Income volatility, labor mobility, and fiscal policy in Russian regions

Goohoon Kwon Antonio Spilimbergo

IMF IMF, CEPR, WDI

Outline

• Brief Description of Regions (GDP. Income shocks. Welfare. Integration)

• Tale of three adjustments• Consequence for Unemployment • Source of regional volatility• Fiscal Response to oil shocks• Transfers• Conclusions

Data

• Russia (89 regions)

• US (50 states + DC)

• China (30 provinces)

• Canada (11 provinces)

• Europe 15 (178 regions)

Regional Income Differences

.2.3

.4.5

.6S

tand

ard

Dev

iatio

n of

Reg

iona

l Inc

ome

1975 1980 1985 1990 1995 2000year

Russia ChinaUS Canada

Europe

Figure 1: Regional Income Dispersion

Regional Income Shocks

0.0

5.1

.15

Sta

ndar

d D

evia

tion

of R

egio

nal G

row

th

1975 1980 1985 1990 1995 2000year

Russia ChinaUS Canada

Europe

Figure 2: Size of Regional Shocks

Regional shocks (controlling for regional trends)

0.0

2.0

4.0

6.0

8.1

Sta

ndar

d D

evia

tion

of d

etre

nded

Reg

iona

l Gro

wth

1975 1980 1985 1990 1995 2000year

Russia ChinaUS Canada

Europe

Figure 3: Size of Reg. Shocks (controlling for regional trends)

Why are Russia regions subject to large idiosyncratic shocks?

• Natural Resources are concentrated in few regions

• Soviet faith in economy to scale has created “excessive” specialization

How to measure shocks?

• Oil shock = (oil price) * (size energy sector)

• Industrial shock = rer * (size manufacturing sector)

Source of Shocks

Table 1. Regional growth and regional shocksFixed effects Arellano-Bond

oil shock 1.64***industrial shock -0.11**Lag D.gdpgrowth -0.04D.oil shock 2.28 *** D.industrial shock -0.23*** Constant 2.85 1.98***

Number of samples 760 608Number of Regions 76 76** p<.05; *** p<.01

Tale of three adjustments

How do economies react to regional shocks?

Do people stay in distressed areas or do they move?

To answer this question we need to make an econometric detour

(Small) Econometric Detour

itj

jitjj

jitjit

itj

jitjj

jitjit

dummiesregionaldummiesyearpopulationincomepopulation

dummiesregionaldummiesyearpopulationincomeincome

2

3

12

3

12

1

3

11

3

11

lnlnln

lnlnln

Income Shocks: response of Income

0

.02

.04

.06

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8

Europe, lminc, lminc Russia, lminc, lminc US, lminc, lminc

90% CI orthogonalized irf

Inco

me

Re

spo

nse

Years

Graphs by irfname, impulse variable, and response variable

Income Shocks: response of population

-.002

0

.002

.004

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8

Europe, lminc, lpop Russia, lminc, lpop US, lminc, lpop

90% CI orthogonalized irf

Po

pu

latio

n r

esp

on

se

Years

Graphs by irfname, impulse variable, and response variable

Consequence on Regional Unemployment

.2.3

.4.5

.6R

ussi

a/U

S/E

urop

e

1975 1980 1985 1990 1995 2000year

Russia US

Europe

Figure 7: Coefficient of Variation of Regional Unemployment

Adjustment - American Style

• Flexible Labor and housing markets.

• Limited unemployment benefits.

• Labor is highly mobile.

• Variation in regional unemployment is limited.

Adjustment – European Style

• Rigid labor and housing markets

• Unemployment subsidies.

• Regional fiscal transfers.

• Scarce labor mobility.

• Large variation in regional unemployment.

• Persistency in regional unemployment.

Adjustment – Russian style

• Large shocks

• Scarce labor mobility

• Rigid housing market (housing subsidies)

• Fiscal transfers not necessarily targeted to compensate shocks

Adjustment – Latin American style

• Large shocks

• Small role for fiscal policy (procyclical)

• Population concentrates in large cities (Argentina, Chile, Uruguay among the highest urban concentration)