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Macroeconomic Policy and Employment: A Development Perspective

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Abstract

The present paper questions the conventional framework of macroeconomic policies where their primary role is to ensure macroeconomic stability which, in turn, is expected to ensure economic growth and employment. Using empirical evidence on countries of South Asia, it shows that the relationships between economic growth, inflation and budget deficit do not always support the conventional framework. The paper points out that some developed countries, e.g., the USA, have legislated the dual mandate of maintaining price stability and full employment for their monetary policy, and take the labour market situation into account in formulating such policies. In contrast, countries of South Asia seem to be guided more by inflation than by considerations of growth and employment. The paper argues that in developing countries, the notion of full employment cannot be conceptualized in the same way as in developed countries. In such cases, monetary policy would have to be informed by in-depth analysis of the employment and labour market situation. In fiscal policy, the effectiveness of different instruments (e.g., tax rates, and government expenditures) in boosting employment varies. Hence, the choice should be guided by the size of the fiscal multiplier. Experience indicates that public expenditure, especially on infrastructure, should have a greater impact on employment compared to tax reduction.

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Fig. 1
Fig. 2
Fig. 3

Source: (i) Repo rates are from Bangladesh Bank Quarterly available at https://www.bb.org.bd/pub/publictn.php (accessed on 18.10.2017); (ii) GDP growth and inflation data are from Bangladesh Economic Review of the Ministry of Finance, Government of Bangladesh and Bangladesh Bank Quarterly mentioned above

Fig. 4

Source: Constructed by using data available from Reserve Bank of India: Handbook of Statistics on Indian Economy, Sept 2017. www.rbi.org.in (accessed on 18.10.2017)

Fig. 5

Source: Constructed by the author using data from the following websites: (i) for Federal Funds Rate, https://www.federalreserve.gov/monetarypolicy/openmarket.htm (accessed on 1.10. 2017). (ii) for headline inflation, www.usinflationcalculator.com/inflation/historical-inflation-rates/ (accessed on 1.10.2017). (iii) for core inflation, https://data.bls.gov/pdq/SurveyOutputServlet (accessed on 1.10.2017)

Fig. 6

Sources (i) For Federal Funds Rates, see Fig. 3. (i) Data on unemployment were obtained from the US Bureau of Labour Statistics website at the following address: https://data.bls.gov/timeseries/LNU04000000?years_option=all_years&periods_option=specific_periods&periods=Annual+Data (accessed on 1.10.2017)

Fig. 7

Source: Adapted from ILO-World Bank (2012)

Fig. 8

Source: Adapted from ILO-World Bank (2012)

Fig. 9

Source: Constructed by using data from ADB: Asian Development Outlook, various years

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Notes

  1. Influential reports like the World Bank’s World Development Report on “jobs” (World Bank 2012) and the IMF’s 2013 report on “Jobs and Growth” (IMF 2013) express such views.

  2. See, for example, Weeks (2011), Iyanatul Islam (2017a) Islam and Islam (2015) and Islam and Kucera (2013).

  3. In the context of developed countries, a report by OECD concludes that sound macroeconomic and labour market policies are important determinants of labour market resilience, and macroeconomic policies are highly effective in preventing employment declines during economic downturns (OECD 2017).

  4. See, for example, McKinley (2011b), Weeks (2011), Chowdhury (2005), Chap. 3 of Islam and Islam (2015), and the first three chapters of Islam and Kucera (2013).

  5. These results are based on data on sample of 24 countries for the period 2000–2012. For further details, see Chapter 3 of Islam and Islam (2015)

  6. See the econometric analysis by Mahmood and Khalid (2013) based on data for the period 1980–2010.

  7. For a broad-based analysis of the macroeconomic aspects of growth, investment and employment in South Asia, see Muqtada (2016).

  8. An illustration of such coordination can be found in Bernanke (2015).

  9. For example, Bhattacharyya (2012) lists countries like Bangladesh, China, India, Malaysia, Nepal, Pakistan and Vietnam as pursuing multiple goals including employment.

  10. These are: (1) price stability both internal and external, (2) sustainable growth and development (3) high employment (4) economic and efficient use of resources, and (5) stability of financial and payment system. See the website of the Bangladesh Bank at https://www.bb.org.bd/fnansys/regulator.php (Accessed on 3 October 2017).

  11. For an analysis of the policy orientation of Bangladesh Bank, see Muqtada (2015).

  12. This is the rate at which the central bank meets the demand for liquidity from the commercial banks.

  13. As of 3 October 2017 (the date the present author visited the website of RBI), the target was set at 4 per cent Consumer Price Index (CPI) increase with the “upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent”. RBI website https://www.rbi.org.in/scripts/fs_overview.aspx?fn=2752 (accessed on 3 October 2017).

  14. This is the rate at which RBI meets the banking sector’s demand for liquidity; and it has been used by RBI as its main monetary policy instrument.

  15. See Chandrasekhar (2016) for an interesting discussion of factors other than inflation that go into decision making on repo rates in India. One factor mentioned is to discourage the outflow of capital from the economy, especially when interest rates were being raised in USA.

