Non-tradable Sector Research Articles

Real Convergence Across the Euro Area

This paper studies the relationship between real convergence in the euro area and macroeconomic imbalances. It compares the main features of convergence within the euro area with other EU and non-EU country groups, looking at both ‘sigma’ and ‘beta’ convergence in output and total factor productivity. Expected convergence paths for euro area countries are estimated using growth regressions run on a large panel of advanced and emerging market economies and compared to actual growth. The findings support the view that EU and euro area countries display similar convergence patterns to those of other country groups, while the group of countries that adopted the euro first exhibit relatively weak convergence since before the financial crisis. Such differences could be partly linked to relatively low dispersion in per capita incomes across this country group, although lack of convergence is also largely due to persisting differences in total factor productivity performance. The findings also suggest that macroeconomic imbalances accumulated in the pre-crisis period such as high private and government debt and strong growth in the non-tradable sector have been associated with lower convergence, particularly for euro area countries.

The equalizing spiral in early 21st century Brazil: a Kaleckian model with sectoral heterogeneity

The relative success of the Brazilian and other South American economies in combining higher growth rates with a reduction of income inequality in the 2000s can be better understood through the study of the relationship between wage distribution, consumption patterns and the composition of employment. By starting from the Neo-Kaleckian framework, this paper builds a two-sector open economy model with two types of workers, where changes in wage inequality can affect the output composition of the economy towards an increase in the non-tradable sector. Taking into account an endogenous response of the wage-share in the non-tradable sector to changes in the composition of employment, a reduction in wage inequality seems to have a stronger positive effect on non-tradable output, what may also exacerbate a possible side effect of this process: the deterioration of the trade balance.

Sectoral allocation and macroeconomic imbalances in EMU

We document how, over 1996–2008, large capital inflows in Southern Europe coincided with broad-based growth of the nontradable sector, extending beyond the construction and real estate sectors. We then present a tractable two-sector, two-region (‘North’ and ‘South’) model of a monetary union, in which we show how the sharp, permanent, fall in Southern real interest rates that occurred in the run-up to EMU can explain the Southern consumption boom, wage growth, growth of the nontradable sector, and deteriorating external position. Upward pressure on the EMU-wide interest rate induces an opposite process in North. Consequently, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in South, while dampening them in North. We confirm the key model predictions using a panel-BVAR for the euro area and investigates various policy reforms to facilitate the ongoing rebalancing process in the eurozone.

The role of intellectual property rights in a directed technical change model

AbstractWe propose a two country, Innovator and Follower, directed technical change model between tradable and nontradable sectors. The Innovator performs innovative R&D and the Follower adopts the available technological knowledge. Substitutability between sectors, scale effects, international IPRs protection and R&D productivity determine the economic growth and the technological‐knowledge bias, which, in turn, affects relative prices and wages. Wages are higher in the Innovator, namely in the nontradable sector under strong substitutability. Technological‐knowledge and intra‐country wage inequality are biassed towards the tradable sector, the effect being reinforced by positive IPRs protection and substitutability. Real exchange rates accommodate the Balassa‐Samuelson proposal and increase with positive IPRs protection and substitutability. The effect of IPRs on the steady‐state growth rate is ambiguous, depending on the substitutability. Theoretical results are also influenced by labor movements and are confirmed by a calibrated exercise for 11 developed/Innovator countries and 11 developing/Follower countries, and by the empirical evidence.

Is There Any Linkage between Sectoral Capital-labour Ratios, Total Factor Productivity, and Wages?

ABSTRACT This paper investigates the relationship between sectoral capital-labor ratios, total factor productivity (TFP) and wages based on the contemporary Balassa-Samuelson model. To proceed, first, we identify a tradable and nontradable sector using an average of export to value added ratio for a group of developed and developing countries over the period 2001 to 2014. After accounting for cross-sectional dependence in the data, we find strong evidence that TFP of the tradable sector and wages significantly determines sectoral capital-labor ratios in both developed and developing countries. The long-run elasticities show that improvement in TFP declines the capital-labor ratios, whereas wages increase the capital-labor ratios in both tradable and nontradable sectors across developed and developing countries.

Structural Labor Precariousness in Peru

The role of Peru in the international division of labor is the structural condition for the persistence of labor precariousness in the country. At a more concrete level, labor precariousness is an expression of the economic and business structure of the country. An economic structure heavily dependent on the non-tradable sectors and a business structure dominated by micro business undertakings do not permit the eradication of precarious labor conditions as economic growth hinges on economic progress abroad and precariousness is the source of profit of micro companies. Labor precariousness is not an automatic consequence of Peru’s role in the globalized capitalist world, but rather the social and economic consequence of the neoliberal policies implemented in the 1990s and, in particular, the current neoliberal development model in place.

