IMF Survey : Structural Reforms in Advanced Economies: Pressing Ahead and Doing them Right
IMF News, April 6, 2016
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Bibliographic details
- Authors: Romain Duval, Davide Furceri IMF Research Department April
- Published: April 6, 2016
Overview
- Publication: IMF Survey; IMF Research Department; April 6, 2016.
- Context: Persistent weak economic activity in many advanced economies since the 2008–09 global financial crisis has prompted emphasis on structural reforms to complement macroeconomic policies such as fiscal stimulus and unconventional monetary policies.
- Focus: Product market reforms (lowering barriers to firm entry in network, retail trade, and professional services) and labor market reforms (strengthening active labor market policies, revising unemployment benefit provisions, cutting labor taxes, streamlining and harmonizing employment protection legislation for regular and temporary workers).
- Main finding: Product and labor market reforms raise potential output and employment over the medium term; short-term effects are more modest and depend on reform type and macroeconomic conditions.
Key findings on impacts
- Medium-term:
- Product and labor market reforms increase potential output and employment.
- Short-term:
- Product market reforms aimed at reducing barriers to firm entry have some expansionary effect in the short term; they boost private investment and hiring as new firms enter the market, and this effect does not depend markedly on overall economic conditions.
- Some labor market reforms, such as reduced labor tax wedges and increased public spending on active labor market policies, have larger effects under weak macroeconomic conditions, in part because they usually entail some degree of fiscal stimulus.
- Reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can weaken aggregate demand and further lower output in bad times.
- Complementary role of macroeconomic policy:
- Supportive macroeconomic policies can maximize benefits of labor market reforms directly (through aggregate demand) and indirectly (by improving incentives for firms and workers to respond positively to reforms).
Policy recommendations and sequencing
- General guidance:
- Now is a good time to make a big push for additional product and labor market reforms in many advanced economies given need, scope, and a conducive political environment.
- Careful prioritization and sequencing of reforms is required, particularly for labor market reforms, and they should be accompanied by complementary macroeconomic policies.
- Specific recommendations:
- Reforms that involve fiscal stimulus will be the most valuable, including reducing labor tax wedges and increasing public spending on active labor market policies.
- Where budget constraints are binding, budget-neutral implementation of such measures can still support growth.
- Product market reforms should be implemented forcefully, as they boost output even under weak macroeconomic conditions and would not worsen public finances.
- Where possible, narrowing unemployment benefits and easing job protections should be accompanied by other policies to offset their short-term cost.
- Alternatives for politically or macroeconomically constrained settings: enact narrowing of benefits and easing of protections now but have them come into force only when the recovery is more robust, or apply them only to new beneficiaries (“grandfathering” of reforms).
Limitations and complementary actions
- Reforms are not a silver bullet: growth effects appear to be transitory.
- Recommendation: undertake product and labor market reforms in combination with other growth-oriented reforms, including in the areas of education and innovation.
Additional notes
- Further related IMF World Economic Outlook research was scheduled for release on April 12.
- Lead authors: Romain Duval and Davide Furceri; contributors include Alexander Hijzen, Sinem Kılıç Çelik, and João Jalles, with additional contributions and support from a broader team.
IMF Survey : Structural Reforms in Advanced Economies: Pressing Ahead and Doing them Right — Romain Duval and Davide Furceri; IMF Research Department; April 6, 2016