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Intertwining Inequality and Labor Market under the New Normal

Author

Listed:
  • Tanida Arayavechkit

    (City University of Hong Kong)

  • Somprawin Manprasert

    (Chulalongkorn University)

  • Jaree Pinthong

    (Bank of Thailand)

Abstract

This paper builds on a life cycle model of occupational choices and financial frictions to understand the main channel through which demography and inequality influence the economy. Based on household data from Thailand, younger cohorts are likely to be workers and older cohorts are likely to be entrepreneurs due to age-dependent skills and asset accumulation. Under the new normal faced by the Thai economy as well as others, aging population can lower overall total factor productivity and increase inequality. An increase in equilibrium wage due to shortage of labor supply drives mediocre entrepreneurs to become self-employed - a low-income and low-productivity occupation - and worsens total factor productivity and hence inequality. Moreover, a decline in world interest rates associated with global aging population will exacerbate this negative effect. Reducing financial frictions or alleviating a borrowing constraint of talented entrepreneurs can mitigate this effect while extending retirement age will only improve output per capita while total factor productivity and inequality worsen.

Suggested Citation

  • Tanida Arayavechkit & Somprawin Manprasert & Jaree Pinthong, 2015. "Intertwining Inequality and Labor Market under the New Normal," PIER Discussion Papers 6., Puey Ungphakorn Institute for Economic Research, revised Oct 2015.
  • Handle: RePEc:pui:dpaper:6.
    as

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    File URL: http://www.pier.or.th/wp-content/uploads/2015/10/pier_dp_006.pdf
    File Function: Published version, 2015
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    References listed on IDEAS

    as
    1. Allub, Lian & Erosa, Andrés, 2019. "Financial frictions, occupational choice and economic inequality," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 63-76.
    2. Piriya Pholphirul, 2005. "Competitiveness, Income Distribution, and Growth in Thailand : What Does the Long-run Evidence Show?," Finance Working Papers 22054, East Asian Bureau of Economic Research.
    3. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2011. "Finance and Development: A Tale of Two Sectors," American Economic Review, American Economic Association, vol. 101(5), pages 1964-2002, August.
    4. Robin Brooks, 2003. "Population Aging and Global Capital Flows in a Parallel Universe," IMF Staff Papers, Palgrave Macmillan, vol. 50(2), pages 1-3.
    5. Zissimopoulos, Julie M. & Karoly, Lynn A., 2007. "Transitions to self-employment at older ages: The role of wealth, health, health insurance and other factors," Labour Economics, Elsevier, vol. 14(2), pages 269-295, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Demographic Trends; Occupational Choice; Inequality; Life Cycle Models; Financial Frictions;

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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