Cross-border effects of regulatory spillovers: Evidence from Mexico

This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.

Migration flows in commodity cycles: Assessing the role of migration policies

This paper sheds light on the role of immigration policies in shaping immigration flows in responses to labor market changes. Using data from Australia during the 2001 to 2015 commodity cycle as a quasi-experiment, we find that employer-sponsored (demand-driven) immigration varied in line with commodity prices, with commodity-intensive states witnessing stronger growth rates than remaining states over the resources boom period. There is no evidence of any such patterns for points-based (supply-driven) immigrants. Moreover, we do not find either employer-sponsored or point-based migration flows increase in non-tradable sector in relative to tradable sector in the triple-differences analysis with state-industry level data. These findings emphasize the importance of employer-sponsored immigration in alleviating short-term local labor shortages.

Do Firms Adapt to Climate Change? Evidence from Establishment-Level Data

Using detailed information on establishments owned by U.S. public firms from 1990 to 2012, we show that higher abnormal temperatures over the previous five years in a county lead to a significant reduction in local employment and the number of establishments. The decline in employment and establishments is larger for firms in non-tradable sectors and consumer services and retailing industries, and when managers are likely to care more about global warming. In addition, we find that establishments located in abnormally hot counties seek to hire new workers with greater education and IT skills. Our findings are consistent with the notion that it is the declining local consumer demand, rather than deteriorating employee productivity, that drives firms’ responses. Overall, we provide large-sample evidence on firms’ adaptation to climate change and the resultant impacts on the local economy.

Entrepreneurship and the fight against poverty in US cities

Entrepreneurship is often seen as the cure-all solution for poverty reduction. Proponents argue that it leads to job creation, higher incomes and lower poverty rates in the cities in which it occurs. Others argue that many entrepreneurs are actually creating low-productivity firms serving local markets. Yet, despite this debate, little research has considered the impact of entrepreneurship on poverty in cities. This paper addresses this gap using a panel of US cities for the period between 2005 and 2015. We hypothesize that the impact of entrepreneurship will depend on whether it is in tradeable sectors, so likely to have positive local multiplier effects, or non-tradeable sectors, which may saturate local markets. We find that entrepreneurship in tradeables reduces poverty and increases incomes for non-entrepreneurs, a result we confirm using an instrumental variable approach, taking the inheritance of entrepreneurial traits as the instruments. In contrast, while there are some economic benefits from non-tradeable entrepreneurship, we find these are not large enough to reduce poverty.

The Impact of Credit Constraints on Tradable and Non-Tradable R&D Investments in Portugal

We develop a directed technical change model with two sectors, tradable and non-tradable, and dynamic firms’ decisions to invest in R&D in the presence of financial constraints. The model establishes a linkage between R&D decisions, product and process innovations, future productivity, profits, and credit constraints. The model is estimated using Portuguese firms’ data of the tradable and non-tradable sectors. We find that the previous R&D investments raises the innovating probabilities, the innovating probabilities are higher in the tradable sector, and the startup costs of innovation tend to be higher than the maintenance costs. The results also show complementary between the R&D benefits and the firm’s financial strength, diminishing marginal returns to capital on innovation benefits, and high heterogeneity of the innovation costs across industries. Finally, when the firms’ financial strength and the trade-off between tradable and non-tradable goods are considered, the R&D benefits in the non-tradable sector do not compensate its cost given the higher productivity and innovation probabilities of the tradable sector. As a result, the R&D investments in the tradable sector illustrates a misallocation of financial resources.

Local multipliers at work

AbstractWe propose a novel evaluation strategy to estimate local multipliers in Italy during 1996–2006. We find the presence of positive multipliers: 0.26–0.33 for the tradable sector (manufacturing) and 0.88–1.13 for the non-tradable sector (construction and services). They are lower than what was previously found for the United States but much higher than those identified for European and Asian countries. The reasons for this finding lie in the higher accuracy of the data, in the relevance of the instrument used, and in the widespread underutilization of production factors.

Tradable and nontradable directed technical change

ABSTRACT We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale effects can be present or can be partially or totally removed. With a lower skilled labour ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity differences and thus wage inequality. Along the balanced growth path, the real exchange rate can be negatively related with the relative productivities in horizontal innovation (the Balassa-Samuelson effect) and with the relative labour level, depending on scale effects. The wage premium increases due to an increase in the relative labour level in the nontradable sector under substitutability with scale effects or under complementarity without scale effects. A calibrated version of the model indicates that the model closely replicates the data for Germany. Moreover, while the Balassa-Samuelson effect is quantified, an increase in the relative supply of labour in the tradable sector decreases both terms of trade and inequality.

