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

Real GDP growth

2.6

2.4

2.2

2

1.8

1.6

1.4

1.2

--------efficiency shock            baseline

---participation shock.....Nairu fall

Figure 6. Simulated impact of various structured shocks in the euro area

Inflation

Output GAP

Unemployment rate

2.5

2.4

2.3

2.2

2.1

2

1.9

1.8

1.7

1.6

1.5

Potential output growth

Structural fiscal balance (% of GDP)

Fiscal balance (% of GDP)

Net government debt (% of GDP)

Note: The nature of the shocks is specified in the main text. Nominal exchange rate and real interest rates are kept
unchanged relative to baseline. Real government expenditure is also kept at baseline level.

Effects of a decline in structural unemployment

43. Also a decline in structural unemployment would raise the employment rate and potential output.
This is illustrated by a third simulation which reduces the structural unemployment gradually by
1 percentage point over the first three years. The increase in potential output is thus concentrated in these
years and the output gap widens initially by more than in the other simulations. This leads to a larger real
wage and inflation deceleration than in the other two simulations (Figure 6). This stimulates employment,

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