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The interaction between the labour tax wedge and structural reforms in Italy

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  • Michele Catalano
  • Emilia Pezzolla

Abstract

We present a quantitative analysis of Italian fiscal and structural reforms using the Prometeia Dynamic Stochastic General Equilibrium (DSGE) model to identify the optimal reform mix to boost growth and employment. We find that structural reforms via a reduction in price and wage markups and a labour tax wedge cut can provide a strong stimulus to the economy by increasing GDP and employment levels. The balanced budget constraint shows that to offset the decreased revenue due to the labour wedge cut, a reduction in public lump-sum transfers or a tax shift from labour to consumption or property is preferred over a cut in public spending on goods and services. Conversely, under simultaneous fiscal and structural reforms, the best payoff would be obtained from an expansion to public spending. Finally, we find that public investment works to magnify this effect in the long run.

Suggested Citation

  • Michele Catalano & Emilia Pezzolla, 2015. "The interaction between the labour tax wedge and structural reforms in Italy," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 185-223.
    • Handle: RePEc:cai:reofsp:reof_141_0185
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    Cited by:

    1. Bulent Diclehan Cadirci & Mustafa Tekdere, 2022. "The Effect of Economic Uncertainty on the Tax Wedge: The Case of Selected OECD Countries," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 72(72-2), pages 787-822, December.
    2. Michele Catalano & Emilia Pezzolla, 2017. "The Italian Labor Market Reform: An Evaluation of the Jobs Act Using the Prometeia DSGE Model," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(2), pages 209-238, July.
    3. Alho, Kari E.O., 2015. "Structural Reforms and Stabilization Policies in the Euro Area," ETLA Working Papers 31, The Research Institute of the Finnish Economy.

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