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We examine the extent to which declining manufacturing employment may have contributed to increasing inequality in advanced economies. This contribution is typically small, except in the United States. We explore two possible explanations: the high initial manufacturing wage premium and the high level of income inequality. The manufacturing wage premium declined between the 1980s and the 2000s in the United States, but it does not explain the contemporaneous rise in inequality. Instead, high income inequality played a large role. This is because manufacturing job loss typically implies a move to the service sector, for which the worker is not skilled at first and accepts a low-skill wage. On average, the associated wage cut increases with the overall level of income inequality in the country, conditional on moving down in the wage distribution. Based on a stylized scenario, we calculate that the movement of workers to low-skill service sector jobs can account for about a quarter of the increase in inequality between the 1980s and the 2000s in the United States. Had the U.S. income distribution been more equal, only about one tenth of the actual increase in inequality could have been attributed to the loss of manufacturing jobs, according to our simulations.

Over the past three decades, the price of machinery and equipment fell dramatically relative to other prices in advanced and emerging market and developing economies. Using cross-country and sectoral data, we show that the decline in the relative price of tangible tradable capital goods provided a significant impetus to the capital deepening that took place during the same time period. The broad-based decline in the relative price of machinery and equipment, in turn, was driven by the faster productivity growth in the capital goods producing sectors relative to the rest of the economy, and deeper trade integration, which induced domestic producers to lower prices and increase their efficiency. Our findings suggest an additional channel through which rising trade tensions and sluggish productivity could threaten real investment growth going forward.

We explore the extent to which macroeconomic policies, structural policies, and institutions can mitigate the negative relationship between temperature shocks and output in countries with warm climates. Empirical evidence and simulations of a dynamic general equilibrium model reveal that good policies can help countries cope with negative weather shocks to some extent. However, none of the adaptive policies we consider can fully eliminate the large aggregate output losses that countries with hot climates experience due to rising temperatures. Only curbing greenhouse gas emissions—which would mitigate further global warming—could limit the adverse macroeconomic consequences of weather shocks in a long-lasting way.

Global temperatures have increased at an unprecedented pace in the past 40 years. This paper finds that increases in temperature have uneven macroeconomic effects, with adverse consequences concentrated in countries with hot climates, such as most low-income countries. In these countries, a rise in temperature lowers per capita output, in both the short and medium term, through a wide array of channels: reduced agricultural output, suppressed productivity of workers exposed to heat, slower investment, and poorer health. In an unmitigated climate change scenario, and under very conservative assumptions, model simulations suggest the projected rise in temperature would imply a loss of around 9 percent of output for a representative low-income country by 2100.

Women across the world remain an underutilized resource in the labor force. Participation in the labor force averages around 80 percent for men but only 50 percent for women – nearly half of women's productive potential remains untapped compared to one-fifth for men. Latin America and the Caribbean (LAC), as a region, saw the largest gains in female labor force participation (LFP) in the world during the last two decades. Women in LAC are becoming increasingly active in paid work, closing the gap with men and catching up to their counterparts in advanced economies at an impressive rate. In this paper, we document the recent trends in female LFP and female education in the LAC region, discuss the size of potential gains to GDP from increasing female LFP and policies which could be deployed towards this goal.

This paper focuses on the reform options for Paraguay's fiscal responsibilities law as well as credit growth and banking system vulnerabilities. During the first year of Paraguay's fiscal responsibility law, implementation has proven challenging, and a debate has emerged over whether its current design is excessively rigid. There are also important reputational costs to amending the framework. Paraguay has experienced rapid credit growth over the past decade. Reflecting these considerations, this chapter analyzes banks'health and potential risks in Paraguay. Paraguay's credit markets, as well as the rest of its financial system, are dominated by commercial banks.