The Distributional Impact of Labour Market Reforms: A Model-Based Assessment

39 Pages Posted: 27 Nov 2019

See all articles by Werner Roeger

Werner Roeger

European Commission, DGECFIN; European Commission

Janos Varga

Independent

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Lukas Vogel

European Union - European Commission

Date Written: 2019

Abstract

This paper studies the effects of labour market reforms on the functional distribution of income in a DSGE model (Roeger et al., 2008) with skill differentiation, in which households supply three types of labour: low-, medium- and high-skilled. The households receive income from labour, tangible capital, intangible capital, financial wealth and transfers. We trace how structural reforms in the labour market affect these different types of income. The quantification of labour market reforms is based on changes in structural indicators that significantly reduce the gap of the EU average income towards the best-performing EU countries. We find a general trade-off between an increase in employment for a particular group and the income of the average group member relative to income per capita. Reforms that increase employment of low- and medium-skilled workers imply a trade-off between employment and wages in the low- and medium-skilled group, due to the increase in the skill-specific supply of labour. Capital owners generally benefit from labour market reforms, with an increasing share in total income. This can be attributed to limited entry into the final goods production sector, underlining the importance of product market reforms in addition to labour market reforms.

Keywords: labour market reforms, dynamic general equilibrium modelling, income distribution, inequality

JEL Classification: C330, D580, E250, J200

Suggested Citation

Roeger, Werner and Roeger, Werner and Varga, Janos and in 't Veld, Jan and Vogel, Lukas, The Distributional Impact of Labour Market Reforms: A Model-Based Assessment (2019). CESifo Working Paper No. 7918, Available at SSRN: https://ssrn.com/abstract=3480924 or http://dx.doi.org/10.2139/ssrn.3480924

Werner Roeger (Contact Author)

European Commission ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Janos Varga

Independent ( email )

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

CHAR 14/245
Brussels, Bruxelles B-1049
Belgium
(32 2) 2993 577 (Phone)
(32 2) 2957 499 (Fax)

Lukas Vogel

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

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