The distributional impact of labour market reforms: A model-based assessment

Abstract

Abstract This paper studies the effects of labour market reforms on the functional distribution of income in a DSGE model (Roeger et al., 2008) with skill differentiation, in which households supply three types of labour: low-, medium- and high-skilled. The households receive income from labour, tangible capital, intangible capital, financial wealth, and transfers. We trace how structural reforms in the labour market affect these different types of income. The quantification of labour market reforms is based on changes in structural indicators that significantly reduce the gap of the EU average income towards the best-performing EU countries. We find a general trade-off between an increase in employment for a particular group and the income of the average group member relative to income per capita. Reforms, which aim at increasing employment of low- and medium-skilled workers, are associated with a fall in low- and medium-skilled wages relative to income per capita. Capital owners generally benefit from labour market reforms, with an increasing share of profits in total income that can be attributed to limited entry into the final goods production sector.