CONSIDERACIONES FINALES

In most CGE analyses, it is assumed either that:

 real wages remain unaffected and (national) employment adjusts; or

 real wages adjust to a shock so that there is no effect on (national) employment.

Option 1 is typical of a short-run modelling environment, and option 2 of a longer-run environment (see chapter 9).

VURM allows for a third, intermediate position (or partial adjustment), where the deviation in the consumer (after-tax) real wage rate in a policy simulation, from its basecase level, varies in proportion to the deviation in national employment from its basecase level.

This can be expressed algebraically as:

(C_RW_POLICY(t) C_RW_BASE(t) − 1) = ( C_RW_POLICY(t − 1) C_RW_BASE(t − 1) − 1) + LAB_SLOPE × ( C_EMP_POLICY(t) C_EMP_BASE(t) − 1) (E6.69) where: (C_RW_POLICY(t)

C_RW_BASE(t) − 1) is the proprtional deviation in the national consumer (after-tax) real wage rate

in year t from its basecase level;

(C_RW_POLICY(t−1)

C_RW_BASE(t−1) − 1) is the proprtional deviation in last year’s ratio brought forward to this year;

(C_EMP_POLICY(t)

C_EMP_BASE(t) − 1) is the proprtional deviation in employment in year t from its basecase level;

and

LAB_SLOPE is a positive coefficient (with a value like 0.7).

To operationalise this dynamic relationship between the values in the basecase and policy simulations involves four steps:

1. setting the growth rates in national real wages and employment from the model core; 2. transferring the required values from the basecase to the policy simulation;

4. calculating the required deviation in the national consumer real (after-tax) wage rate in the policy scenario from the deviation in employment.

Setting the growth rates in national real wages and employment from the model core (E_natrwage_ct to E_empdev)

The first step involves specifying the percentage changes in national real wages and national employment from the model core to use in the deviation analysis.

Equation E_natrwage_ct calculates the percentage change in the national real after-tax wage rate received by consumers. It is calculated as the percentage change in the national real before-tax wage rate received by consumers (natrwage_c) less the percentage change in the tax rate on labour income (100/(1-TLABINC)*d_tlabinc).31

Equations E_rwdev and E_empdev specify the growth rate in national real wages and national employment to use in the deviation analysis, respectively. Equations E_rwdev links the deviation in the national real wage (rwdev) to the national real after-tax wage rate received by consumers derived in equation E_natrwage_ct (natrwage_ct). Equations E_empdev links the deviation in the national employment (empdev) to the percentage change in national hours worked from the model core (natx1lab_io).

Equation E_natrwage_ct

# National consumer real wage rate, after income tax # natrwage_ct = natrwage_c - 100/(1-TLABINC)*d_tlabinc;

Equation E_rwdev # Equates rwdev with natrwage_ct # rwdev = natrwage_ct;

Equation E_empdev # Equates empdev with natx1lab_io # empdev = natx1lab_io;

Transferring the required values from the basecase to the policy simulation (E_f_emp to E_f_rw)

The second step involves transferring the required values for national real wages and national employment from the basecase simulation to the policy simulation. This enables values in the policy simulation to be expressed as deviations from the (pre-determined) values in the basecase. This is done by equations E_f_rw and E_f_emp.

The transfer equations are of the form:

xfor = x − f_x (E6.70)

where:

x is the value of a variable in the basecase simulation that is to be transferred to the policy simulation (e.g., real wage rate growth);

f_x is the variable in the policy simulation that is given the forecast simulation value of x; and xfor is the difference between x and f_x.

In a basecase simulation, f_x is exogenous and equal to zero. This results in xfor = x.

31 _{d_labinc is the ordinary change in the national tax rate on labour income, and TLABINC is the level of the} national tax rate (see chapter 3).

In a policy simulation, xfor is exogenous and f_x is endogenous and equal to x by definition.

As the RUNMONASH software gives all exogenous variables in a policy simulation (other than those exogenously shocked) their values in the basecase simulation, the exogenous variable xfor in a policy simulation takes on the value of x in the bascecase simulation, as required.

Equation E_f_emp

# Introduces forecast employment into deviation simulation #

empfor = natx1lab_io + f_emp;

Equation E_f_rw

# Introduces real wage rate (after tax) into deviation sims. #

rwfor = natrwage_ct + f_rw;

Calculating the lagged changes in the national real wage rate and national employment (E_rwdev_l to E_empfor_l)

The third step involves calculating the lagged deviations in the national real wage rate and national employment.

