How quickly does structural reform pay off? An empirical analysis of the short-term effects of unemployment benefit reform

Abstract

While there is a fairly broad consensus regarding the potential adverse effects of generous unemployment benefit insurance on steady-state employment, the short-term effects of benefit reforms are not well-established. This paper contributes to fill this gap by estimating impulse responses to benefit reform "shocks" identified for a panel of OECD countries. Findings indicate that although it takes time for unemployment benefit reforms to pay off, such reforms do not appear to entail any negative short-run effects. There is however some suggestive evidence that reducing unemployment benefits could have negative short-run effects in "bad times".JEL classification: E02, E24, E60, J38, J58, J68

Drivers and effects of labour market reforms: Evidence from a novel policy compendium

“…However, when analysing the effects of reforms at different points of the business cycle, the results reveal that deregulatory labour market reforms increase the unemployment rate in the short run when they are approved during crises-while not having a statistically significant effect if they are implemented during periods of economic stability or expansion. These results are in line with the previous literature which argues that structural reforms might have unintended consequences when implemented during economic crises (Cacciatore et al 2012;Bouis et al 2012).…”

“…For example, Cacciatore et al (2012) use a DSGE model and find that in the short term, labour market reforms increase unemployment and reduce wages, while in the long run they have positive effects on GDP and consumption and consequently on labour market performances. More similar to the methodology of the present analysis, Bouis et al (2012) identify reforms to have taken place if the annual change in the unemployment benefits' replacement rate is above two standard deviations of the average change across countries. With this indicator, they report for a panel of OECD countries that reductions in the unemployment benefit replacement rates are positively correlated with increases in employment rates.…”

Going for Growth 2019 – reform actions taken in 2017-18

“…Governments may be unwilling to face the short run costs of structural reforms. Some reforms may hit the most vulnerable in the short run, even if the overall effect is positive in the medium-term (Bouis et al, 2012). Examples include wage bargaining reforms aimed at encouraging wage responsiveness to cyclical and local conditions as well as tax reforms to achieve internal devaluation in the absence of exchange rate adjustment (i.e.…”

Identifying asymmetric effects of labor market reforms

“…A more standard approach to measure reforms would be given by using observed (or at least constructable) indicators such as replacement rates or OECD indexes of employ ment protection legislation (e.g., Bouis et al, 2012 andBanerji et al, 2017). 4 While this approach has the advantage of clear interpretability, obvious difficulties are connected to measurement, i.e., the strength of reforms, timing/anticipatory effects (these indicators are only available at annual frequency), and the restriction to the limited parts of the legislation that can be defined in a standardized way.…”

“…5 Blanchard and Wolfers (2000) further make 3 A similar identification of persistent components is used to estimate potential output and output gaps (e.g., Morley et al, 2003), trend inflation (e.g., Morley et al, 2015), the natural rate of unemployment (e.g., Everaert, 2008, Sinclair, 2010) and hours (e.g., Vierke and Berger, 2017). 4 Bouis et al (2012) find that reforms take time to fully materialize and that short-run effects of some labor market reforms might become weaker in bad times. 5 See Duval et al (ming) and Ciminelli and Furceri (2017) for discussions and approaches on how to improve the measurement of these indicators along at least part of these dimensions.…”