with dominant employers tend to be poorer to begin with, rising interest rates will push unemployment up exactly where incomes are lowest. This mechanism would thus lead to an increase in inequality across and within regions as the Fed raises interest rates.   Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org

Latin America and the Caribbean Smaller Economies in Latin America and Caribbean Face a Bigger Inflation Challenge By Emine Boz, Ilan Goldfajn, Jaime Guajardo, and Metodij Hadzi-Vaskov As inflation continues to be elevated across Latin America and the Caribbean (LAC), the impact on real incomes and purchasing power remains a key challenge, especially for the most vulnerable. We looked into this challenge from the perspective of smaller economies in LAC by analyzing recent inflation dynamics for three sub-groups of small economies: Central America, Panama, and the Dominican Republic (CAPDR); the Caribbean; and the smaller economies in South America—Bolivia, Ecuador, Paraguay, and Uruguay. Our work shows that high inflation is a bigger challenge in smaller economies because they are less diversified, rely more on imports, and have more limited policy levers at their disposal. The poorest households have been hit the hardest and food insecurity is on the rise. Many of these countries have pegged exchange rates and do not have an independent monetary policy. Thus, they had to rely on temporary fiscal measures, of which about half were targeted to the most vulnerable. Countries with larger pre-existing subsidies tended to introduce smaller measures. Inflation on the rise During the first half of 2022, inflation reached multi-decade highs in many of these countries. The latest available inflation data for August reveals that yearly headline inflation exceeded 9 percent in CAPDR and 6 percent in the smaller economies of South America. In the Caribbean, it reached almost 6 percent in March. Core inflation showed similar trends, staying at lower levels than headline inflation since it strips out food and energy prices. Smaller economies are typically less diversified and rely more on imports, making them more susceptible to inflationary pressures arising from higher import prices. Also, food and fuel—both of which have experienced large price increases since the beginning of the war in Ukraine—account for a larger share in the consumption basket in these economies. Smaller economies also have more limited policy levers at their disposal. They typically have less flexible exchange rate arrangements, and hence, rely less on exchange rate adjustments. Many of the small countries have high public debt and elevated sovereign spreads, partly a legacy of the COVID-19 pandemic. Facing higher public debt levels, smaller economies have more limited fiscal space and policy options at their disposal. Poorest hit hardest The ongoing inflation wave is hurting the poor more given the rapid increase in food prices. Inflation estimates across income quintiles in CAPDR show that over the past few months, the poorest quintiles have faced considerably higher inflation rates than the richest quintiles. The main driver of this discrepancy has been the increase in food prices. These developments may worsen food insecurity further, which had already increased during the pandemic. Responding to global shocks amid domestic constraints Many countries worldwide have implemented measures to mitigate the impact of higher global energy and food prices in the domestic economy, particularly after the start of the war in Ukraine. To gauge the magnitude of these measures, we estimate the response of domestic fuel prices to a one percent change in the international fuel price—the pass-through from international to domestic fuel prices. We find that the pass-through from international to domestic fuel prices has declined from about 1 before the war (i.e. domestic prices were moving almost one-to-one with international prices on average during 2015-2021) to about 0.8 after the start of the war. A similar decline has been observed in the pass-through from international to domestic fuel prices in the smaller countries in LAC. Several constraints have shaped the policy responses. Many small LAC economies have currency pegs and thus less policy flexibility to address the impact of the price shock. Only a few of these economies have increased policy rates to contain second-round effects and keep inflation expectations anchored. To mitigate the impact of higher global energy and food prices, they have implemented discretionary fiscal policy measures, most of which were announced as temporary and about half were targeted to the most vulnerable. The size of the fiscal measures has varied across economies—they have been larger for economies with larger weights of food and transportation in their consumer price index (CPI) basket, weaker social safety nets, or lower income per capita. Looking at the new measures and their costs provides a partial picture because some countries already had in place extensive subsidies on food and fuel. When comparing existing energy or food subsidies with the cost of new measures, we observe that countries with larger pre-existing subsidies tended to introduce smaller measures.  Preparing for a possibly more persistent inflationary shock Policymakers should be prepared for a possible long-lasting inflationary shock. Given the uncertainty around the intensity and duration of the shock, the following general principles can help policymakers navigate through these turbulent times: (i) domestic prices should adjust to international prices, while providing targeted and temporary support to the most vulnerable; (ii) if targeted measures are not feasible, price smoothing mechanisms with clear exit strategies could help while social safety nets are strengthened; and (iii) consider offsetting revenue or spending measures to limit overall fiscal impact. **** Emine Boz is Assistant to the Director in the Western Hemisphere Department. Ilan Goldfajn is Director of the Western Hemisphere Department. Jaime Guajardo is Deputy Division Chief in the Western Hemisphere Department. Metodij Hadzi-Vaskov is the Regional Resident Representative for Central America, Panama and the Dominican Republic. RELATED LINKS Central America: Seeking Resilient Growth and Social Cohesion in the Aftermath of Shocks Latin America Hit By One Inflationary Shock On Top of Another Shifting Global Winds Pose Challenges to Latin America

