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Factor Markets in General Computable Equilibrium Models No. 47, May 2013 Martin Banse, Lindsay Shutes, Peter Dixon, Hans van Meijl, Maureen Rimmer, Andrzej Tabeau, Geert Woltjer and Andrea Rothe Factor Markets in General Computable Equilibrium Models ABSTRACT One objective of Computable general equilibrium (CGE) models is the analysis of economy- wide effects of policy measures. The focus of the Factor Markets project is to analyse the functioning of factor markets for agriculture in the EU-27, including the Candidate Countries. While agricultural and food markets are fully integrated in a European single market, subject to an EU-wide common policy, the Common Agricultural Policy (CAP), this is not the case for the agricultural factor markets capital, labour and land. There are partly serious differences with regard to member state regulations and institutions affecting land, labour and capital markets. The presentation of this heterogeneity of factor markets amongst EU Member States have been implemented in the CGE models to improve model-based analyses of the CAP and other policy measures affecting agricultural production. This final report comprises the outcome of a systematic extension and improvement of the Modular Applied GeNeral Equilibrium Tool (MAGNET) model starting from an overview of the current state of the art to represent factor markets in CGE models to a description of work on labour, land and capital in MAGNET. FACTOR MARKETS Working Papers present work being conducted within the FACTOR MARKETS research project, which analyses and compares the functioning of factor markets for agriculture in the member states, candidate countries and the EU as a whole, with a view to stimulating reactions from other experts in the field. See the back cover for more information on the project. Unless otherwise indicated, the views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated. Available for free downloading from the Factor Markets (www.factormarkets.eu) and CEPS (www.ceps.eu) websites ISBN 978-94-6138-315-0 © Copyright 2013 Barbara Tocco, Alastair Bailey and Sophia Davidova FACTOR MARKETS Coordination: Centre for European Policy Studies (CEPS), 1 Place du Congrès, 1000 Brussels, Belgium Tel: +32 (0)2 229 3911 • Fax: +32 (0)2 229 4151 • E-mail: [email protected] • web: www.factormarkets.eu Contents 1. Introduction ........................................................................................................................... 1 2. Factor markets in selected CGE-Models - A general overview ............................................ 2 2.1 Labour markets ...............................................................................................................2 2.2 Capital markets ............................................................................................................... 3 2.3 Land markets .................................................................................................................. 4 3. Factor Markets in MAGNET ................................................................................................. 5 3.1 The current state of factor market modelling in MAGNET .......................................... 5 3.1.1 Flexible structure of factor demand ................................................................... 5 3.1.2 Land supply function .......................................................................................... 7 3.1.3 Factor supply over time ..................................................................................... 8 3.1.4 Segmented agricultural and non-agricultural factor markets .......................... 9 3.1.5 Land allocation ................................................................................................. 10 3.2 Extensions of factor market modelling in MAGNET .................................................. 11 4. Labour .................................................................................................................................. 13 4.1 Labour supply curves for European Member and Candidate States .......................... 13 4.1.1 Background ....................................................................................................... 13 4.1.2 Extending the modelling of the labour supply ................................................ 13 4.1.2.1 Current specification .......................................................................... 14 4.1.2.2 Labour supply curve ........................................................................... 15 4.1.2.3 Empirical labour supply curves for the European states .................. 16 4.1.3 Scenarios & Model Specification ...................................................................... 19 4.1.3.1 Scenario specification ........................................................................ 19 4.1.3.2 Model specification ........................................................................... 20 4.1.3.3 Model aggregation ............................................................................. 20 4.1.4 The effect of changes in the labour market specification on the results of a CAP reform scenario ......................................................................................... 21 4.1.5 Scenario results ................................................................................................. 21 4.1.6 Sensitivity analysis ........................................................................................... 25 4.1.7 Conclusions and future work ...........................................................................26 5. Land ..................................................................................................................................... 27 5.1 Renewable Energy Directives versus Reducing Emissions from Deforestation and Degradation: Biofuel policy versus forest conservation .............................................. 27 5.1.1 Background ....................................................................................................... 27 5.1.2 Modelling land use, RED and REDD .............................................................. 28 5.1.2.1 Modelling framework ........................................................................ 28 5.1.2.2 Modelling the response of agricultural land to REDD .................... 28 5.1.3 Macroeconomic assumptions and RED and REDD scenarios ........................ 35 5.1.4 Consequences of RED and REDD policies for land use, food security and trade .................................................................................................................. 37 5.1.5 Implications for Europe ...................................................................................42 5.1.6 Summary and conclusions ............................................................................... 43 6. Capital .................................................................................................................................. 43 6.1 Will Improved Access to Capital Dampen the Need for More Agricultural Land? - A CGE analysis of agricultural capital markets and world-wide biofuel policies .......... 43 6.1.1 Introduction ...................................................................................................... 43 6.1.2 Biofuel policies ................................................................................................. 44 6.1.3 Effects of biofuel mandates: literature overview ............................................. 45 6.2 Quantitative Approach ................................................................................................ 46 6.2.1 Database ........................................................................................................... 46 6.2.2 MAGNET model ............................................................................................... 47 6.3 Scenario results ............................................................................................................ 50 6.3.1 Scenario description ........................................................................................ 50 6.3.2 Scenario setup .................................................................................................. 50 6.3.3 Scenario results ................................................................................................. 51 6.4 Conclusions ................................................................................................................... 55 References ................................................................................................................................... 56 List of Tables Table 1. Labour market features in global CGE model ................................................................ 3 Table 2. Capital market features in global CGE model ................................................................ 4 Table 3. Land market features in global CGE model ................................................................... 5 Table 4. Possible extensions to factor market modelling in MAGNET ..................................... 12 Table 5. Country aggregation ..................................................................................................... 20 Table 6. Commodity aggregation ................................................................................................ 21 Table 7. Membership of aggregated regions ..............................................................................29
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