Abstract
This chapter explores whether labour market reforms impact the price stability mandate. Evidence contained in the chapter shows that a positive (loosening) shock in labour market reforms significantly increases labour productivity, GDP and employment growth. Furthermore, evidence of the responsiveness and peak effects show that GDP growth is highly responsive to an unexpected labour reform loosening stance followed by productivity and employment growth. We find that loosening in the comprehensive labour market regulation index leads to a decline in inflation. This is particularly the case when inflation exceeds 6 per cent. This means that the loosening of the labour market reform stance contributes to the attainment of the price stability mandate. The policy implication is that price stability matters for the effectiveness of labour market reforms. At the same time, the labour market reforms stance supports the attainment of the price stability mandate. These policies re-inforce each other.
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Notes
- 1.
Chamberlain and Yeuh (2006) indicate these include trade unions bargaining collectively or employment laws giving rights to workers, and these are expected to increase workers ability to push for high wages when demands are backed by industrial action and legislation. Price expectation (P e) has a positive effect.
- 2.
However, this assumes price rigidities and market may not clear instantaneously.
- 3.
For instance, weak wage pressures coexist alongside sharp declines in unemployment, business investment does not respond strongly to the extraordinarily low cost of capital; currency depreciations do not lead to robust exports; productivity growth and innovation slow.
- 4.
See Isaacs G (2016). A National Minimum Wage for South Africa. University of the Witwatersrand, SOAS, University of London for further reading.
- 5.
Contrary to Bouis et al. (2016), who define the labour market reform stance as the difference between the number of reforms, we use a principal components analysis (PCA) approach to extract the common factors. The PCA method has the advantage in that it allows for summarizing large information set into a single indicator. Johnson and Wichern (2007) and Helbling et al. (2011) show that, by design, factors extracted via PCA capture maximum variance and that the global factors obtained with a dynamic factor model are qualitatively similar to those derived via the first PCA.
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Gumata, N., Ndou, E. (2017). Labour Market Reforms and the Price Stability Mandate. In: Labour Market and Fiscal Policy Adjustments to Shocks. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-66520-7_10
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DOI: https://doi.org/10.1007/978-3-319-66520-7_10
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