## sipea2025001 - Section 1 & Section 2

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---

### Introduction and context
- Kosovo experienced a 10 percent decline in population since 2012 (preliminary census information).
- Around one-third of people born in Kosovo live abroad.
- Labor participation has remained flat at just under 40 percent over the past 10 years, compared with averages of 69 percent in the other Western Balkan countries and 75 percent in the EU.
- The unemployment rate fell from around 30 percent 10 years ago to around 11 percent in 2023.
- Net PPP-adjusted average wages in Kosovo are just over one-quarter of the values in Germany.
- Main destination countries of Kosovo emigrants (2023): Germany 47%, Switzerland 28%, Italy 9%, Austria 7%, Slovenia 6%.

### Structural model and scenario design
- Model framework:
  - Extends a search-and-matching model to include inactivity and migration choices by households.
  - Households choose among inactivity, migration, or entering the domestic labor market as unemployed workers.
  - Firms incur entry costs and post vacancies; matching rates depend on structural factors and equilibrium conditions.
  - Calibrated to data for 35 European countries; Kosovo values are estimated using relationships and panel data due to missing country-level series.
- EU integration experiment:
  - Modeled as a reduction in emigration costs by around 6.1 percent (calibrated to imply a doubling of emigration).
  - Two scenarios simulated:
    - Lower migration costs only.
    - Lower migration costs plus productivity increase (production of a worker-firm match rises by around 10.5 percent, implying an increase in output-per-capita of 30 percent, consistent with evidence on new EU member states).

### Simulation results and key findings
- Lower migration costs alone:
  - Tend to hurt the domestic economy (lower wages, higher emigration).
- Lower migration costs combined with productivity convergence:
  - Increase wages (percent changes shown in the source figure).
  - Lower unemployment (percentage point changes shown in the source figure).
  - Increase immigration (percentage point changes shown in the source figure).
  - Productivity improvements help retain workers and boost potential output relative to the “no reform” case by making domestic wages higher and encouraging firm entry, which raises job-finding rates.
- Interpretation:
  - Productivity convergence brought on by EU integration can offset negative effects of lower migration costs.
  - EU integration may itself drive productivity growth via reduced trade barriers and improved financial integration.

### Policy simulations: modeling assumptions and mechanisms
- Four broad policy classes simulated and their modeled numerical representations:
  - Structural reforms:
    - Modeled as an increase in output produced by a matched firm-worker pair by 1 percent.
    - Mechanism: higher revenues → more vacancy posting → higher wages → greater labor market activity.
  - Active labor market policies (ALMP):
    - Modeled as a 10 percent increase in matching efficiency between unemployed workers and firms.
    - Mechanism: easier matches → higher value of entering unemployment and posting vacancies → lower unemployment.
  - Small- and medium-sized enterprise promoting (SME) policies:
    - Modeled as a 10 percent decrease in the cost of posting vacancies.
    - Mechanism: more vacancies per unemployed worker → lower unemployment and more matches.
  - Labor participation policies (LP):
    - Modeled as a 10 percent decrease in home production (reducing benefits of not working).
    - Mechanism: increases opportunity cost of inactivity → more individuals enter the labor market; firms can bargain for marginally lower wages → lower unemployment.
- Note: A prior experiment used a larger productivity shock (production of a match up by around 10.5 percent → output-per-capita up by 30 percent).

### Policy recommendations and examples (Section 2)
- Public infrastructure and regulation:
  - Developing and upgrading public infrastructure, including transport networks, digital infrastructure, and energy supply.
  - Simplifying hiring and firing procedures to reduce the administrative burden on, especially small, businesses.
- Active labor market policies:
  - Improving vocational training.
  - Supporting personalized job search assistance.
  - Implementing youth employment and apprenticeship programs.
  - Improving labor market information systems that help provide accurate information on job vacancies, skill requirements, and employment trends as well as job seekers.
- SME promoting policies:
  - Establishing a one-stop shops for business registration.
  - Reducing incentives for firms to remain informal.
  - Tackling informality by increasing access to digital services (e.g., business registration, tax filing), simplifying tax procedures, and providing support for small businesses (e.g., training, advisory services, market access services).
- Labor participation policies:
  - Providing access to affordable and accessible childcare.
  - Improving equality of quality and accessibility of educational services.
  - Implementing gender budgeting.

### Policy lessons from previous EU accession cases
- Four main themes and example policies observed in Romania, Bulgaria, Poland, and Croatia around accession:
  - Maintaining cultural identities and traditions: state-supported diaspora cultural/linguistic programs and schools.
  - Motivating expatriates to return: grants, streamlined settlement permits, reintegration platforms, language/adaptation courses, scholarships linked to return.
  - Facilitating remittances: measures to prevent double taxation to ease remittance flows.
  - Tackling local workforce shortages: increase work permit quotas for third-country workers; speed up work permit issuance; extend allowable work periods; removal of work permit quotas (example: Croatia).

