The macroeconomic impact of euro area labor market reforms: evidence from a narrative panel VAR

Abstract

Using quarterly narrative evidence, the paper examines the macro-economic impact of reforms of unemployment benefits (UB) and employment protection legislation (EPL) in the euro area from a Bayesian narrative panel VAR. The approach complements micro-econometric approaches by assessing aggregate effects and aligning short- and medium-term effects in a unified framework. I find that liberalizing reforms of UB and regular contract EPL resulted in temporary wage declines and persistent increases in economic activity and employment.