Fiscal consolidation in reformed and unreformed labour markets

Alessandro Turrini

Quarterly Report on the Euro Area (QREA), 2012, vol. 11, issue 3, 27-30

Abstract: Since the onset of the of the 2008 financial crisis, Europe has been witnessing a worrying upsurge in unemployment and an unprecedented dispersion of unemployment rates. The implementation of major and protracted fiscal consolidation strategies in such a context, and without prospects of a stable worldwide recovery, has stimulated a policy debate on the growth and employment impact of consolidation measures. (35) Despite these concerns, a number of euro area countries have recently put in place ambitious fiscal consolidation plans while at the same time carrying out major labour market reforms. In particular, the rigid and hard-to-reform employment protection legislation (EPL) systems in southern European countries have been profoundly shaken up with a view to stimulating job creation and tackling the problem of labour market segmentation. At the same time, severe budgetary cuts have been implemented in order to put public finances on a sustainable footing and reassure markets. Empirical analyses of the impact of fiscal policy focus mostly on output, (36) while only a few papers look at the unemployment and labour market impact. An example of the latter is Monacelli et al. (2010) (37), who develop a structural VAR for the US and find a negative and significant impact of government spending on unemployment and job destruction, while job creation increases. Against this background, the present section aims to address the following questions: ï How do employment protection reforms interact with fiscal consolidation in determining unemployment and labour market flows? (35) See for instance Corsetti, G. (2012), ëHas austerity gone too far?í, VoxEU.org, 2 April. (36) Blanchard, O. and R. Perotti (2002), ëAn empirical characterization of the dynamic effects of changes in government spending and taxes on outputí, Quarterly Journal of Economics, Vol. 117, NR. 1329-68; and Perotti, R. (2005), ëEstimating the effects of fiscal policy in OECD countriesí, Proceedings, Federal Reserve Bank of San Francisco. (37) Monacelli, T, R. Perotti, and A. Trigari (2010), ëUnemployment fiscal multipliersí, Journal of Monetary Economics, 97(5), 531-553 ï What is the impact of fiscal consolidation on job market flows, and does it matter if dismissals are less costly? The section looks at the impact of fiscal policy on cyclical unemployment, job market flows and the share of long-term unemployment. Cyclical unemployment is defined as the difference between the actual unemployment rate and the non-accelerating-wage rate of unemployment (NAWRU). The analysis is based on a recent panel regression presented in more detail in Turrini (2012).

Keywords: fiscal consolidation; labour markets (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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