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Discussion Paper

No. 2007-42 | September 07, 2007
The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment

Abstract

Most people accept that structural and labour market reforms are needed in Europe. However few have been undertaken. The usual conjecture is that reforms are costly in economic performance and costly to finance. Blanchard and Giavazzi (2003) and Spector (2004) develop a general equilibrium model with imperfect competition to show the impact of labour or product market deregulation. We extend that model to combine both reforms, and include the costs of financing them, the conflict between long run gains and short run costs, and to allow for reforms of distortionary taxation. We also extend the model to explain the natural rate of unemployment and non-wage employment costs, to show the impact of reform on the short and long run Phillips curve parameters. We find that structural reforms imply short run costs but long run gains (unemployment rises and then falls, while wages move in the opposite way); that the long run gains outweigh the short run costs; and that the financing of such reforms is the main stumbling block. We also find that the implications for welfare improvements and employment generation are quite different: tax reforms are more effective for welfare, but market liberalisation for employment.

JEL Classification

E24 H23 J58

Cite As

Nikola Bokan and Andrew Hughes Hallett (2007). The Impact of Tax, Product and Labour Market Distortions on the Phillips Curve and the Natural Rate of Unemployment. Economics Discussion Papers, No 2007-42, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-42

Assessment



Comments and Questions


Anonymous - Referee Report
December 11, 2007 - 10:00

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Anonymous - Referee Report
January 02, 2008 - 12:20

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Anonymous - Invited Reader Comment
January 14, 2008 - 09:03

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Nikola Bokan, Andrew Hughes-Hallett - Reply to Referee Reports and Reader Comment
August 15, 2008 - 11:50

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