CGE and IO models to model job effects Maximiliano Mendez-Parra Dirk Willem te Velde 17 September 2015 Introduction There are a range of analytical tools to assess job impacts, e.g.: Ex-ante: CGE and IO models and production function approaches. Ex-post: tracer studies, econometric studies, value chain studies. Using the non-direct effects in IO and CGE models can be used to ensure allocation of scarce resources is not biased towards projects that lead to direct job effects only. Pros and cons 2 A DFI Project Funnel (What information is collected? What incentives exist? What procedures are in place to source projects? How do additionality / job impact feature?) Potential projects on the radar screen of Investment Officers Projects making it to CIP stage FPFP FP projects Investment Committee Other rules/procedures ????? Ex-ante impact indicators Where do we need better ex-ante tools? Sector of DFIs investment Direct job effects Indirect job effects Other effects (e.g. second order productivity effects) ManufacturingVery importantPotentially importantLess important Financial servicesLess important Very important TourismMedium importantVery importantLess important InfrastructureLess importantTemporaryVery important AgricultureVery importantLess important Input-output analysis (I-O) I-O Analysis allows to identify the effect of a change in an exogenous variable (e.g. exports) on output and employment. Multiplier: How much output/employment of each sector is needed to produce one unit in each sector? It considers the direct effect (on the own sector) and the indirect effects in the rest of the sectors of the economy. It also takes into account the 2 nd order effects induced by the demand of the other sectors in the production of inputs. It can be used to assess the effect of production on environment and on the use of natural resources. It is also used to evaluate the effects on imports of an increase in final demand. It is an ex-ante analysis. It is a relatively low-tech method. Standard matrix knowledge required. It can be implemented using Excel. Data availability good. WIOT, OECD, Eora-MRIO, IFPRI SAMs, National sources. 5 Input-output analysis (I-O) Final demand (e.g. exports) is exogenous. Increases in output or employment do not have additional effects on the economy. Prices are constant before and after the experiment. All the effects are assumed to be quantity effects. Fixed proportions between inputs (Leontief model). No substitution possible between factors of production. Technology fixed. Although is possible to introduce constraints, it is assumed that all sectors can deliver what each other sector is demanding. I.e. No friction between exports of barley and beer I-Os are calculated/estimated. Data may be outdated: I-Os do not reflect the actual internal transactions and technology and they tend to be updated by discrete jumps. Need to make assumptions about the economic structure. Sectoral disaggregation limited. Compatible international disaggregation: 57 GTAP sectors, 35 WIOT, 25 Eora-MRIO National sources vary: 124 Argentina, 58 Tanzania, 106 UK, 98 Scotland 6 Effect on output and labour demand of one unit increase in demand in each sector in Tanzania Less than primary education Effect on output and labour demand of one unit increase in demand in each sector in Tanzania Primary education completed Computable General Equilibrium Models What is useful: Could include feedback and second order effects of DFI affected projects, e.g.: Labour market effects of investment: demand effects can increase employment which can then raise wages (and decrease employment), or just wages if labour supply is fixed/segmented. Dutch disease effects of investment: large investments (e.g. in natural resources) can lead to exchange rate effects which can effect competitiveness Inclusion of policy feedback rules: interest and exchange rates Co-ordinated investment approaches International linkages What is problematic: Depends on accuracy of individual equations (could be estimated econometrically depending on data) Aggregated level (often link to a SAM) Fixed costs of understanding and designing complex models 9 Impact Dutch aid on Dutch exports: (IO & CGE approaches give similar results for exports but different results for jobs) 10 Conclusions IO models are useful ex-ante tools (e.g. three fold differences in terms of impact between sectors) but miss out some important productivity effects (constant technology) CGE models can incorporate wider national impacts and feedback loops (difference between 15,000 jobs created, or less), but also lack structural change components There is often a lack of appropriate IO/CGE models relevant for the specific investment opportunity; we dont know how wrong we are ignoring them. Can we use rules of thumb derived from IO and CGE models for wider application? 11