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28 November 2018

EU: assessment of the nature and potential role of structural reform programs in the EU

Recent assessments of the reform policies in Europe focus on the effects of employment protection regulation on economic growth and productivity. The findings lead to the conclusion that changes in labour market are mainly driven by trade reforms and income levels, whilst better employment protection decreases inequality without detrimental effects on economic growth.

Reforms in labour markets play a central role in government policies. In recent years, several authors have tried to analyse the impact of these reforms on economic performance. A first assessment in 2015 analysed the main features and determinants of EU labour market reforms over the period of 2000–2011 using a European Commission database. The comprehensive study indicated that countries with similar institutional settings had followed broadly analogous reform patterns throughout the 2000s. The 2008 crisis triggered increased reform policies in a large number of EU countries. At the start of the recession, reforms were mainly aimed at supporting labour demand and adapting social safety nets. In a later stage, reforms intensified in policy areas related to labour market adjustment, including employment protection legislation and wage setting frameworks. The authors concluded that reform activism was more intense in countries with a longer record of EU membership. They found evidence that some reforms, notably those reducing the extent of employment and wage setting regulations, were triggered by financial market pressure.

A recent publication that brings together leading contributions from academia, the central banks in Europe, and the OECD argues that structural reforms can make a fundamental contribution to improving economic performance. However, the type of reform, timing, sequence, and political constraints play crucial roles in determining the impact of reforms on economic growth and income inequality. The book Political Economy of Structural Reforms in Europe bundles together theoretical and empirical studies that address the potential role of structural reform in restoring macroeconomic stability, resuming economic growth, addressing income inequality, and grappling secular stagnation. The assessment of the costs and benefits of different reform programs throws new light on the determinants and effects of reforms and on how these shape the European integration experience. The authors conclude that structural reform policies operate like the business cycle. There are moments when these are implemented with great fervour and others when they are put on the back burner or even dismantled. In a column based on the research the authors make an attempt to address the lack of adequate knowledge which makes the implementation of reforms more difficult and limits their effectiveness.

Some of the authors have focused on the impact of reform on the labour market - one of the most important structural reforms but also one of the least well-understood. Changes in labour market laws seem to be mainly driven by trade reforms and income levels. In an interesting blog, the authors criticise the orthodox view, that changes in employment laws which lower the costs of hiring workers (and of firing them) should foster job creation and help firms recover from shocks. According to this position, employment protection stifles inequality and obstructs the recovery. The authors of the blog conclude that, in fact, the opposite happens - labour market rigidity reduces income inequality without detrimental effects on economic growth. They conclude that more work is needed that differentiates between de jure and de facto liberalisation. It is necessary to dig deeper in the various facets of labour reform, within and beyond employment protection, including changes in unemployment benefits and active labour market policies.

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