How rapidly do reforms affect labour market outcomes?

Jørgen ElmeskovEconomics Department

OECD

I do not have the answer

• The issue has not been researched• Presentation will be based on very

indirect evidence• And the main conclusion will be

modest: reforms are probably like monetary policy, i.e. they work with “long and variable lags”

• And lags are likely to differ across types of reform

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Roadmap

• Long-term effects of structural reforms• Simple empirical evidence• Indirect evidence based on dynamic

adjustment to shocks• Model simulations to illustrate the effect

from structural policies on adjustment speeds

• Model simulations to illustrate the effect from macroeconomic policies on adjustment speeds

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4

EQUILIBRIUM UNEMPLOYMENT RATE AND THE CONTRIBUTION OF INSTITUTIONS

OECD

Note: The sample includes the 20 countries examined in Bassainini and Duval (2006) except Germany, Finland and Sweden.

5

Decomposing the impact of recent policy changes on the change in unemployment

Simulated unemployment effects of changes in policies over 1994-2003, in percentage points

Source : Bassanini and Duval (2006)

Change in unemployment rate predicted by policies =

Change in PMR +Change in average replacement rate +

Change in tax wedge +

-10 -8 -6 -4 -2 0 2 4 6

IRL

GBR

USA

DNK

ESP

NZL

DEU

ITA

NLD

FIN

PRT

AUS

BEL

SWE

FRA

AUT

CAN

CHE

JPN

NOR

-10 -8 -6 -4 -2 0 2 4 6 -10 -8 -6 -4 -2 0 2 4 6 -10 -8 -6 -4 -2 0 2 4 6

6

EQUILIBRIUM UNEMPLOYMENT RATE AND THE CONTRIBUTION OF INSTITUTIONS

SWEDEN

Estimates of “equilibrium” unemployment are fragile

• Other factors than policy and institutions may play a role (e.g. competition created by globalisation)

• Policies and institutions not covered are likely to play a role (e.g. minimum wages)

• The effects of policies and institutions are likely to be different across countries

7

8

ACTUAL, EQUILIBRIUM UNEMPLOYMENT RATES AND NAIRU

−−− Equilibrium unemployment rate — Unemployment rate — NAIRU

Note: The sample includes the 20 countries examined in Bassainini and Duval (2006) except Germany, Finland and Sweden.

9

ACTUAL, EQUILIBRIUM UNEMPLOYMENT RATES AND NAIRUS

−−− Equilibrium unemployment rate — Unemployment rate — NAIRU

10

CORRELATION BETWEEN CHANGES IN NAIRUS AND INSTITUTIONS

Employment adjustment to shocks

• Large literature, but does not discriminate by the source of shocks, i.e. does not identify adjustment to structural reform

• Country differences seem to be related to structural policy settings, table is my reading of literature

• But estimates are not robust

Policy Speeding

Slowing

UI -

ALMP +

EPL -

PMR -

Unionisation -

Coordination

+

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12

PERSISTENCE OF UNEMPLOYMENT SHOCKS1970 - 2007

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TRANSITION DYNAMICS WITH EMPLOYMENT AND PRICE ADJUSTMENT COSTS

1 pp reduction of the benefit replacement rate

─── Euro area employment & price adjustment costs −−− US employment & price adjustment costs ××× US employment & euro area price adjustment costs

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TRANSITION DYNAMICS WITH EMPLOYMENT AND PRICE ADJUSTMENT COSTS

1 pp reduction of the income tax

─── Euro area employment & price adjustment costs −−− US employment & price adjustment costs ××× US employment & euro area price adjustment costs

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EFFECTS OF A 1 PP DECLINE IN THE NAIRU ON EMPLOYMENT

−−− without monetary policy — with monetary policy

Summing up

• We know little about adjustment speeds to reform

• They often seem to be low• They likely differ across types of

reform• They probably depend on structural

policy settings …• … and on macroeconomic policies

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