The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies

39 Pages Posted: 24 Apr 2018

See all articles by Romain Duval

Romain Duval

International Monetary Fund (IMF)

Davide Furceri

International Monetary Fund (IMF)

Date Written: February 2018

Abstract

The paper estimates the dynamic macroeconomic effects of labor and product market reforms on output, employment and productivity, and explores how these vary with prevailing macroeconomic conditions and policies. We apply a local projection method to a new dataset of major country- and country-sector-level reform shocks in various areas of labor market institutions and product market regulation covering 26 advanced economies over the past four decades. Product market reforms are found to raise productivity and output, but gains materialize only slowly. The impact of labor market reforms is primarily on employment, but it varies across types of reforms and depends on overall business cycle conditions—unlike that of product market reforms. Reductions in labor tax wedges and increases in public spending on active labor market policies have larger effects during periods of slack, in part because they usually entail some degree of fiscal stimulus. In contrast, reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can become contractionary in periods of slack. The economy’s response to such reforms is significantly improved when they are accompanied by fiscal or monetary stimulus.

Suggested Citation

Duval, Romain and Furceri, Davide, The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies (February 2018). IMF Economic Review, Vol. 66, Issue 1, 2018, Available at SSRN: https://ssrn.com/abstract=3162102 or http://dx.doi.org/10.1057/s41308-017-0045-1

Romain Duval

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Davide Furceri (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
191
PlumX Metrics