ISIGrowth findings on the effects of labour market reforms have been included in the last discussion paper of the EU Commission
ISIGrowth findings on the effects of labour market reforms have been included in the December 2017 discussion paper of the European Commission, ‘Inequality and structural reforms: methodological concerns and lesson from policy’.
The publication collects the proceedings of the workshop organised by the Directorate-General for Economic and Financial Affairs held in Brussels on May, 16th 2017. The workshop was aimed at enriching the existing knowledge of the relationship between structural reforms and inequality. Income inequality has become more and more prominent in the academic and policy debate in recent years and particularly since the economic downturn. Inequality, indeed, may have long-term effects on (potential) growth and macroeconomic stability, reinforcing existing inequalities and reducing opportunities, skills development and social and occupational mobility.
ISIGrowth’s coordinator Giovanni Dosi contributed to the workshop proceedings with a paper titled ‘The unexpected damages of labour market flexibility and structural reforms: insights from the ‘Schumpeter meeting Keynes’ agent – based models’. The paper, which summarises a series of contributions developed under the ISIGrowth project, shows that structural reforms aimed at increasing labour market flexibility may have a detrimental effects, not only for the labour market itself, but for the macro-economy overall. The “unexpected” damages of flexibilizing the labour market include both short run effects, as higher GDP volatility and likelihood of crises, but also long run ones, as persistently lower GDP and productivity growth. Ultimately, structural reforms are identified as sources of higher unemployment and both functional and personal inequality.
The results of this contribution show that the flexibilization recipe, the purported panacea to boost the functioning of the labour market according to the “Berlin-Washington Consensus”, actually revealed to be a hoax. If policy-makers aim at improving the performance of the economy, they should introduce policies that increase the rigidities in the labour market. More specifically, policies reforms that sustain low-wage workers and unemployed people by means of income support schemes are rather urgently in the short run to boost aggregate demand. Relatedly, increasing the sharing of the benefits from productivity growth to wage growth and restoring worker bargaining powers are the directions that the European Union should undertake if it wants to counteract the explosion of functional inequality.
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