How rapidly do reforms affect labour market outcomes? Jørgen Elmeskov Economics 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 2

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 3

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.

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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 PolicySpeedingSlowing UI - ALMP + EPL - PMR - Unionisation - Coordination + 11

12 PERSISTENCE OF UNEMPLOYMENT SHOCKS

13 TRANSITION DYNAMICS WITH EMPLOYMENT AND PRICE ADJUSTMENT COSTS 1 pp reduction of the benefit replacement rate

14 TRANSITION DYNAMICS WITH EMPLOYMENT AND PRICE ADJUSTMENT COSTS 1 pp reduction of the income tax

15 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 16