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Reforming the labor market and improving competitiveness: An analysis for Spain using FiMod

Tim Schwarzmüller and Nikolai Stähler

No 2011,28, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: This paper uses an extended version of 'FiMod - A DSGE Model for Fiscal Policy Simulations' (Stähler and Thomas, 2011) with endogenous job destruction decisions by private firms to analyze the effects of several currently discussed labor market reforms on the Spanish economy. The main focus is on the firms' hiring and firing decisions, on the implications for fiscal balances and on Spain's international competitiveness. We find that measures aiming at reducing (policy-induced) outside option of workers, such as a decrease in unemployment benefits, public wages or, to a lesser extent, public-sector employment, seem most beneficial to foster output, employment, international competitiveness and fiscal balances. Decreasing the unions' bargaining power also accomplishes this task, however, at a lower level and at the cost of higher job turnover. Our simulation suggests that reforming employment protection legislation does not seem to be a suitable tool from the perspective of improving international competitiveness. All measures imply (income) redistribution between optimizing and liquidity-constrained consumers. Our analysis also suggests that those reforms that are beneficial for Spain generate positive spillovers to the rest of EMU, too.

Keywords: general equilibrium; fiscal policy simulations; labor market search (search for similar items in EconPapers)
JEL-codes: E24 E32 E62 H20 H50 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-eur, nep-lab and nep-mac
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Journal Article: Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod (2013) Downloads
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