Speed of Adjustment to Selected Labour Market and Tax Reforms

This paper examines the nature and the length of economic adjustments to selected structural reforms,drawing on a variety of approaches: descriptive analysis and simulations using Dynamic GeneralEquilibrium and macro-economic neo-Keynesian models. The descriptive analysis suggests that thecorrelation between reforms, including a change in the tax wedge, the replacement ratio or anti-competitiveproduct market regulation and the structural unemployment rate peaks only after 5 to 10 years. Loweringemployment and price adjustment costs in the euro area to their respective US levels would only have arelatively limited effect on the speed of adjustment to labour market and tax reforms. Monetary policyreaction can speed up the adjustment to a new equilibrium, though to a varying degree in the differentOECD countries or regions. In particular, reforms in individual euro area countries are likely to triggeronly little or no policy reaction, unless there is an area-wide effort to implement reforms.