Study about Lessons from Successful Labor Market Reformers in Europe
Abstract: Welfare states can be reformed successfully, and popular support for reforms can be maintained. But this requires an internally consistent package of labor market, fiscal, and product market reforms, including some kind of buy-in, through, for example, tax cuts. Empirical analysis combined with a select number of case studies—comprising Ireland, Denmark, the Netherlands, and the United Kingdom—reveals that successful reformers focused on increasing labor supply through benefit reform, lowering tax wedges, and lowering government consumption. At the same time, greater labor supply translated into employment growth more effectively in the presence of liberal labor and product markets.
Introduction: The goal of this short paper is straightforward: to illuminate the broad factors driving successful labor market reform in European countries and to derive a road map for emulation. In the wake of adverse global supply shocks in the 1970s and early 1980s, often compounded by domestic policy mistakes, unemployment rose precipitously in many European countries. In some cases, it remains high to this day. But other countries have witnessed a remarkable turnaround, experiencing dramatic declines in unemployment rates, and corresponding sharp increases in employment rates. This paper discusses some of the successful policy responses to these shocks over the past two decades, including the political economy context.
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