The effects of supporting local business: Evidence from the UK

This paper assesses the effects of a significant place-based intervention that targeted local businesses in deprived areas in the UK. To gain identification, we use data at a fine spatial scale and a regression discontinuity design exploiting the eligibility deprivation rank rule based on a pre-determined deprivation index. We detect no overall effects on employment in treated areas but find a significant displacement of employment from nearby untreated areas, corresponding to around 10% of local employment. The results suggest that indirect displacement effects may substantially weaken the ability of local support programmes targeting the non-tradable sector to reduce economic inequality.

The Real Effects of Land Use Regulation: Quasi-Experimental Evidence From a Discontinuous Policy Variation

We provide quasi-experimental evidence of the effects of a relaxation of land use constraints on local economic activity. We exploit the fact that in 1999 the central government imposed fiscal rules on municipal governments and in 2001 it relaxed them for municipalities with less than 5,000 inhabitants. First, we show that municipalities rely on the urbanization revenues that they collect from issuing building permits to avoid fiscal distress and to finance current expenditure. The rise of building permits is concentrated in the non-residential market and is stronger after 2003, when urban revenues were allowed to pay for municipalities’ current expenditures. Second, we exploit this de facto reduction of firms’ entry barriers to examine downstream effects. We find a positive impact on employment growth and firms’ entry that is concentrated in non-tradable sectors.

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

ABSTRACTCredit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

An empirical examination of shift‐share instruments

AbstractBartik's (1991, 1993) approach to identifying shocks in demand to regional economies has been used extensively for nearly 30 years. We chronicle the development of Bartik‐type shift‐share instruments and examine the empirical performance of alternative versions that use different combinations of national shift and local share variables in their construction. We offer three main findings. First, instruments constructed from shares that omit employment in nontraded sectors empirically dominate versions that include total employment. Second, industrial sectors with high average shares and low variation across areas are more likely to be nontraded and endogenous. This suggests placing large weights on nontraded sector shares worsens both relevance and potential endogeneity. Finally, we demonstrate national shifters other than employment, such as prices and wages, can be used to construct instruments with unique and relevant explanatory power.

An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease Phenomenon in South Asia

Inflows of foreign currencies into the developing economies, in particular, have been associated with the Dutch disease phenomenon whereby a surge in such inflows is believed to stimulate real appreciation of the real exchange rate. As a result, there could be deindustrialization impacts on the recipient economies following a growth in the non-tradable sector at the expense of the tradable sector's contraction. This paper empirically investigates the dynamics of real exchange rate responses to official development assistance, foreign direct investments and international remittances flowing into the four emerging South Asian economies Bangladesh, India, Pakistan, and Sri Lanka. The results from the extensive econometric analyses show that a 1% rise in the total volume of official development assistance and remittances received appreciates the real exchange rate by 0.18% and 0.23% respectively. In contrast, a 1% rise in FDI inflows was found to trigger a 0.19% depreciation of the real exchange rate. Furthermore, the Dumitrescu and Hurlin (2012) test results reveal unidirectional long run causalities running from official development assistances and FDI inflow to real exchange rate while certifying a bidirectional causal association between inward international remittances and the real exchange rate.

The Weight of Compliance: Anti-Money Laundering Enforcement, Bank Composition, and Lending

We exploit a tightening of anti-money laundering (AML) enforcement that imposed disproportionate costs on small banks to examine the effects of a change in bank composition towards larger banks on real economic outcomes. In response to intensified AML enforcement at the end of 2012, counties prone to high levels of criminal activity in the form of money laundering experience a withdrawal of small banks and increased activity by large banks. This change in bank composition results in an increase in the number of small establishments and real estate prices. Wages and employment increase in the non-tradable sector, consistent with a household demand channel. Increased secured lending through mortgages is one potential driver of this result, whereas lending through the Community Reinvestment Act (CRA) and the Small Business Administration (SBA) are not.

Minimum Wage, Trade and Unemployment in General Equilibrium

The path breaking work of Card and Krueger (1993), showing higher minimum wage can increase employment turned the age-old conventional wisdom on its head. This paper demonstrates that this apparently paradoxical result is perfectly plausible in a competitive general equilibrium production structure of a small open economy with a non-traded good, without taking any recourse to monopsony, spatial heterogeneity, heterogeneity of consumers etc. the usual theoretical drivers behind the result. Following Jones and Marjit (1992) we build up a simple general equilibrium model with complementary relationship in production and we show that higher minimum wage can raise aggregate employment. Expansion in the non-traded sector following a wage hike may be consistent with the overall expansion of the export sector in a multi good framework, an unlikely outcome in a conventional two good models which cannot accommodate complementary relationship in production.