OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

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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 General Equilibrium and macro-economic neo-Keynesian models. The descriptive analysis suggests that the correlation between reforms, including a change in the tax wedge, the replacement ratio or anti-competitive product market regulation and the structural unemployment rate peaks only after 5 to 10 years. Lowering employment and price adjustment costs in the euro area to their respective US levels would only have a relatively limited effect on the speed of adjustment to labour market and tax reforms. Monetary policy reaction can speed up the adjustment to a new equilibrium, though to a varying degree in the different OECD countries or regions. In particular, reforms in individual euro area countries are likely to trigger only little or no policy reaction, unless there is an area-wide effort to implement reforms.


Keywords: neo-Keynesian models, adjustment speed, United States, monetary policy, euro area, structural reforms, Taylor rule, DSGE model, adjustment costs
JEL: C5: Mathematical and Quantitative Methods / Econometric Modeling; E5: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit; G10: Financial Economics / General Financial Markets / General Financial Markets: General; E00: Macroeconomics and Monetary Economics / General / Macroeconomics and Monetary Economics: General
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