Interactions between product and labour market reforms

Labour market reforms face very often opposition from the employed workers, because it normally reduces their wages. Also product market regulations are regularly biased towards too much benefitting the firms. As a result there remain many frictions in both the labour and product markets that hinder an optimal functioning of the economy. These issues have recently received a lot of attention in the economics literature and scholars have been looking for politically viable reforms in both markets. However, despite its potential importance, there has been done virtually no research on the interaction between reforms in product and labour markets. We find that when combining reforms, the opposition for reforms decreases considerably. This is because there exist complementarities and the gains in total welfare can be more evenly distributed over the interest groups. Moreover, the interaction of reforms offers a way out for the so-called 'sclerosis' effect.

Public enterprise reforms and efficiency in regulated environments: the case of the postal sector

Purpose - This paper focuses on analyzing the effect that public reforms have on the efficiency of state-owned enterprises in regulated environments. Design/methodology/approach - The research is focused in the postal sector where public and private companies must obey a legal framework related to provide a universal service. The analysis is carried out using a panel of 7 European postal operators for the period 1997-2003. The activity analyzed was the letter mail division; we take as key variable the unit cost of a letter and use a translog cost function where as independent variables we include traffic levels, labor cost per employee, quality and availability of the service as well as the type of ownership (public or private). Additionally, in a second stage the geographical differences among countries are considered. Findings - Results indicate that postal operators that experienced organizational changes without being privatized, such as the Spanish and Greek operators, do not have higher unit costs than privatized postal operators like the one of Germany and the Netherlands. Moreover, we find that in all cases the operator of Ireland appear to be the most efficient. In this case restructuring process has been carried out giving an important leadership role to workers. This suggests us that labor culture could be a key variable to study when analyzing reform processes in public enterprises. Originality/value - Our findings show that in a regulated environment like in the postal sector, public and private companies can obtain similar efficiency levels in term of unit costs.

A theoretical and practical study on linear reforms of dual taxes

We extend the linear reforms introduced by Pf¨ahler (1984) to the case of dual taxes. We study the relative effect that linear dual tax cuts have on the inequality of income distribution -a symmetrical study can be made for dual linear tax hikes-. We also introduce measures of the degree of progressivity for dual taxes and show that they can be connected to the Lorenz dominance criterion. Additionally, we study the tax liability elasticity of each of the reforms proposed. Finally, by means of a microsimulation model and a considerably large data set of taxpayers drawn from 2004 Spanish Income Tax Return population, 1) we compare different yield-equivalent tax cuts applied to the Spanish dual income tax and 2) we investigate how much income redistribution the dual tax reform (Act ‘35/2006’) introduced with respect to the previous tax.

The Political cost of reforms

This paper formalizes in a fully-rational model the popular idea that politicians perceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters. To do so, it proposes a model of elections where political ability is ex-ante unknown and investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politicians make too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannot be fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary to the conventional wisdom, uncertainty makes reforms more politically viable and may, under some conditions, increase social welfare. The model is then used to study how political rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistent with a number of empirical regularities on the determinants of reforms and reelection. They are also consistent with a new stylized fact documented in this paper: economic uncertainty is associated to more reforms in a panel of 20 OECD countries.

The political cost of reforms

This paper formalizes in a fully-rational model the popular idea that politiciansperceive an electoral cost in adopting costly reforms with future benefits and reconciles it with the evidence that reformist governments are not punished by voters.To do so, it proposes a model of elections where political ability is ex-ante unknownand investment in reforms is unobservable. On the one hand, elections improve accountability and allow to keep well-performing incumbents. On the other, politiciansmake too little reforms in an attempt to signal high ability and increase their reappointment probability. Although in a rational expectation equilibrium voters cannotbe fooled and hence reelection does not depend on reforms, the strategy of underinvesting in reforms is nonetheless sustained by out-of-equilibrium beliefs. Contrary tothe conventional wisdom, uncertainty makes reforms more politically viable and may,under some conditions, increase social welfare. The model is then used to study howpolitical rewards can be set so as to maximize social welfare and the desirability of imposing a one-term limit to governments. The predictions of this theory are consistentwith a number of empirical regularities on the determinants of reforms and reelection.They are also consistent with a new stylized fact documented in this paper: economicuncertainty is associated to more reforms in a panel of 20 OECD countries.