  16. It is the rate at which various depository institutions (e.g., banks and credit unions) lend their reserve balances to other depository institutions overnight on an uncollateralized basis.

  17. Both headline inflation rate and the core inflation rate (the latter excludes items like food and energy) are shown in Fig. 3. It may be noted that the Fed watches the core inflation rate more closely as that excludes items like food and energy prices that are more volatile.

  18. The survey covered 77 countries—55 low- and middle-income countries and 22 high-income countries—and the period of 2008–2010. Apart from macroeconomic policies like monetary and fiscal policies, the survey covered other employment-oriented policies and policies relating to social protection, minimum wages, international labour standards and social dialogue. A synthesis report based on the results of the survey (ILO-World Bank 2012) provides a summary of the findings.

  19. It is interesting to note that international support (e.g., from IMF) was reported only by a small proportion of the surveyed countries.

  20. Analysis of the World Bank’s Enterprise Survey (that covered over 135,000 firms in more than 100 countries during 2009–2014 shows that five major constraints to business operations are corruption, crime, access to finance, electricity, and transportation. “Tax administration”—not tax rates—comes after these five constraints. See Islam and Islam (2015, Chap. 8).

  21. It may be recalled that under the American Recovery and Reinvestment Act (ARRA) of 2009, the US government had adopted a stimulus package of $787 billion.

  22. There are studies, e.g., Adams and Gangnes (2010), that argue that the stimulus could have been more effective.

  23. This, of course, does not mean that there is no problem with the labour market in USA. Even though unemployment is at a very low level (4.2 per cent at the time of writing this paper in October 2017), concerns remain about those who left the labour force and didn’t return, proliferation of precarious forms of employment and slow rise in wages.

  24. Out of 168 countries analysed in a study by the ILO (IILS 2012) public debt increased in over 91 per cent of the countries during 2007–2009 and increased further during 2009–2010 in over 71 per cent of the countries. On an average, in advanced countries, public debt as percentage of GDP increased by almost 24 percentage points, reaching 95 per cent in 2010 (while 60 per cent is regarded as the upper limit of prudent debt-GDP ratio). Of course, the situation was different for developing countries - the ratio fell by 5.5 percentage points to 52 per cent in 2010.

  25. For further details on the relative emphasis on these items, see IILS (2012).

  26. For discussions on this debate, see, for example, Iyanatul Islam (2017a), Islam and Islam (2015), and Islam (2017b).

  27. The impact of measures of fiscal consolidation on unemployment is indicated by an ILO study based on macroeconomic models (IILS 2012) which found that fiscal retrenchments would be associated with negative employment growth of the order of 0.2 per cent over the medium term.

  28. Talking about full employment in the context of post-war Britain, Beveridge himself mentioned that the objective of policy should be to bring unemployment rate down to 3 per cent.

  29. The Sustainable Development Goals (SDGs) adopted by the members of the United Nations include full and productive employment in one of the goals (viz., goal 8), but does not make any attempt at going into the challenges involved in defining full employment for developing economies. Of course, some indicators are mentioned for purposes of monitoring progress in attaining the goal which include unemployment rate, hourly earnings, proportion of youth not in employment, education or training, and the proportion of informal employment in non-agricultural employment. For more details, see United Nations (2018).

  30. Fifteen countries of Asia and the Pacific region were covered by this study; they include: Australia, China, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Thailand and Viet Nam.

  31. This has been demonstrated in an exercise on Bangladesh (Islam et al. 2011) where it is found that if the country’s revenue potential can be tapped, the necessary fiscal space can be created for a package of programmes containing a national employment guarantee scheme and other labour market programmes for preserving employment in the face of economic downturns.

  32. In China, for example, the Government’s stimulus programme in the wake of the Great Recession of 2008 included 13 per cent subsidy in rural areas on the purchase of appliances like televisions, refrigerators, washing machines, air conditioners and computers. See “Market Watch” in Beijing Review, June 25, 2009. Such a subsidy-driven consumption boost could not be expected to produce an employment-intensive recovery. Likewise, in India, a credit-financed and inequality-driven boom in consumption demand is mentioned as a factor responsible for an increase in the production of capital-intensive goods resulting in a rise in their share in total industrial output. On India, see Chandrasekhar and Ghosh (2008), and Chandrasekhar (2016).

  33. ILO (2009) provides examples of subsidies provided (in normal times), especially at the state level, through a variety of schemes like capital investment subsidy, subsidy on interest rate, and credit-linked capital subsidy for technology upgrading of small-scale industries. Some of these measures may have ostensibly been conceived as instruments for encouraging investment and growth; but an indirect effect of such measures has been to distort the relative prices of the factors of production.

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  1. Employment Sector, International Labour Office, Geneva, Switzerland

    Rizwanul Islam

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  1. Rizwanul Islam
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Correspondence to Rizwanul Islam.

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Rizwanul Islam is formerly with the Employment Sector, International Labour Office, Geneva, Switzerland

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Islam, R. Macroeconomic Policy and Employment: A Development Perspective. Ind. J. Labour Econ. 61, 427–451 (2018). https://doi.org/10.1007/s41027-018-0139-y

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