Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

fiscal positions, fiscal adjustment and structural reforms

IN LABOUR AND PRODUCT MARKETS

by

Romain Duval⁶²

[Paper prepared for the conference on “Budgetary Implications of Structural Reforms”
organised by the Directorate-General for Economic and Financial Affairs (DG ECFIN) of
the Commission of the European Union on 2 December 2005]

1. Introduction

Many European countries, and in particular a number of those that belong to the euro area,
are usually seen as being in need of structural reform. The symptoms include high unemployment
and low labour-force participation (Figure 1). Contrary to some assertions, low employment in
many euro-area countries is not predominantly the result of an idiosyncratic European taste for
leisure but to a large extent reflects distortions created by policies and institutions.⁶³ Weak
employment also strains government budgets which, in a context of population ageing, is not only
undesirable but also may become unsustainable.

In many EU countries, low employment is accompanied by sub-par productivity levels.⁶⁴
There are many causes for weak productivity, but barriers to competition, reallocation and
innovation created by structural policies in product, labour and financial markets are certainly
among them. Indeed, in spite of progress over past decades, euro-area countries remain more
afflicted by anti-competitive regulatory barriers than most English-speaking countries (Figure 2).
This again underlines the need for structural policy reform.

⁶².Principal economist at the OECD Economics Department. This paper builds very heavily on another paper by Romain Duval and Jorgen
Elmeskov on the effects of EMU on structural reforms (Duval and Elmeskov, 2005). Jackie Gardel, Lyn Urmston and Martine Levasseur
provided secretarial and statistical assistance. The views and results presented in this paper are those of the author and do not necessarily reflect
those of the OECD or its Member countries.

⁶³.About half of the difference between the number of hours worked per capita in the United States and the “old” members of the European Union
reflects lower participation rates and higher unemployment in Europe and these differences can to a large extent be explained by different policy
settings (e.g. Duval, 2004; Jaumotte, 2004; and Elmeskov et al., 1998). Moreover, part of the gap in the number of hours worked per employed
may also reflect policy distortions (Prescott (2004) highlighted the effect of taxes which may affect labour supply along both the intensive and
the extensive margin) even though market failure (e.g. asymmetric information, inter-personal complementarities in leisure consumption) could
boost US hours beyond the social optimum (Landers et al., 1996 and Alesina et al., 2005).

⁶⁴.Observed hourly productivity in countries like Belgium and France is as high as or even higher than in the United States but, to a large extent,
this reflects the exclusion of low-productive workers from the labour force (Bourles and Cette, 2005).

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