The effects of structural reforms on productivity and profitability enhancing reallocation: Evidence from Colombia

Estimates for the U.S. suggest that at least in some sectors productivity enhancing reallocationis the dominant factor in accounting for producitivity growth. An open question, particularlyrelevant for developing countries, is whether reallocation is always productivity enhancing. Itmay be that imperfect competition or other barriers to competitive environments imply that thereallocation process is not fully e?cient in these countries. Using a unique plant-levellongitudinal dataset for Colombia for the period 1982-1998, we explore these issues byexamining the interaction between market allocation, and productivity and profitability.Moreover, given the important trade, labor and financial market reforms in Colombia during theearly 1990's, we explore whether and how the contribution of reallocation changed over theperiod of study. Our data permit measurement of plant-level quantities and prices. Takingadvantage of the rich structure of our price data, we propose a sequential mehodology to estimateproductivity and demand shocks at the plant level. First, we estimate total factor productivity(TFP) with plant-level physical output data, where we use downstream demand to instrumentinputs. We then turn to estimating demand shocks and mark-ups with plant-level price data, usingTFP to instrument for output in the inversedemand equation. We examine the evolution of thedistributions of TFP and demand shocks in response to the market reforms in the 1990's. We findthat market reforms are associated with rising overall productivity that is largely driven byreallocation away from low- and towards highproductivity businesses. In addition, we find thatthe allocation of activity across businesses is less driven by demand factors after reforms. Wefind that the increase in aggregate productivity post-reform is entirely accounted for by theimproved allocation of activity.

Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms

Temporary employment contracts allowing unrestricted dismissals wereintroduced in Spain in 1984 and quickly came to account for most new jobs.As a result, temporary employment increased from around 10% in themid-eighties to more than 30% in the early nineties. In 1997, however,the Spanish government attempted to reduce the incidence of temporaryemployment by reducing payroll taxes and dismissal costs for permanentcontracts. In this paper, we use individual data from the Spanish LaborForce Survey to estimate the effects of reduced payroll taxes anddismissal costs on the distribution of employment and worker flows. Weexploit the fact that recent reforms apply only to certain demographicgroups to set up a natural experiment research design that can be usedto study the effects of contract regulations. Our results show that thereduction of payroll taxes and dismissal costs increased the employmentof young workers on permanent contracts, although the effects for youngwomen are not always significant. Results for older workers showinsignificant effects. The results suggest a moderately elastic responseof permanent employment to non-wage labor costs for young men. We alsofind positive effects on the transitions from unemployment and temporaryemployment into permanent employment for young and older workers, althoughthe effects for older workers are not always significant. On the otherhand, transitions from permanent employment to non-employment increasedonly for older men, suggesting that the reform had little effect ondismissals.

Incentives and pharmaceutical reimbursement reforms in Spain

The aim of this paper is to assess whether cost-containment has beenaffected by recent pharmaceutical reimbursement reforms that have beenintroduced in the Spanish health care system over the period 1996-2002,under the conservative Popular Party government. Four main reimbursementpolicies can be observed in the Spanish pharmaceutical market after1996, each of them largely unintegrated with the other three. First, asecond supplementary negative list of excluded pharmaceutical productswas introduced in 1998. Second, a reference pricing system wasintroduced in December 2000, with annual updating and enlargement.Third, the pharmacies payment system has moved from the traditionalset margin on the consumer price to a margin that varies according tothe consumer price of the product, the generic status of the product,and the volume of sales by pharmacies. And fourth, general agreementsbetween the government and the industry have been reached with costcontainment objectives. In the final section of this paper we presentan overall assessment of the impact of these pharmaceuticalreimbursement policies on the behaviour of the agents in thepharmaceutical market.

Tax reforms and inequality: theoretical and empirical implications

In this paper we examine the effect of tax policy on the relationship between inequality and growth in a two-sector non-scale model. With non-scale models, the longrun equilibrium growth rate is determined by technological parameters and it is independent of macroeconomic policy instruments. However, this fact does not imply that fiscal policy is unimportant for long-run economic performance. It indeed has important effects on the different levels of key economic variables such as per capita stock of capital and output. Hence, although the economy grows at the same rate across steady states, the bases for economic growth may be different.The model has three essential features. First, we explicitly model skill accumulation, second, we introduce government finance into the production function, and we introduce an income tax to mirror the fiscal events of the 1980¿s and 1990¿s in the US. The fact that the non-scale model is associated with higher order dynamics enables it to replicate the distinctly non-linear nature of inequality in the US with relative ease. The results derived in this paper attract attention to the fact that the non-scale growth model does not only fit the US data well for the long-run (Jones, 1995b) but also that it possesses unique abilities in explaining short term fluctuations of the economy. It is shown that during transition the response of the relative simulated wage to changes in the tax code is rather non-monotonic, quite in accordance to the US inequality pattern in the 1980¿s and early 1990¿s.More specifically, we have analyzed in detail the dynamics following the simulation of an isolated tax decrease and an isolated tax increase. So, after a tax decrease the skill premium follows a lower trajectory than the one it would follow without a tax decrease. Hence we are able to reduce inequality for several periods after the fiscal shock. On the contrary, following a tax increase, the evolution of the skill premium remains above the trajectory carried on by the skill premium under a situation with no tax increase. Consequently, a tax increase would imply a higher level of inequality in the economy

A theoretical and practical study on linear reforms of dual taxes

[cat] En aquest treball extenem les reformes lineals introduïdes per Pfähler (1984) al cas d’impostos duals. Estudiem l’efecte relatiu que els retalls lineals duals d’un impost dual tenen sobre la distribució de la desigualtat -es pot fer un estudi simètric per al cas d’augments d’impostos-. Tambe introduïm mesures del grau de progressivitat d’impostos duals i mostrem que estan connectades amb el criteri de dominació de Lorenz. Addicionalment, estudiem l’elasticitat de la càrrega fiscal de cadascuna de les reformes proposades. Finalment, gràcies a un model de microsimulació i una gran base de dades que conté informació sobre l’IRPF espanyol de l’any 2004, 1) comparem l’efecte que diferents reformes tindrien sobre l’impost dual espanyol i 2) estudiem quina redistribució de la riquesa va suposar la reforma dual de l’IRPF (Llei ’35/2006’) respecte l’anterior impost.