### Simulation findings and quantitative outcomes (Section 2 figures summarized)
- Simulations show that policymakers have a range of options to improve labor market outcomes and boost potential output. While the magnitudes differ, the four policies all tend to:
  - increase output and wages,
  - lower net emigration,
  - lower the unemployment rate.
- Key comparative labels from the simulations:
  - Policy categories shown: Structural Reforms, ALMP, SME, LP.
- Impact of Simulated Policies on Output (Percent):
  - -2 0 2 4 6 8 10
  - Wage
  - Output per capita
  - Structural Reforms
  - ALMP
  - SME
  - LP
- Impact of Simulated Policies on the Labor Market (Percentage points):
  - -5 -4 -3 -2 -1 0 1 2
  - Labor Participation
  - Unemployment Rate
  - Structural Reforms
  - ALMP
  - SME
  - LP
- Impact of Simulated Policies on Migration (Percentage points):
  - -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08
  - Emigration
  - Immigration
  - Structural Reforms
  - ALMP
  - SME
  - LP

### Conclusions and policy guidance
- Ayerst et al (2024) find large structural barriers in:
  - the productivity of workers,
  - the matching efficiency between workers and firms,
  - the cost of creating new vacancies in Kosovo compared to other European countries and other Western Balkan countries.
- Policies targeting these areas (as in Table 2) could help lift the quality of the Kosovo labor market and boost potential.
- A key result from the policy simulations:
  - Policies that target various stages of the labor market (e.g., participation, job finding, the productivity of the match) have similar macroeconomic impacts.
  - Policymakers should focus on policies with the largest potential impact relative to the cost of implementation.
  - Policies should be combined with careful monitoring and updating to ensure they remain effective and efficient.
- Recommended combined approach:
  - Combine EU integration with continued structural reforms to capture productivity gains and retain workers.
  - Use a diverse policy toolkit to raise potential and support the labor market, including:
    - Structural reforms to improve operational efficiency (examples: tackling informality, increasing financial development, reducing bureaucratic costs and corruption).
    - Active labor market policies to improve matching (examples: standardize accreditation, reskilling, apprenticeships, job counselling, job boards).
    - SME support to lower vacancy posting costs (examples: reduce business startup bureaucracy, promote entrepreneurship, tackle unfair business practices).
    - Labor participation policies to raise participation (examples: address large gender gaps in labor participation).
  - Lessons from accession cases suggest targeted diaspora engagement, return incentives, remittance facilitation, and managed labor inflows as complementary tools.

*IMF Selected Issues Paper (SIP/2025/001): Labor Market Integration and Migration, Republic of Kosovo. Prepared by Stephen Ayerst; completed December 4, 2024.*

### Section 1

### sipea2025001 - Section 1

### Introduction
- Kosovo experienced a 10 percent decline in population since 2012 (preliminary census information).
- Around one-third of people born in Kosovo live abroad.
- Labor participation has remained flat at just under 40 percent over the past 10 years, compared with averages of 69 percent in the other Western Balkan countries and 75 percent in the EU.
- The unemployment rate fell from around 30 percent 10 years ago to around 11 percent in 2023.
- Net PPP-adjusted average wages in Kosovo are just over one-quarter of the values in Germany.
- Main destination countries of Kosovo emigrants (2023): Germany 47%, Switzerland 28%, Italy 9%, Austria 7%, Slovenia 6%.

### Structural Model and Scenarios
- Model framework:
  - Extends a search-and-matching model to include inactivity and migration choices by households.
  - Households choose among inactivity, migration, or entering the domestic labor market as unemployed workers.
  - Firms incur entry costs and post vacancies; matching rates depend on structural factors and equilibrium conditions.
  - Calibrated to data for 35 European countries; Kosovo values are estimated using relationships and panel data due to missing country-level series.
- EU integration experiment:
  - Modeled as a reduction in emigration costs by around 6.1 percent (calibrated to imply a doubling of emigration).
  - Two scenarios simulated:
    - Lower migration costs only.
    - Lower migration costs plus productivity increase (production of a worker-firm match rises by around 10.5 percent, implying an increase in output-per-capita of 30 percent, consistent with evidence on new EU member states).

### Simulation Results and Key Findings
- Lower migration costs alone:
  - Tend to hurt the domestic economy (lower wages, higher emigration).
- Lower migration costs combined with productivity convergence:
  - Increase wages (percent changes shown in the source figure).
  - Lower unemployment (percentage point changes shown in the source figure).
  - Increase immigration (percentage point changes shown in the source figure).
  - Productivity improvements help retain workers and boost potential output relative to the “no reform” case by making domestic wages higher and encouraging firm entry, which raises job-finding rates.
- Interpretation:
  - Productivity convergence brought on by EU integration can offset negative effects of lower migration costs.
  - EU integration may itself drive productivity growth via reduced trade barriers and improved financial integration.

