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The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment


Nikola Bokan


University of Saint Andrews - Centre for Dynamic Macroeconomic Analysis (CDMA)

Andrew J. Hughes Hallett


George Mason University - School of Public Policy

2007

Economics Discussion Paper No. 2007-42

Abstract:     
Most people accept that structural and labour market reforms are needed in Europe. However few have been undertaken. The usual conjecture is that reforms are costly in economic performance and costly to finance. Blanchard and Giavazzi (2003) and Spector (2004) develop a general equilibrium model with imperfect competition to show the impact of labour or product market deregulation. We extend that model to combine both reforms, and include the costs of financing them, the conflict between long run gains and short run costs, and to allow for reforms of distortionary taxation. We also extend the model to explain the natural rate of unemployment and non-wage employment costs, to show the impact of reform on the short and long run Phillips curve parameters. We find that structural reforms imply short run costs but long run gains (unemployment rises and then falls, while wages move in the opposite way); that the long run gains outweigh the short run costs; and that the financing of such reforms is the main stumbling block. We also find that the implications for welfare improvements and employment generation are quite different: tax reforms are more effective for welfare, but market liberalisation for employment. --

Number of Pages in PDF File: 27

Keywords: Structural reform, wage bargains, short vs. long run substitutability, endogenous entry of firms

JEL Classification: E24, H23, J58

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Date posted: November 29, 2010  

Suggested Citation

Bokan, Nikola and Hughes Hallett, Andrew J., The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment (2007). Economics Discussion Paper No. 2007-42. Available at SSRN: http://ssrn.com/abstract=1716666 or http://dx.doi.org/10.2139/ssrn.1716666

Contact Information

Nikola Bokan (Contact Author)
University of Saint Andrews - Centre for Dynamic Macroeconomic Analysis (CDMA) ( email )
Castlecliffe
St Andrews, Fife KY16 9AL
United Kingdom
+44 1334 462 445 (Phone)
Andrew Hughes Hallett
George Mason University - School of Public Policy ( email )
3351 Fairfax Dr
Arlington, VA 22201
United States

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