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International Monetary Fund. Western Hemisphere Dept.

The Role of Labor Frictions in Colombia’s Recent Economic Performance 1 Colombia has sustained strong growth and outpaced its regional peers in recent years and recently implemented an important tax reform to foster labor formality. This paper quantifies the role that improvements in labor market distortions have had in Colombia’s recent economic performance; it finds that they have had a significant role in the evolution not only of GDP but also employment and investment . A. Introduction 1. Colombia’s recent economic performance stands out among its

Mr. Nooman Rebei

Front Matter Page Institute for Capacity Development Department Contents I. Introduction II. Stylized facts and the RBC model A. Stylized facts B. The benchmark RBC model 1. Representative household’s and firm’s problems 2. Impulse-response functions III. Alternative models A. The sticky price (SP) model B. The entry-exit (EE) model C. The habit in consumption (HC) model D. The persistent technology shock (PT) model E. The labor friction (LF) model F. The Leontief production (LP) model IV. Full information

International Monetary Fund. Western Hemisphere Dept.

Rodríguez-Delgado, Kristine Vitola (all WHD), Mohamed Afzal Norat (MCM), and Christina Kolerus (SPR). Contents OVERVIEW COLOMBIA’S EXPERIENCE WITH INCLUSIVE GROWTH A. Introduction B. Pro-Poor Growth C. Limited Inclusiveness of Economic Growth D. Some key Drivers of the Recent Decline in Income Inequality E. What Could be Behind the Still High Income Inequality? F. Conclusion APPENDIX 1. Selected Social Programs in Colombia References THE ROLE OF LABOR FRICTIONS IN COLOMBIA’S RECENT ECONOMIC PERFORMANCE A. Introduction B

Mr. Nooman Rebei

. 9 The model with labor friction does well in matching the first order autocorrelation of real wages growth, however, it fails in generating the significantly positive autocorrelations at higher orders. 10 Assuming π i,T is the marginal data likelihood of the model i ∈ {SP, HC}, Jeffereys (1961) suggests to assess the odds ratio using the following rule of thumb: if 1 < π S P , T π H C , T < 3 there is only weak evidence for SP. If 3 < π S P , T π H C , T < 12 there is weak to moderate evidence for SP. If 12 < π S P , T π H C , T < 148 there is

Mr. Nooman Rebei
The paper asks how state of the art DSGE models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race. To that end we construct and estimate several competing small-scale DSGE models that extend the standard real business cycle model. In particular, we identify from the literature six different hypotheses that generate the empirically observed decline in worked hours after a positive technology shock. These models alternatively exhibit (i) sticky prices; (ii) firm entry and exit with time to build; (iii) habit in consumption and costly adjustment of investment; (iv) persistence in the permanent technology shocks; (v) labor market friction with procyclical hiring costs; and (vi) Leontief production function with labor-saving technology shocks. In terms of model posterior probabilities, impulse responses, and autocorrelations, the model favored is the one that exhibits habit formation in consumption and investment adjustment costs. A robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included.
Mr. Pau Rabanal

that matter for potential output over the longer term. These models also narrow down explicitly the definition of potential output to the output level that would be available if the economy could operate in the absence of price and wage rigidities, but taking into account the reality of real frictions (such as adjustment costs to investment or employment) that demand policies cannot overcome. The latest generation of estimated DSGE models incorporates labor frictions (see Galí, Smets, and Wouters 2011), and financial frictions (see Furlanetto, Gelain, and Taheri

Mr. Nooman Rebei and Alexandros Mourmouras

of the model with habit in consumption and costly adjustment of investment as specified by Francis and Ramey (2005) . Then comes the sticky price hypothesis as the second best alternative, followed by the introduction of labor frictions. The version of the model embedding persistent technology shocks and alternatively the Leontief production function specification are ranked fourth and fifth, respectively. Finally, the model encompassing entry-exit firms with time-to-build hypotheses is not supported by the data even when compared with the plain vanilla structure

Ms. Era Dabla-Norris, Mr. Si Guo, Mr. Vikram Haksar, Minsuk Kim, Ms. Kalpana Kochhar, Kevin Wiseman, and Ms. Aleksandra Zdzienicka

M a x { K i , L i } p i Y i − ( 1 + τ K , i ) r K i − ( 1 + τ L , i ) w L i , ( 3 ) where τ K,i and τ L,i are capital and labor frictions that influence the effective rental cost of capital and labor in sector i . The market clearing conditions are Σ i K i = K, Σ i L i = L . 3. Firm’s optimization problem . Following Aoki

Ms. Era Dabla-Norris, Mr. Si Guo, Mr. Vikram Haksar, Minsuk Kim, Ms. Kalpana Kochhar, Kevin Wiseman, and Ms. Aleksandra Zdzienicka
Total factor productivity growth was stagnant or slowing in many advanced countries even prior to the crisis. This paper documents sector-level productivity patterns across advanced economies prior to the crisis and examines the role of product and labor market rigidities as well as innovation and investments in information technology and human capital in driving productivity differences across sectors and countries. Since productivity payoffs of reforms evolve over time, we also focus on large changes in the structural indicators examine their dynamic impact on productivity, employment, and output. Our results suggest that reform priorities depend on country-specific settings, including the scale of specific policy distortions and the distance from the technology frontier. Productivity gains from reforms are large and materialize predominantly in the medium term, with some important variations across industries and countries.
Ms. Era Dabla-Norris, Mr. Si Guo, Mr. Vikram Haksar, Minsuk Kim, Ms. Kalpana Kochhar, Kevin Wiseman, Ms. Aleksandra Zdzienicka, and Mr. Siddharth Tiwari

considering changes only to capital (or labor) frictions. This allows us to identify the contributions of reallocating labor (capital) to the aggregate TFP gain. One noteworthy issue arises from the measurement of labor inputs. The easiest way to measure labor input is to consider the total hours worked by employees without distinguishing workers’ skill levels (our baseline measure of labor inputs). However, this measure could be problematic, as high-skilled workers tend to provide more effective labor services than low-skilled workers. Therefore, we also constructed a