### Policy Simulations (Modeling Assumptions and Mechanisms)
- Four broad policy classes simulated and their modeled numerical representations:
  - Structural reforms:
    - Modeled as an increase in output produced by a matched firm-worker pair by 1 percent.
    - Mechanism: higher revenues → more vacancy posting → higher wages → greater labor market activity.
  - Active labor market policies (ALMP):
    - Modeled as a 10 percent increase in matching efficiency between unemployed workers and firms.
    - Mechanism: easier matches → higher value of entering unemployment and posting vacancies → lower unemployment.
  - Small- and medium-sized enterprise promoting (SME) policies:
    - Modeled as a 10 percent decrease in the cost of posting vacancies.
    - Mechanism: more vacancies per unemployed worker → lower unemployment and more matches.
  - Labor participation policies (LP):
    - Modeled as a 10 percent decrease in home production (reducing benefits of not working).
    - Mechanism: increases opportunity cost of inactivity → more individuals enter the labor market; firms can bargain for marginally lower wages → lower unemployment.
- Note: A prior experiment used a larger productivity shock (production of a match up by around 10.5 percent → output-per-capita up by 30 percent).

### Policy Lessons from Previous EU Accession Cases (Summarized Themes)
- Four main themes and example policies observed in Romania, Bulgaria, Poland, and Croatia around accession:
  - Maintaining cultural identities and traditions: state-supported diaspora cultural/linguistic programs and schools.
  - Motivating expatriates to return: grants, streamlined settlement permits, reintegration platforms, language/adaptation courses, scholarships linked to return.
  - Facilitating remittances: measures to prevent double taxation to ease remittance flows.
  - Tackling local workforce shortages: increase work permit quotas for third-country workers; speed up work permit issuance; extend allowable work periods; removal of work permit quotas (example: Croatia).

### Policy Implications and Recommendations
- Combine EU integration with continued structural reforms to capture productivity gains and retain workers.
- Use a diverse policy toolkit to raise potential and support the labor market, including:
  - Structural reforms to improve operational efficiency (examples: tackling informality, increasing financial development, reducing bureaucratic costs and corruption).
  - Active labor market policies to improve matching (examples: standardize accreditation, reskilling, apprenticeships, job counselling, job boards).
  - SME support to lower vacancy posting costs (examples: reduce business startup bureaucracy, promote entrepreneurship, tackle unfair business practices).
  - Labor participation policies to raise participation (examples: address large gender gaps in labor participation).
- Lessons from accession cases suggest targeted diaspora engagement, return incentives, remittance facilitation, and managed labor inflows as complementary tools.

*IMF Selected Issues Paper (SIP/2025/001): Labor Market Integration and Migration, Republic of Kosovo. Prepared by Stephen Ayerst; completed December 4, 2024.*

### Section 2

### sipea2025001 - Section 2

### Policy recommendations and examples
- Developing and upgrading public infrastructure, including transport networks, digital infrastructure, and energy supply. Simplifying hiring and firing procedures to reduce the administrative burden on, especially small, businesses.
- Active labor market policies
  - Improving vocational training.
  - Supporting personalized job search assistance.
  - Implementing youth employment and apprenticeship programs.
  - Improving labor market information systems that help provide accurate information on job vacancies, skill requirements, and employment trends as well as job seekers.
- SME promoting policies
  - Establishing a one-stop shops for business registration.
  - Reducing incentives for firms to remain informal.
  - Tackling informality by increasing access to digital services (e.g., business registration, tax filing), simplifying tax procedures, and providing support for small businesses (e.g., training, advisory services, market access services).
- Labor participation policies
  - Providing access to affordable and accessible childcare.
  - Improving equality of quality and accessibility of educational services.
  - Implementing gender budgeting.

### Simulation findings and quantitative outcomes
- Simulations show that policymakers have a range of options to improve labor market outcomes and boost potential output. While the magnitudes differ, the four policies all tend to:
  - increase output and wages,
  - lower net emigration,
  - lower the unemployment rate.
- Key comparative labels from the simulations:
  - Policy categories shown: Structural Reforms, ALMP, SME, LP.
- Impact of Simulated Policies on Output (Percent):
  - -2 0 2 4 6 8 10
  - Wage
  - Output per capita
  - Structural Reforms
  - ALMP
  - SME
  - LP
- Impact of Simulated Policies on the Labor Market (Percentage points):
  - -5 -4 -3 -2 -1 0 1 2
  - Labor Participation
  - Unemployment Rate
  - Structural Reforms
  - ALMP
  - SME
  - LP
- Impact of Simulated Policies on Migration (Percentage points):
  - -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08
  - Emigration
  - Immigration
  - Structural Reforms
  - ALMP
  - SME
  - LP

### Conclusions and policy guidance
- Ayerst et al (2024) find large structural barriers in:
  - the productivity of workers,
  - the matching efficiency between workers and firms,
  - the cost of creating new vacancies in Kosovo compared to other European countries and other Western Balkan countries.
- Policies targeting these areas (as in Table 2) could help lift the quality of the Kosovo labor market and boost potential.
- A key result from the policy simulations:
  - Policies that target various stages of the labor market (e.g., participation, job finding, the productivity of the match) have similar macroeconomic impacts.
  - Policymakers should focus on policies with the largest potential impact relative to the cost of implementation.
  - Policies should be combined with careful monitoring and updating to ensure they remain effective and efficient.

*Source: sipea2025001 - Section 2*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025001.pdf_