How to Change Factor Market Closures (Unemployment, Mobility)
There are two factor market closure decisions in the UNI-CGE model.
First,
factors can be described as being fully employed OR factors may become
unemployed. If factors are fully employed, changes in activities’ factor
demands will cause wages to change.
Factors will move among production activities until all are reemployed
at some equilibrium wage or rent that is the same in all activities.
The second factor market closure describes whether factors are mobile across
activities (they can move to new employment as wages change) or sector-specific
(they must remain in their original employment).
This guide shows you the mechanics of how you can change the factor market closures. You can learn more about the economic thinking behind both closures in the factor market lesson in the Supply module of this course.
2. Factor Market Closure - Define in Country Data File
i. Open the Excel file with your country data.
Our example uses the SAM-US333.xlsx file.
ii. Go to the “Sets” worksheet. This page has the definitions of all sets in the model.
iii. The
UNI-CGE model has two factor sets:
SET FSF -
Factors that are Sector-specific
(Fixed in original employment)
SET FUE -
Factors that can be UnEmployed
iv. The SAM-US333.xlsx file has empty
sets for set FSF and set FUE. This means
that in the UNI-CGE model, all factors are fully employed and fully mobile.
v. In Figure 1, SET FUE is redefined to
include labor (f-LABOR). Labor is now
defined to allow unemployment to occur. Set FSF remains empty – so no factor
has been designated as sector-specific.
vi. The country data file, and its
factor set definitions, is read into the UNI-CGE model.
vii. The CGE model then automatically
assigns flags for employment or unemployment based on the content of the set
FUE.
viii. The CGE model turns on code that makes factors sector-specific based on the content of set FSF.
Figure 1. Set definition worksheet in SAM-US333.xlsx
3. Unemployment Closure - Flags in the UNI-CGE Model
The factor employment closure has a flag value of one or two
(Table 1). A full employment closure has
a value of 1, and an unemployment closure has a value of 2.
Table 1. Factor market closure – full employment versus unemployment
Closure |
Flag number |
Fixed variable |
Variable that adjusts |
Full employment |
FCLOS(f) = 1 |
Factor supply |
Factor wage or rent |
Unemployment |
FCLOS(f) = 2 |
Factor wage or rent |
Factor supply |
FCLOS(F) = 1 ;
If set FUE in the country data file contains a factor, the model
will then redefine that factor as having an unemployment closure, with a flag
of 2:
FCLOS(f)$FUE(f) = 2 ;
4. Factor Mobility closure - Conditioned Code in UNI-CGE Model
If the modeler has defined a sector-specific factor in set FSF in the country data file, the lack of factor mobility in the UNI-CGE model is implemented by turning on the appropriate model code. That is, the code that describes factor mobility is “conditioned” – it turns on only if a factor is listed in set FSF. Table 2 presents and explains the conditioned code:
Table 2. UNI-CGE model code for sector-specific factors
Model code |
What it does: |
IF((FCLOS(F) = 1 AND FSF(F)),
|
The code is conditioned. It is turned on IF the factor is fully employed AND it is included in set FSF |
QF.FX(F,A) = QF0(F,A) ;
|
The quantity of factor f (QF) employed in activity A is fixed at the original level |
WFDIST.LO(F,A) = -INF ; WFDIST.UP(F,A) = +INF ;
|
The sectoral wage/rent differential (WFDIST) will adjust to keep factors in their original employment |
WF.FX(F) = WF0(F) ;
|
The economy-wide average wage/rent (WF) (excluding the sectoral premia) is fixed at its original level. |