In the long run, real GDP would increase by 1.8 percent,
with most of
the increase
driven by
the re
forms
that boost
labor supply, particularly
through higher
female participation.
As labor supply
increases, labor productivity would
deteriorate
slightly
in the long run
,
but unit labor cost
would still be lower since wages would
decline by more.
With more
labor available for
production, the firms‘ demand for capital would also increase,
and investment would be
permanently higher by 1.5 percent.
This would also lead
to a permanent
real
depreciation
of
almost 0.7
percent
and a slightly stronger external posi
tion
.
After 5 years,
real GDP gains relative to the baseline would be 1
.1
percent
.
Since
in the
medium term
, households
would have perceived the changes in policies regarding ALMP
and childcare as temporary
, they would not fully commit to supplying more
labor. The
impact from easing EPL would
,
in general
,
be marginal.
W
ages would fall by 0
.9
percent,
more than in the long run, since the positive effects of
higher demand for Italian goods and
hence
for production
factors
would still take time to materializ
e
. We see this
also from the
dynamics of
consumption
, which
would
decline slightly
after 5 years
before increasing
in the
long run
.
The relatively modest impact of the labor market reforms reflect
s
several factors. First, i
n the
areas of employment prot
ection legislation, active labor market policies, and childcare
services, Italy, according to the OECD estimates, is not as far off from best practices.
Second, t
he effects of these reforms on productivity and GDP are empirically found to be
relatively sma
ll (e.g., Barnes and others,
2011; Bouis and Duval,
2011), even more so when
government spending associated with these measures (in case of ALMP and childcare) are
offset as assumed in our simulations.
Third
, i
n the short run, their impact is muted because
of
the assumed stepwise credibility of the reforms (per design of the exercise) such that the
future shocks are not fully taken into ac
count in households‘ and firms‘
decisions in the first
years.