(CREDIT: ROGER BROWN/ PEXELS) Dear maria, Crypto assets have been around for more than a decade, but it’s only now that efforts to regulate them have moved to the top of the policy agenda, write the IMF’s Aditya Narain and Marina Moretti in F&D.  The regulatory fabric is being woven, and a pattern is expected to emerge. But the worry is that the longer this takes, the more national authorities will get locked into differing regulatory frameworks. “A global regulatory framework will bring order to the markets, help instill consumer confidence, lay out the limits of what is permissible, and provide a safe space for useful innovation to continue,” Narain and Moretti write. Read the full article F&D September Issue The Money Revolution: Crypto, CBDCs, and the future of finance The ongoing money revolution and its implications for finance, monetary policy, international capital flows and society at large is the focus of our September edition. F&D delves into Crypto and CBDCs by drawing on cutting-edge research and analysis from economists and other leading experts including Agustín Carstens, Eswar Prasad, Ravi Menon, Tobias Adrian and many others. Want to get a print copy delivered to your home or office? Click here to subscribe. Nick Owen Senior Editor F&D Magazine nowen@IMF.org

Latin America and the Caribbean The Unexpected Rise in Remittances to Central America and Mexico During the Pandemic Carli Jeen/Unsplash By Yorbol Yakshilikov Remittances—the money sent from citizens working abroad to families back home—are a crucial source of income in Central America, Panama, and the Dominican Republic (CAPDR) as well as Mexico. Despite an expected decline at the onset of the pandemic, remittances surprisingly increased in 2020, hitting record levels in 2021. IMF staff research explores why remittances from the US to CAPDR and Mexico remained resilient during the pandemic. An unexpected comeback Remittances to CAPDR and Mexico are sent by immigrants working predominantly in the service-providing sectors of the US economy. Economists predicted that remittances to CAPDR and Mexico would decline by up to 20 percent, given the fall in US employment at the onset of the pandemic. They based this prediction on the data from traditional macroeconomic models that linked US labor market conditions with immigrants’ income. These models accurately predicted the deep but brief collapse in remittances that we observed in April 2020, but they failed to predict the strong comeback that followed. Explaining the surge Before the pandemic, the number of remittance transactions—the volume effect—determined the level of remittances. The jump in remittances observed in the second half of 2020 was a result of an increase in both the number of transactions and the average amount remitted per transaction—the value effect. The rise in the number of transactions—the volume effect—was most likely driven by an increase in the number of people sending remittances rather than new immigrants arriving in the US. As a result of the lockdowns, immigrants also adapted and switched to remitting digitally, rather than in person, increasing the number of transactions. More importantly, most of the increase in remittances was due to the value effect. Rising US wages drove the increase in the average amounts remitted. US government assistance, through unemployment insurance relief, also supported incomes and compensated for the loss of income, contributing to the increase. The “altruism” motive was very strong; as COVID-19 cases were increasing at home, immigrants in the US sent on average more money home. Remittances remained strong in 2021 due to the US labor market recovery and sustained growth in real wages. By the end of 2021, the service sectors where CAPDR and Mexican immigrants predominantly work recovered, recording increases in weekly earnings that were above the US average. A look ahead Looking forward, the growth in remittances to CAPDR and Mexico is expected to slow, as some of the extraordinary factors in 2020 and 2021 dissipate. However, over time remittances are expected to grow, as immigration to the US continues to rise and the average amount remitted grows in line with US wages. If employment and wages remain strong in the US, we should expect an increase in remittances during times of hardship in Central America and Mexico, as immigrants help families back home. **** Yorbol Yakhshilikov is an economist in the IMF Western Hemisphere Department. RELATED LINKS Central America: Seeking Resilient Growth and Social Cohesion in the Aftermath of Shocks Regional Economic Outlook

