1. 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 España Versión inglesa

2. 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

3. 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

4. 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

5. 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

6. 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

7. 2. Forecasts for the Spanish labour market Pre-crisis employment levels are forecasted to not be reached even by 2020

8. 2. Forecasts for the Spanish labour market The recovery of employment is quite heterogeneous across age groups …

9. 2. Forecasts for the Spanish labour market … sectors …

10. 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

11. 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

12. 3. The simulate impact of a YG-alike measure Simulation 1 How 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

13. 3. The simulate impact of a YG-alike measure Simulation 2 How 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

14. 3. The simulate impact of a YG-alike measure Simulation 2 How 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

15. 3. The simulate impact of a YG-alike measure Simulation 3 How 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

16. 3. The simulate impact of a YG-alike measure Simulation 3 How 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