LA GARANTÍA JUVENIL EN ESPAÑA Y EUROPA: UNA OPORTUNIDAD PARA REPENSAR LAS

POLÍTICAS DE EMPLEO JUVENILES

Simulación del impacto en el empleo de las medidas de Garantía Juvenil en

EspañaVersión inglesa

1. The FGB model: key characteristics

2. Forecasts for the Spanish labour market

3. The simulate output and employment impact of a Youth Guarantee-alike measure

Outline

1. The FGB model: key characteristics

The FGB model is a tool for the analysis and forecasting of an economy, with a specific focus on the labour market. The model is made of:

A "core" - or "pilot" - open economy DSGE model block that defines the evolution of the fundamental macro-variables with:

relations derived from households and firms' optimality conditions in imperfect goods and labour markets with nominal and real frictions

special focus on the labour market modeled in terms of stocks and flows through a search and matching framework that considers a distinction between incumbent workers and new entrants, and staggered Nash-wage bargaining

flexibility in simulating policy scenarios, including standard fiscal and monetary policies, as well as active and passive labour market policies

"Satellite" blocks of equations that define the breakdowns of forecasted labour market stocks and flows variables by sectors, occupations, age groups and educational levels

1. The FGB model: key characteristics

Estimation methodology: Bayesian techniques are used for the “pilot” model SURE (Seemingly Unrelated Regression Equations) techniques are

used for the “satellite” blocks

Data: the “pilot” model uses EUROSTAT and OECD quarterly time series of

gross domestic product, private and public consumption, private gross investment, real wages, consumption deflator, population in active age and its official medium-to-long term forecast, labour force, total employment and unemployment rate

the “satellite” blocks use EU LFS quarterly micro data to estimate employment stocks and flows at the desired disaggregation levels

1. The FGB model: key characteristics

The FGB model has been developed considering a small open economy in which the foreign sector is an exogenous component

A recent development extended the original model structure to a symmetric open economy DSGE models that endogenously incorporates the bilateral relations of two countries (or economic areas) and their relationships with the remaining Euro Zone (EZ) and non-EZ partners

Forecasts and simulations shown in the next slides come from an application of this new structure to Italy and Spain

2. Forecasts for the Spanish labour market

Model forecasts to 2018 point to: an improvement of the economy and the labour market outlook a recovery up to pre-crisis levels for real GDP and its main aggregates a recovery below pre-crisis levels for the labour market

Economic Outlook

2008-2013 2013-2018 2008-2018Real GDP (million euro): 1,087,788 1,022,988 1,089,025 -5.96 6.46 0.11 Consumption 834,371 811,611 832,707 -2.73 2.60 -0.20 Investments 316,697 186,656 201,910 -41.06 8.17 -36.25 Imports 288,217 349,120 470,345 21.13 34.72 63.19 Exports 351,497 324,399 415,937 -7.71 28.22 18.33Short-term nominal interest rate (%) 4.63 0.22 0.03 -95.24 -87.66 -99.41Gross average yearly wage (euro) 26,542 25,899 26,043 -2.42 0.56 -1.88Employment (thousand people) 20,470 17,139 18,043 -16.27 5.28 -11.85Unemployment rate (%) 11.3 26.1 22.0 130.97 -15.63 94.88

2008 2013 2018 % change

2. Forecasts for the Spanish labour market

Pre-crisis employment levels are forecasted to not be reached even by 2020

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q3

2014Q1

2014Q3

2015Q1

2015Q3

2016Q1

2016Q3

2017Q1

2017Q3

2018Q1

2018Q3

2019Q1

2019Q3

2020Q1

2020Q315,000

17,000

19,000

21,000

23,000

historical data forecast

Peop

le in

em

ploy

men

t (th

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2. Forecasts for the Spanish labour market

The recovery of employment is quite heterogeneous across age groups …

15-24 25-49 50-64 65+0

2000

4000

6000

8000

10000

12000

14000

16000

2008 2013 2018

2. Forecasts for the Spanish labour market

… sectors …

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Transp

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Accommodati

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Informati

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Finan

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Profes

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Public ad

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Educati

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Human hea

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1000

1500

2000

2500

3000

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2008 2013 2018

Peop

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3. The simulate impact of a Youth Guarantee-alike measure

3 simulations to assess the impact of a YG-alike policy:1. the impact on output and employment cyclical

properties, conditional to a generic source of business cycle variability affecting the demand side of the economy.

2. the impact on output and employment of the implementation of a hiring and wage subsidies for new hires of labour

3. the comparison of the impact on output and employment with more standard and equivalently financed expansionary fiscal policies

3. The simulate impact of a YG-alike measure

YG is modelled as the introduction in Spain or Italy of hiring and wage subsidisation generating and internal deflation (thus a real exchange rate depreciation) through reduced direct and indirect labour costs

Two scenarios: i) no coordination - one country adopts the policy (Italy or Spain); ii) coordination - both countries adopt the policy

The different simulations are made comparable by calibrating the size of each policy shock to be equivalent to 1% of GDP

3. The simulate impact of a YG-alike measure

Simulation 1How does a (1 standard deviation point) demand-side negative shock in Italy affect output and unemployment in Italy and Spain with and without YG?

