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25 November 2019:

Monday  25 November 2019  12:00 - 13:30

Trade and Informality in the Presence of Labor Market Frictions and Regulations

Gabriel Ulyssea (Oxford)

Motivated by recent work on the labor market effects of trade, we build a model of trade with labor market frictions and regulations that are not perfectly enforced by the government. Heterogeneous firms decide whether to operate formally or informally, allowing for a link between globalization, informality and unemployment. We estimate the model using several data sources from Brazil, including matched employer-employee data from formal and informal firms and workers. We perform counterfactual analyses to understand how increasing trade openness affects informality, unemployment and welfare under different scenarios of labor market regulations and levels of enforcement. Our results suggest that domestic policies leading to a reduction in informality have the potential to strongly increase aggregate productivity and welfare, at the expense of modest increases in unemployment. These policies have a much larger effect on welfare relative to policies aiming to reduce international trade costs. The informal sector works as a buffer in the event of negative economic shocks. However, the welfare gains from eradicating informality are so significant that it is hard to justify lenience toward the informal sector on the basis that it works as a buffer following negative economic shocks.

32L 1.04, 1st Floor Conference Room, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH

CEP/STICERD Applications Seminars
Monday  25 November 2019  12:30 - 14:00

The surprising effectiveness of minimum unit prices on alcohol

Rachel Griffith (IFS and University of Manchester) , joint with Martin O'Connell and Kate Smith

All OECD countries have policies that aim to reduce the externalities associated with alcohol consumption. Policies that increase the price of alcohol face the inherent trade-off of reducing externalities while minimising allocative distortions. Scotland and Ireland have recently introduced minimum unit prices, and other countries looks set to follow suit. Advocates of the minimum unit price argue that it targets alcohol misuse and problem drinking (while limiting the impact on light and moderate drinkers), because it raises the price of cheap alcohol, which is disproportionately purchased by the heaviest drinkers. Economists have been critical of this policy; price fixing is illegal in competition law, which includes agreements not to sell something below a minimum price, and it leads to substantial transfer from government tax receipts to industry revenues. When the externalities from alcohol consumption are homogeneous, a tax levied on alcohol content is more efficient than a minimum unit price. However, if externalities are heterogeneous (e.g. if the marginal cost of drinking is larger the more someone drinks), then the relative effectiveness of policies depends on how those who generate different externalities respond to policy intervention. We find that, in the UK, if externalities are sufficiently concentrated among heavy drinkers, then a minimum unit price is more efficient than a flat tax levied on alcohol content.

32L 2.04, 2nd Floor Conference Room, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH

STICERD Industrial Organisation Seminars
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