This paper uses an extended version of “FiMod – A DSGE Model for Fiscal Policy
Simulations” (Stähler and Thomas, 2011) with endogenous job destruction decisions
by private firms to analyze the effects of several currently discussed labor
market reforms on the Spanish economy. The main focus is on the firms’ hiring and
firing decisions, on the implications for fiscal balances and on Spain’s international
competitiveness. We find that measures aiming at reducing (policy-induced)
outside option of workers, such as a decrease in unemployment benefits, public
wages or, to a lesser extent, public-sector employment, seem most beneficial to
foster output, employment, international competitiveness and fiscal balances.
Decreasing the unions’ bargaining power also accomplishes this task, however, at
a lower level and at the cost of higher job turnover. Our simulation suggests that
reforming employment protection legislation does not seem to be a suitable tool
from the perspective of improving international competitiveness. All measures
imply (income) redistribution between optimizing and liquidity-constrained
consumers. Our analysis also suggests that those reforms that are beneficial for
Spain generate positive spillovers to the rest of EMU, too.