On the Complementarity between Labour Market Regulation and Tax Reforms in the European Union

Abstract

One reason the effects of individual structural reforms are notoriously difficult to capture is the possibility that they depend upon other reforms and institutions. This chapter studies whether and to what extent reforms in labour market regulation are complementary to tax changes in increasing employment in the European Union (EU). We use a dynamic model of employment growth to estimate and try to disentangle the individual effects from the combined effects of these reforms using a yearly panel of EU countries from 1990 to 2015. Our estimates suggest that reform complementarity between labour market policy and taxation, through substantial and significant interaction effects, seems key to foster employment growth and enhance the effectiveness of both reforms.