The FGB-LM model

This paper synthetically describes the structure, the estimation and the informative power of the recently updated econometric model for the Italian labour market FGB-LM, developed by the Fondazione Giacomo Brodolini. The model, which has been specifically designed to provide detailed forecasts and policy scenario simulations for labour market stock and flows, is composed of two main building blocks. A theory-based “core” New Keynesian Dynamic Stochastic General Equilibrium (NKDSGE) model describes the evolution of the fundamental macro-variables of the system. “Satellite” blocks of equations, derived from empirical relations, define the breakdown of the employment stocks and flows by sector, region, cohort, job typology and skill. We show that the main distinctive feature of the "core" model lies in the hypotheses describing the functioning of the labour market, which is modelled as an extension of the Mortensen-Pissarides approach. In particular, the introduction of (government) wage and hiring subsidies for newly hired workers, obtained by considering a distinction between incumbent workers and new entrants in the search and matching framework, affects both the job creation condition and the Nash bargained wage, such that unions/firms are non-neutral in wages/labour costs with respect to new hires of labour. Such a modification allows us to simulate the effects of detailed labour market policies specifically targeted to enhancing the employability of the unemployed by subsidizing the hiring cost and/or the wage of newly hired workers. To exemplify on this model potential, an application of the model mimicking the introduction of Youth Guarantee-related measures in Italy is described. Finally, we discuss the modifications and the theoretical solutions that need to be implemented in order to transform the present model structure in a structure describing multiple foreign relations with both EU and non-EU countries.