Forecasting development outcomes under alternative surplus labour assumptions

Issue Date

2016

Abstract

Economic forecasts are useful to policymakers both as aids to planning, and as baselines against which counterfactual scenarios can be compared. However, policy makers should be aware that assumptions relating to model structure can influence forecast results. We explore the sensitivity of forecasts to one aspect of model structure important in modelling developing economies: surplus agricultural labour. We outline a framework for modelling surplus agricultural labour that relies on average product remuneration. We embed this within a model of a developing economy (the Philippines) characterized by surplus agricultural labour. We compare the results of two forecasts that differ in their treatment of the agricultural labour market. In the first, the surplus labour theory is activated, establishing average product remuneration in agriculture. In the second, the surplus labour theory is not activated, creating a failure to recognize average product remuneration in agriculture. By comparing the two simulations, we show that failure to model the presence of average product remuneration, when it would be appropriate to do so, has an impact that would be material to economic planners, leading them to: under-estimate agricultural employment; over-estimate GDP growth; and, over-estimate important policy variables (like tax revenue) that are related to GDP growth.

Source or Periodical Title

Applied Economics

ISSN

0003-6846

Volume

48

Issue

42

Page

4019-4032

Document Type

Article

Language

English

Subject

CGE model, economic forecasting, Philippine agriculture, Surplus labour

Identifier

DOI: 10.1080/00036846.2016.1150949

Digital Copy

yes

Link to Full Text

Share

COinS