Reforming the Liberal Welfare State: International Shocks, Unemployment and Household Income Shares

We examine how labour market and welfare state reforms affect long-run unemployment and the dynamic behaviour of an economy characterised by a liberal welfare state system in response to international shocks. The shares of different income sources in household income shed light on the distributional impact of policy reforms and shocks. Reform packages exist that can improve upon the labour market outcomes of a liberal welfare state system. Even when reducing labour market flexibility and steady-state unemployment, flexicurity reforms appear to lead to a higher volatility in unemployment and GDP in response to exogenous foreign shocks; training expenditure, by improving firms’ productivity, can however reduce these effects.