Reforming the labor market and improving competitiveness: an analysis for Spain using FiMod

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.