Kiel Working Papers, Kiel Institute for World Economics
No 1336:
The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment
Nikola Bokan and Andrew Hughes Hallett
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.
Keywords: Structural reform, wage bargains, short vs. long run substitutability, endogenous entry of firms; (follow links to similar papers)
JEL-Codes: J58,; H23,; E24; (follow links to similar papers)
27 pages, June 2007
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