A Model-Based Assessment of the Distributional Impact of Structural Reforms

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

No 91, European Economy - Discussion Papers from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: This paper studies the effects of structural reforms on the functional distribution of income in EU Member States. To study this mechanism we use a DSGE model (Roeger et al. 2008) with households supplying three types of labour, low-, medium- and high-skilled. We assume that households receive income from labour, tangible capital, intangible capital, financial wealth and transfers and we trace how structural reforms affect these types of incomes. The quantification of structural reforms is based on changes in structural indicators that can significantly close the gap of a country’s average income towards the best performing countries in the EU. We find a general trade-off between an increase in employment of a particular group and the income of the average group member relative to income per capita. In general, reforms which aim at increasing employment of low skilled workers are associated with a fall in wages relative to income per capita. Capital owners generally benefit from labour market reforms, with an increasing share in total income, due to limited entry into the final goods production sector. This suggests that labour market re-forms may lead to suboptimal distributional effects if there are rigidities in goods markets present, a finding which confirms the importance of ensuring that such reforms are accompanied or preceded by product market reforms.

JEL-codes: C53 E10 F47 O20 O30 O41 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2019-02
New Economics Papers: this item is included in nep-dge, nep-eec and nep-mac
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:dispap:091

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