Tax reforms and inequality: theoretical and empirical implications

In this paper we examine the effect of tax policy on the relationship between inequality and growth in a two-sector non-scale model. With non-scale models, the longrun equilibrium growth rate is determined by technological parameters and it is independent of macroeconomic policy instruments. However, this fact does not imply that fiscal policy is unimportant for long-run economic performance. It indeed has important effects on the different levels of key economic variables such as per capita stock of capital and output. Hence, although the economy grows at the same rate across steady states, the bases for economic growth may be different.The model has three essential features. First, we explicitly model skill accumulation, second, we introduce government finance into the production function, and we introduce an income tax to mirror the fiscal events of the 1980¿s and 1990¿s in the US. The fact that the non-scale model is associated with higher order dynamics enables it to replicate the distinctly non-linear nature of inequality in the US with relative ease. The results derived in this paper attract attention to the fact that the non-scale growth model does not only fit the US data well for the long-run (Jones, 1995b) but also that it possesses unique abilities in explaining short term fluctuations of the economy. It is shown that during transition the response of the relative simulated wage to changes in the tax code is rather non-monotonic, quite in accordance to the US inequality pattern in the 1980¿s and early 1990¿s.More specifically, we have analyzed in detail the dynamics following the simulation of an isolated tax decrease and an isolated tax increase. So, after a tax decrease the skill premium follows a lower trajectory than the one it would follow without a tax decrease. Hence we are able to reduce inequality for several periods after the fiscal shock. On the contrary, following a tax increase, the evolution of the skill premium remains above the trajectory carried on by the skill premium under a situation with no tax increase. Consequently, a tax increase would imply a higher level of inequality in the economy

A theoretical and practical study on linear reforms of dual taxes

[cat] En aquest treball extenem les reformes lineals introduïdes per Pfähler (1984) al cas d’impostos duals. Estudiem l’efecte relatiu que els retalls lineals duals d’un impost dual tenen sobre la distribució de la desigualtat -es pot fer un estudi simètric per al cas d’augments d’impostos-. Tambe introduïm mesures del grau de progressivitat d’impostos duals i mostrem que estan connectades amb el criteri de dominació de Lorenz. Addicionalment, estudiem l’elasticitat de la càrrega fiscal de cadascuna de les reformes proposades. Finalment, gràcies a un model de microsimulació i una gran base de dades que conté informació sobre l’IRPF espanyol de l’any 2004, 1) comparem l’efecte que diferents reformes tindrien sobre l’impost dual espanyol i 2) estudiem quina redistribució de la riquesa va suposar la reforma dual de l’IRPF (Llei ’35/2006’) respecte l’anterior impost.

Financial reforms and capital flows: Insights from general equilibrium

As a result of debt enforcement problems, many high-productivity firms in emergingeconomies are unable to pledge enough future profits to their creditors and this constrains thefinancing they can raise. Many have argued that, by relaxing these credit constraints, reformsthat strengthen enforcement institutions would increase capital flows to emerging economies. Thisargument is based on a partial equilibrium intuition though, which does not take into account theorigin of any additional resources that flow to high-productivity firms after the reforms. We showthat some of these resources do not come from abroad, but instead from domestic low-productivityfirms that are driven out of business as a result of the reforms. Indeed, the resources released bythese low-productivity firms could exceed those absorbed by high-productivity ones so that capitalflows to emerging economies might actually decrease following successful reforms. This resultprovides a new perspective on some recent patterns of capital flows in industrial and emergingeconomies.

Reference prices: the spanish way

The aim of this paper is to analyse the effects of recent regulatory reforms that Spanish Health Authorities have implemented in the pharmaceutical market: the introduction of a reference price system together with the promotion of generic drugs. The main objectives of these two reforms are to increase price competition and, ultimately, reduce pharmaceutical costs. Before the introduction of reference prices, consumers had to pay a fixed copayment of the price of whatever drug purchased. With the introduction of such system, the situation differs in the following way: if (s)he buys the more expensive branded drug, then (s)he pays a sum of two elements: the copayment associated to the reference price plus the difference between the price of this good and the reference price. However, if the consumer decides to buy the generic alternative, with price lower than the reference price, then (s)he has to pay the same copayment as before. We show that the introduction of a reference price system together with the promotion of generic drugs increase price competition and lower pharmaceutical costs only if the reference price is set in a certain interval. Also profits for the duopolists might be reduced. These results are due to the opposing effects that reference prices have on branded and generic producers respectively.