Dear maria, We just published a new blog—please find the revised text below.  Africa’s Rapid Economic Growth Hasn’t Fully Closed Income Gaps (Photo: IMF) By Habtamu Fuje and Jiaxiong Yao Many economies in sub-Saharan Africa grew at a record pace before the pandemic. Ethiopia and Rwanda, for example, saw some of the fastest expansions in the world—an average of more than 7.5 percent per year over the past two decades. However, it is less clear whether the gains in economic growth have been shared equally across regions within countries because income data at the subnational level are not always available. To assess the extent to which sub-Saharan Africa’s strong growth performance spread across subnational regions, we used satellite-recorded images of the Earth’s nighttime lights as a proxy for economic activity. The data show that at least until 2010, African countries made tremendous progress in reducing regional income inequality (differences in output per capita across regions of a country). This is in marked contrast with other parts of the world, where inequality either increased or convergence was slower. Taking a closer look at the factors that affect regional inequality, we found that progress was largely due to improvements in basic infrastructure, which helped lagging regions converge faster to national levels. Night lights per capita increased several-fold in the poorest regions, with the biggest gains in oil exporters and frontier markets such as Ghana and Kenya. However, not all lagging regions saw improvement. Fragile and conflict-affected states made little-to-no progress in reducing regional inequality. And even in countries that experienced decades of growth, progress stalled after 2010, with regional inequalities having likely widened post-pandemic. Access to clean water, electricity, and cellphone services, for example, is two to four times lower in lagging regions compared to leading ones, in part because public expenditure per capita is so much lower. Similarly, the share of residents that have completed primary and secondary education is two to three times lower in lagging regions. In countries where access to public services is generally low, and distribution very unequal, the gap is even larger. In Burkina Faso, for instance, access to electricity is nearly 20 times higher in leading regions. What are the key drivers that helped reduce regional inequality in the past few decades? We find that there are four major factors that supported this improvement: Macroeconomic stability: Inequality tends to increase in countries with high, persistent inflation by eroding the purchasing power of consumers, reducing government spending in real terms and disincentivizing private investment. Trade openness: Easier access to global markets supports convergence by increasing the value of a country’s resources like raw materials, which are more abundantly available in lagging regions. It also brings more workers into urban centers, which could in turn lead to a decline in income per capita of more urbanized regions if infrastructure development and the overall increase in economic activity in city centers are unable to keep up. Strong institutions and political stability: Weak institutions impede the capacity of governments to provide services and civil wars destroy public infrastructure, raising the likelihood that regions are left behind. Well-targeted investments: We used mineral discoveries as a proxy for analyzing the impact of investments on regional inequality and found that progress depends on the location. Investments that occur outside of the capital cities are the most likely to have impact by creating jobs and promoting economic activity in lagging regions. What can policy makers do to address these inequalities? Sub-Saharan Africa countries would need to pursue a broad-based policy framework anchored around three main pillars: Well-designed redistributive fiscal policy with a clear investment strategy to assist underserved regions, Macroeconomic stability to foster inclusive growth, and Building institutions to ensure political stability and equitable public service delivery. Governments also need to invest in building local administrative capacity to collect and analyze data. Only 12 sub-Saharan African countries publish their public budget allocations at the subnational level. Having this data more readily available would provide a more accurate picture of disparities across regions, helping policymakers to better target policies.

Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org