03 July 2012

Goldman Sachs:: Quantifying the impact of labour market reform in the Euro area



Structural reform is a crucial element in
effecting the required reversal of the crosscountry
divergence in competitiveness
accumulated over the first decade of
Monetary Union. This divergence in
competitiveness is reflected in the evolution
of relative unit labour cost (ULC) trends.
With this in mind, we examine two episodes
of significant labour market reform:
Germany’s Hartz IV measures, introduced in
2005, and Italy’s abolition of institutionalised
wage indexation (the scala mobile) in 1992.
The implementation of these reforms has
yielded substantial benefits, notably by
speeding up and magnifying the positive
effect on growth of positive innovations in
ULCs fostered through the reform measures.
Using this historical experience as a guide,
we develop a view on whether the Spanish
labour market reform implemented earlier
this year will have a positive effect on the
outlook for the Spanish economy over our
forecast horizon (i.e., to the end of 2013).
We find that the cumulative boost to Spanish
GDP growth could be as much as two
percentage points, with the maximum impact
occurring as early as around mid-2013. As
positive side effects, inflation dynamics
would also become less persistent, thereby
helping to better control the level of longterm
interest rates. At the same time, we
recognise that this effect is unlikely to be
sufficient to offset the impact of the
deflationary pressures coming from fiscal
austerity and financial market dislocation


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Goldman Sachs  - Quantifying the impact



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