IMF Economic Review

, Volume 66, Issue 1, pp 31–69 | Cite as

The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies

Research Article


The paper estimates the dynamic macroeconomic effects of labor and product market reforms on output, employment and productivity, and explores how these vary with prevailing macroeconomic conditions and policies. We apply a local projection method to a new dataset of major country- and country-sector-level reform shocks in various areas of labor market institutions and product market regulation covering 26 advanced economies over the past four decades. Product market reforms are found to raise productivity and output, but gains materialize only slowly. The impact of labor market reforms is primarily on employment, but it varies across types of reforms and depends on overall business cycle conditions—unlike that of product market reforms. Reductions in labor tax wedges and increases in public spending on active labor market policies have larger effects during periods of slack, in part because they usually entail some degree of fiscal stimulus. In contrast, reforms to employment protection arrangements and unemployment benefit systems have positive effects in good times, but can become contractionary in periods of slack. The economy’s response to such reforms is significantly improved when they are accompanied by fiscal or monetary stimulus.

JEL Classification

E32 E52 E62 H30 H53 J21 J65 L43 L51 O43 O47 

Supplementary material (1.3 mb)
Supplementary material 1 (ZIP 1313 kb)


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Copyright information

© International Monetary Fund 2018

Authors and Affiliations

  1. 1.International Monetary FundWashingtonUSA

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