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The distributional impact of labour market reforms: A model-based assessment

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  • Roeger, Werner
  • Varga, Janos
  • Veld, Jan in 't
  • Vogel, Lukas

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, which aim at increasing employment of low- and medium-skilled workers, are associated with a fall in low- and medium-skilled wages relative to income per capita. Capital owners generally benefit from labour market reforms, with an increasing share of profits in total income that can be attributed to limited entry into the final goods production sector.

Suggested Citation

  • Roeger, Werner & Varga, Janos & Veld, Jan in 't & Vogel, Lukas, 2021. "The distributional impact of labour market reforms: A model-based assessment," European Economic Review, Elsevier, vol. 131(C).
  • Handle: RePEc:eee:eecrev:v:131:y:2021:i:c:s0014292120302683
    DOI: 10.1016/j.euroecorev.2020.103638
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    More about this item

    Keywords

    Labour market reforms; Dynamic general equilibrium modelling; Income distribution; Inequality;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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