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Unemployment, Growth and Welfare Effects of Labor Market Reforms

Pierre-Richard Agénor () and King Yoong Lim ()

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The Univeristy of Manchester

Abstract: The effects of labor market reforms are studied in an innovation-driven model of endogenous growth with a heterogeneous labor force, labor market rigidities, and structural unemployment. The model is calibrated for stylized high- and middle-income economies and used to perform a range of experiments, including both individual labor market reforms (cuts in the minimum wage and unemployment benefit rates) and composite reform programs involving additional measures. The results show that individual reforms may generate conflicting effects on growth and welfare in the long run, even in the presence of positive policy externalities. A reduction in training costs may also create an oversupply of qualified labor and higher unemployment in the long run. Public investment in infrastructure, partly through its effects on innovation, can help to mitigate this oversupply problem.

Pages: 60 pages
Date: 2017
New Economics Papers: this item is included in nep-dge
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