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Openness and Structural Labour Market Reforms: Counterfactuals for Lithuania

Povilas Lastauskas and Julius Stakenas ()
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Julius Stakenas: Bank of Lithuania

No 1, Bank of Lithuania Discussion Paper Series from Bank of Lithuania

Abstract: This paper deals with the macroeconomic responses to labour market reforms; something of utmost importance in times of monetary policy reaching its limits to affect real economy. We shed more light on the plausible macroeconomic reactions to the ex ante (planned but not implemented yet) reforms in the labour market, taking a currently proposed Social Model in Lithuania as an example. Not only contributing to the current debate on the efficacy of announced structural reforms, we also add to the literature on policy evaluation by assessing reforms from a global perspective. Omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Taking trade connectivity and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labour market policies, and tax wedge on the reforming economy. We contrast the results with the approach when global interdependencies are ignored - still a standard practice. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the initial findings. A discussion on counterfactuals, which use both cross-sectional and temporal dimensions to tackle anticipation effects, is also presented.

Keywords: Labour structural reforms; ex ante policy evaluation; global VAR; social model; spillovers (search for similar items in EconPapers)
JEL-codes: C33 C54 E62 J38 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-08-25
New Economics Papers: this item is included in nep-mac
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