Equation:

 E_rwdev_l calculates the percentage change in the national consumer real after-tax wage rate between years t-2 and t-1 in the policy simulation;

 E_rwfor_l calculates the percentage change in the national consumer real after-tax wage rate between years t-2 and t-1 in the basecase simulation;

 E_empdev_l calculates the percentage change in national employment between years t- 1 and t in the policy simulation; and

 E_empfor_l calculates the percentage change in national employment between years t- 1 and t in the basecase simulation.

These equations are of the form:

X @1

x _ l 100 d _ unity

X _ L@1

   (E6.71)

where:

x_l is the percentage change in X lagged one year (i.e., the percentage change in X in t-1);

X@1 is the initial value of X in a simulation for year t (i.e., the value of X at the end of t-1 brought forward);

X_L@1 is the initial value of X in a simulation for year t-1 (i.e., the value of X at the end of t-2, or the start of t-1); and

d_unity is the homotopy variable which has the value of 1 in year-to-year simulations.

The coefficients X@1 and X_L@1 in equation E6.20 are, respectively, updated using the percentage change variables x and x_l.

Equation E_rwdev_l # Equation explaining rwdev lagged one year # rwdev_l = 100*(C_RWDEV@1-C_RWDEV_L@1)/C_RWDEV_L*d_unity;

Equation E_rwfor_l # Equation explaining rwfor lagged one year # rwfor_l = 100*(C_RWFOR@1/C_RWFOR_L@1- 1)*d_unity;

Equation E_empdev_l # Equation explaining empdev lagged one year # empdev_l = 100*(C_EMPDEV@1/C_EMPDEV_L@1- 1)*d_unity;

Equation E_empfor_l # Equation explaining empfor lagged one year # empfor_l = 100*(C_EMPFOR@1/C_EMPFOR_L@1- 1)*d_unity;

Calculating the required deviation in the national real wage rate in the policy scenario (E_d_frwage_ct to E_fempdampen)

The final step involves calculating the required deviation in the national consumer real (after-tax) wage rate in the policy simulation.

VURM does this be estimating the change form of (E6.15), which is:

C_RW_POLICY

C_RW_BASE (rwdev − rwfor) =

C_RW_POLICY_L

C_RW_BASE_L (rwdev_l − rwfor_l) + LAB_SLOPE ×

C_EMP_POLICY

C_EMP_BASE (empdev − empfor)

(E6.72) where:

rwdev is the percentage change in the consumer real after-tax wage rate between years t-1 and t in the policy simulation;

rwfor is the percentage change in the consumer real after-tax wage rate between years t-1 and t in the basecase simulation;

rwdev_l is the percentage change in the consumer real after-tax wage rate between years t-2 and t-1 in the policy simulation;

rwfor_l is the percentage change in the consumer real after-tax wage rate between years t-2 and t-1 in the basecase simulation;

empdev is the percentage change in national employment between years t-1 and t in the policy simulation; and

empfor is the percentage change in national employment between years t-1 and t in the basecase simulation.

Equation E_d_frwage_ct calculates the proportional deviation in the real wage rate in year t in the policy simulation from its basecase value. It is equal to the proportional deviation in the real wage rate in year t-1 plus a coefficient (LAB_SLOPE) times the proportional deviation in employment in year t. The coefficient LAB_SLOPE is chosen so that the employment effects of a shock to the economy are largely eliminated after 5 years (that i.e., a coefficient of 0.7 is adopted as the default). In other words, after about 5 years, the benefits of favourable shocks, such as outward shifts in export demand curves or improvement in productivity, are realised almost entirely as increases in real wage rates.

The switch variable d_frwage_ct is endogenous in standard policy simulations, denoting that the equation is turned off (see chapter 9).

Equations E_d_empdampen and E_d_fempdampen force the deviation in national employment to zero. They are generally put in place via a closure swap 7-8 years after the exogenous shock to ensure that the long-run condition of zero change in national employment is met (see chapter 9).

Equation E_d_frwage_ct # Relates %devrw to %devemp in year-to-year sims. #

(C_RWDEV/C_RWFOR)*[rwdev - rwfor] =

(C_RWDEV_L/C_RWFOR_L)*[rwdev_l - rwfor_l] +

LAB_SLOPE*(C_EMPDEV/C_EMPFOR)*[empdev - empfor] + 100*d_frwage_ct;

Equation E_d_empdampen # Forces the long-run employment deviation to zero #

(C_EMPDEV/C_EMPFOR)*[empdev - empfor] =

0.5*(C_EMPDEV_L/C_EMPFOR_L)*[empdev_l - empfor_l] + 100*d_empdampen;

Equation E_d_fempdampen # Forces EMPDAMPEN back to zero # d_empdampen = -0.5*EMPDAMPEN@1*d_unity + d