Marcelo C. Pereira

In this paper we develop an agent-based model to study the short- and long-run impact of structural reforms aimed at increasing the flexibility of the labour market. During the years of the recent European crisis (and also before), the economic policy debate has been marked by the emphasis on the need of labour market structural reforms. This rhetoric has addressed particularly the Mediterranean countries, praising all “recipes” aimed at labour market flexibilization as key to increase productivity and GDP growth, ultimately leading to measures such as the Jobs Act in Italy and the reform of the Code du Travail in France.

The call for such reforms finds support in the “consensus” among several scholars on the idea that labour market rigidities are the source of the observed unemployment. The well-known OECD (1994) Jobs Study has been a landmark in the advocacy of the benefits from labour market liberalization. The report and a series of subsequent papers (including Scarpetta, 1996, Siebert, 1997, Belot and Van Ours, 2004, Bassanini and Duval, 2006) argued that the roots of unemployment rest in social institutions and policies such as unions, unemployment benefits, and employment protection legislation. Under this perspective, the ultimate target for reforms should be fostering productivity and the output growth by tackling such bottlenecks. More precisely, a “Jobs Strategy” was proposed with ten recommendations, wherein three of them were explicitly directed at making wage and labour cost more flexible: (i) removing restrictions that prevent wages to be respondent to local conditions; (ii) reform the employment protection legislation (EPL), abolishing legal provisions that can inhibit the private sector’s employment dynamics; and (iii) reform the Social Security benefits such that equity goals can be reached without impinging the efficient functioning of labour markets (OECD, 1994).

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