An overall assessment of the effectiveness of labour market policy instruments put in place or modified during the crisis will have to be made against a longer-term perspective, i.e. whether or not the jobs saved during the crisis will still exist in the medium term after the measures expire (which in most Member States would be by the end of 2010). Moreover, it is too early to provide evidence for the measures’ overall effectiveness at this stage.
However, a simulation using the European Commission’s Labour Market Model (LMM) offers some insight into the potential transmission paths and real-economy impacts of labour market policies which focus on the stabilisation of employment, including the reduction of working time. For an explanation of LMM see Box 8 and Annex 2 below.
LMM is a dynamic computable general equilibrium model containing an in-depth description of the labour market (Berger et al, 2009). The current version of the model covers six Member States, namely Denmark, Germany, Italy, Austria, Poland and United Kingdom.
As an Overlapping Generations Model, it explains optimal behaviour of workers of different age groups, retirees and firms - all acting within an institutional framework that is described in detail. The model’s principal objective is to estimate how an economy might react to changes in labour market policies or other external factors. Those labour market policies may include changes in direct and indirect taxes, lump sum transfers, ALMP, training subsidies, employment protection legislation (including firing taxes) and direct (financial) support to the employed and the employers.
LMM takes on board the complex decisions made by workers and firms. These include what skill level to choose before entering the working process, what amount of labour to supply or demand, at what age to retire, or on what level of wage to bargain. Such decisions are taken following a process of weighing the utility against the marginal costs associated to these efforts.
Firms and workers operate within explicit tax-benefit systems and institutional surroundings. However, the descriptive analysis above indicates the variety of details in the various policy measures implemented to overcome the crisis which a modelling exercise cannot hope to replicate. However, while LMM cannot tackle in-depth policies such as STWA or unemployment benefits, it is a tool for stylised modelling of “core types of action” which focus on employment stabilisation and the impact on working time. Given the variety of measures taken in the Member States, such a process has one major advantage in that it makes cross-country comparisons possible: the same core policy tool would be elaborated for every country considered. However, given LMM’s technical limitations and its limited coverage (with six countries considered) it cannot cover the whole range of very detailed measures implemented by the Member States during the crisis. Nor can it deliver forecasts or produce results which could be generalised for the EU as a whole. The LMM is explained in greater detail in Annex 2 below.
Policy measures are simulated in a comparative-dynamic manner. For example, starting from an initial economic and labour market situation, a measure might be introduced for a period of three years, and then withdrawn. Using the model, it is possible to plot the policy outcome over time (in terms of GDP, output, consumption, capital formation, employment, unemployment and participation) against their initial levels in order to estimate the policy’s likely fundamental impact.
Crisis related measures introduced to protect jobs at the expense of working time mostly envisage a certain (minimum) working time reduction. In other words, the number of hours to be reduced is being targeted ex-ante. In terms of LMM, however, the number of working hours is one of the core endogenous variables and should not be treated as a fixed exogenous policy parameter because it is a major determinant of effective labour volume, productivity and economic growth. Therefore, in order to be close enough to the crisis related measures taken by the Member States, and to respect the model’s core transmission mechanisms, we allow employment stabilisation and working time reduction to be effectuated endogenously by an in-work subsidisation paid from the state budget directly to workers.
This approach is possible because LMM explicitly depicts the responses of households and firms to changes in the institutional framework achieved through policy measures. In this context LMM implicitly takes into account the individual or institutional conditions under which both firms and workers bargain about wages. Firms offer higher wages if productivity is high or if subsidies are being paid to them, which could be conditioned to workers’ training or just to their ‘being employed’. Workers, on the other hand, are assumed to be willing to accept lower wages if the ‘effort cost’ of working decreases, if public wage supplements are paid to them, or if their relative fall-back position worsens because the value of public benefits are reduced.