Without YG, the output and unemployment variability produced by the negative demand shock in Italy (0.012 and 1.14) generates output and unemployment variability also in Spain (0.01 and 0.30)

If only Spain introduces the YG, Spanish output variability reduces (0.00) while unemployment one increases (0.88)

If both countries introduce the YG, both Spanish and Italian unemployment variability increases (1.00 and 3.70)

RESULT 1: the reduction in hiring and wage costs of new entrants increases the responsiveness of labour demand to business cycle, i.e. employers are induced to react to shocks through firing since eventual future hires will be cheaper

Output variance in Spain (Italy)

Unemployment variance in Spain (Italy)

YG Spain

YG Spain

No Yes

No Yes

YG Italy No 0.012 (0.018) 0.004 (0.018)

YG Italy

No 0.300 (1.142) 0.879 (1.175)

Yes 0.013 (0.019) 0.005 (0.020)

Yes 0.330 (3.626) 1.005 (3.706)

3. The simulate impact of a YG-alike measure

Simulation 2How does the Spanish output and unemployment react to the introduction of foreign and home YG-alike measures?

When only Spain introduces a YG-alike measure (green lines), the output short-term response is negative and then becomes positive in the medium term (the unemployment response mimics the same dynamic)

If both countries introduce the YG (red lines), both the short-term negative effects and the longer-term positive ones are dampened

When only Italy introduces a YG-alike measure (blue lines), the Spanish response is negative both in the short-term and in the longer term

3. The simulate impact of a YG-alike measure

Simulation 2How does the Spanish output and unemployment react to the introduction of home and foreign YG-alike measures?

RESULT 2: the introduction of a YG-alike policy has positive effects in the medium to long-term

3 channels make negative the short-term impact of the policy :

i) nominal wage rigidity affecting the intertemporal wage bargaining process, i.e. wages (and therefore prices) do not adjust immediately to the hiring costs reduction

ii) the real interest rate (equal to nominal interest rate minus inflation) temporarily increases reducing consumption and investments because of the inertial behaviour of the monetary authority in adjusting nominal interest rate to accommodate the internal deflation (i.e., when wages and therefore prices

reduce, Central Banks need some time to reduce – when they can – the nominal interest rate accordingly, and therefore the real interest rate temporarily increase

iii) nominal and real rigidities prevents a timely response of the real variables once the monetary authority adjust the nominal interest rate

RESULT 3: the effectiveness of the policy is weakened when the policy is adopted also by the competing country

This depends on the fact that the increased competitiveness due to the internal deflation produced by the policy is the same in the two countries, and therefore operates only through bilateral exchanges with the rest of the world

RESULT 4: uncoordinated policies are detrimental for foreign countries

This depends on the increased price competitiveness of the home production

3. The simulate impact of a YG-alike measure

Simulation 3How does the impact of a YG-alike measure compare to the one of alternative policy measures?

Output fiscal multiplier (variation in GDP due to a one euro expansionary policy shock)

Impact indicates the (instantaneous) impact at the time when the reform is introduced

Instrument

Multiplier

Italy

Spain

Hiring subsidy Impact

-0.25

-0.17

Peak (quarter)

0.31 (19)

0.58 (18)

Wage subsidy Impact

-0.22

-0.14

Peak (quarter)

0.28 (19)

0.46 (18)

Government consumption Impact

0.98

0.99

Peak (quarter)

0.98 (1)

0.99 (1)

Government investment Impact

0.14

0.16

Peak (quarter)

0.31 (5)

0.34 (5)

Wage tax Impact

0.35

0.16

Peak (quarter)

0.35 (1)

0.16 (1)

Consumption tax Impact

0.26

0.18

Peak (quarter) 0.26 (1)

0.18 (2)

3. The simulate impact of a YG-alike measure

Simulation 3How does the impact of a YG-alike measure compare to the one of alternative policy measures?

Unemployment fiscal multiplier (variation in the unemployment rate due to a one euro expansionary policy shock)

Impact indicates the (instantaneous) impact at the time when the reform is introduced

RESULT 4: the efficacy of YG-alike measures is not superior to that resulting from equally financed fiscal policies, such as expansions in government consumption and investments or direct and indirect tax reductions

Instrument

Multiplier

Italy

Spain

Hiring subsidy Impact

-0.01

0.01

Peak (quarter)

-0.21 (16)

-0.39 (17)

Wage subsidy Impact

-0.01

0.00

Peak (quarter)

-0.19 (16)

-0.31 (17)

Government consumption Impact

-0.76

-0.74

Peak (quarter)

-0.76 (1)

-0.74 (1)

Government investment Impact

-0.11

-0.12

Peak (quarter)

-0.16 (4)

-0.17 (4)

Wage tax Impact

-0.27

-0.12

Peak (quarter)

-0.27 (1)

-0.12 (1)

Consumption tax Impact

-0.21

-0.13

Peak (quarter) -0.21 (1) -0.13 (1)