OPENNESS AND STRUCTURAL LABOR MARKET REFORMS: EX ANTE COUNTERFACTUALS

In this paper we examine plausible macroeconomic responses to the ex ante (planned but not implemented yet) reforms in the labor market, taking a currently proposed Social Model in Lithuania as an example. We contribute not only to the current debate on the efficacy of announced structural reforms, but also to the literature on policy evaluation, by assessing reforms from a global perspective. Taking trade linkages and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labor market policies, and tax wedge on the reforming economy. In particular, we show that the omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the results derived from the aggregate data. (JEL C33, C54, E62, J38)     

Labour market institutions in open economy: Sectoral reallocations,aggregate adjustments,and spillovers

We introduce frictional unemployment in a multiworker heterogeneous firm model with a dynamic matching process, one‐ and two‐sector equilibria, and international markets. A change in labour market policies transforms the share of exporters and affects average productivity. The closure of equilibrium with or without sectoral arbitrage plays an important role in generating macro‐level outcomes for employment subsidies. Unemployment benefits, on the other hand, make unemployment and openness rise, independently of sectoral reallocations. We also find that simultaneous implementation of labour market policies remove potential gain in the trade share, and, when it comes to unemployment benefits, may even be detrimental.