Labour Market Adjustments and Macroeconomic Performance

Unemployment remains the main concern of most EU countries. Substantial differences are observed not only across countries but also across regions of the same country. Important differences also exist across skill groups. We focus here on the skill dimension and report on some results obtained for the Belgian economy, keeping in mind though that the analysis could be extended to other countries characterised by the same problems. We argue that low-skilled unemployment can be explained in terms of biased technological change and relative wage rigidities (related to labour market institutions). We explore in that context the effects of targeted labour tax cuts. We find that it is most important to take into account the effect of such tax cuts on both the job creation and the job destruction rates. The failure to do so may explain the gap between macro- and micro-econometric evaluations of such policies. We also briefly discuss the impact on welfare and examine the consequences of job competition (ladder effect).