Bank of Latvia

ABSTRACT This paper examines how changes in the minimum wage influence an economy with a substantial informal sector. To achieve this, we simulate the recent minimum wage increase in Latvia, providing a comprehensive assessment of its macroeconomic, sectoral, and distributional effects. This panoptic assessment was made possible by the linked system of the CGE model and the EUROMOD tax-benefit microsimulation model. Notably, the framework incorporates unreported wage payments into both the CGE and EUROMOD components to account for Latvia's significant labour tax non-compliance. Our findings reveal that the minimum wage increase leads to a reduction in unreported payments and an increase in reported gross wages. The model further indicates positive spillover effects on private consumption but identifies adverse outcomes for employment and GDP. In the fiscal sector, budget revenues rise, primarily driven by increased personal income tax revenues linked to higher reported wages. While the analysis suggests a decline in income inequality when considering only officially reported income, this effect is mitigated when the formalization of unreported payments is considered.

We explore the current development of the Latvian fintech companies, corresponding challenges, and expected future results. In 2021, we identified 93 fintech companies in Latvia. For these companies, we analyse essential characteristics and performance data. Moreover, we conducted a survey among these companies in the summer of 2021. We received 31 responses which allowed us to analyse the characteristics of their business models, identify current challenges for fintech companies, and allowed us to speculate on the future of the fintech market. We find that the main financial services provided by fintech companies are digital lending, digital payment, and digital wallets. An interesting new digital finance trend in the Latvian market is the B2B2C (business-to-business-to-consumer) business model with simultaneous fintech aid for small businesses and customers. Fintech companies currently struggle with the lack of availability of qualified personnel and/or experienced managers compared to earlier years when regulation was the most urgent problem.KeywordsFintechDigital financial servicesFinancial marketsLatvian fintechs

Although the influence of exceptional weather on individual behaviour has already been acknowledged in finance, psychology, and marketing, the literature examining weather effects at more aggregate level is still limited. Further, there is a lot of anecdotal evidence that weather anomalies affect consumer spending and retail business. The main aim of this analysis is to investigate and quantify the effects of unusual weather in consumer spending at macro-level. Using aggregate retail sales data for Switzerland, our findings reveal that weather deviations from seasonal norms, especially, unusually high or low temperatures in a given month, do cause sizeable intertemporal shifts in consumer spending at country level. Furthermore, the effects of abnormal weather are found to differ across seasons, both with respect to sign and magnitude. In particular, our findings indicate that weather effects manifest mainly through the seasons change channel: weather conditions in line with the coming season boost the purchases early in the season.

Abstract This study systematically broadens the relevance of possible model performance asymmetries across business cycles in the spirit of the recent state‐dependent forecast evaluation literature (e.g. Chauvet & Potter, 2013) to hundreds of macroeconomic indicators and deepens the forecast evaluation of the recent factor model literature on hundreds of target variables (e.g. Stock & Watson, 2012b) in a state‐dependent manner. Our results are consistent with both strands of the literature and generalize the former to over 200 macroeconomic indicators and differentiate the latter across three levels of temporal granularity: We document systematic model performance differences in both absolute and relative terms across business cycles (longitudinal) as well as across variable groups (cross‐sectional) and find these performance differences to be robust across several alternative specifications. The cross‐sectional prevalence and robustness of state dependency shown in this article encourages economic forecasters to complement model performance assessments with a state‐dependent evaluation of predictive ability.

This paper provides evidence on the role of non-base wage components as a channel for firms to adjust labour costs in the event of adverse shocks. It uses data from a firm-level survey for 25 European countries that covers the period 2010–2013. We find that firms subject to nominal wage rigidities, which prevent them from adjusting base wages, are more likely to cut non-base wage components in order to adjust labour costs when needed. Firms thus use non-base wage components as a buffer to overcome base wage rigidity. We further show that while non-base wage components exhibit some degree of downward rigidity, they do so to a lesser extent than base wages.