Who Dares, Wins: Labor Market Reforms and Sovereign Yields

IMF Working Papers, June 28, 2017

Source details

The paper shows that investors value the adoption of structural reforms by lending at lower cost.
The reform-induced reduction of long-term yields is bigger when reforms are initiated in good times and in countries facing high borrowing costs.
There is no statistical evidence that markets systematically punish countries that launch reforms concomitantly with fiscal stimulus.
Structural reforms lead to a short-lived overshooting of yields when followed by strikes or lockouts.
Controlling for endogeneity issues does not reject the central finding of the paper.
Results are confirmed when using sovereign credit ratings as an alternative dependent variable.
Two main implications:
- (i) on average, labor market reforms lower borrowing costs; and
- (ii) country-specific circumstances also play a role.

Investors lower lending costs following the adoption of structural (labor market) reforms.
The magnitude of long-term yield reductions:
- Larger when reforms are initiated in good times.
- Larger in countries facing high borrowing costs.
No statistical evidence that simultaneous fiscal stimulus with reforms leads to market punishment.
Social context effect:
- Structural reforms followed by strikes or lockouts induce a short-lived overshooting of yields.
Robustness:
- Controlling for endogeneity does not overturn the central result.
- Using sovereign credit ratings as an alternative dependent variable confirms the results.

On average, labor market reforms can be expected to lower sovereign borrowing costs.
Timing and country context matter: initiating reforms in good times and addressing high borrowing-cost environments can amplify yield benefits.
Policymakers should consider the social context and potential for labor disputes, which can temporarily reverse market gains.
Coordinating reform design and communication to minimize disruptive labor actions may preserve favorable market responses.
There is no broad empirical reason to avoid reforms because of concurrent fiscal stimulus; markets do not systematically punish such combinations.

Subject: Banking crises, Bond yields, Employment protection, Financial crises, Financial institutions, Labor, Macrostructural analysis, Output gap, Production, Structural reforms
Keywords: Banking crises, Bond yields, control group, country outlook, dependent variable, Employment protection, Global, Institutions, Long-term bond yields, long-term yield, Output gap, reforming country, Structural reforms, WP, yield, yield country

Source: IMF Working Paper "Who Dares, Wins: Labor Market Reforms and Sovereign Yields" (June 28, 2017).

Who Dares, Wins: Labor Market Reforms and Sovereign Yields, WP/17/141, June 2017
- Who Dares, Wins: Labor Market Reforms and Sovereign Yields, WP/17/141, June 2017 (Markdown version)
- Who Dares, Wins: Labor Market Reforms and Sovereign Yields, WP/17/141, June 2017 (PDF)