Working Paper 12-04 - The macro-economic effects of labour market reforms in the European Union - Some selected simulations with the NIME model.

In this paper, we use the nime model to assess the medium-term macro-economic effects for the European Union (eu) of a one percentage point cut in the social security contribution rate, and a one percentage point increase in the labour participation rate. In the case of a cut in the social security contribution rate, we consider two variants. First, we consider the variant in which the tax cut is ex ante financed by an across the board cut in public outlays. Next, we consider the variant in which the tax cut is ex ante financed by an increase in the indirect tax rates. In the long run, such measures increase unambiguously employment and potential output, thereby raising the standard of living of the eu citizens and reinforcing the sustainability of the social protection system. However, all kinds of rigidities prevent an immediate adjustment towards the new equilibrium, so that economic activity may be less buoyant in the medium-term. This paper describes these medium-term effects.