Annex 4 analytical methods

model description

general description

acronym: LMM

name: Labour Market Model

main purpose: The LMM is a dynamic computable general equilibrium model used to analyse the labour market impact of different policy options and other relevant policy questions. It is used to identify the direction and intensity of the effects of labour market policies.

homepage: —

Developer and its nature

ownership: EU ownership (European Commision)

ownership additional info: Developed by EcoAustria but the intellectual property of the European Commission.

is the model code open-source?: NO

Model structure and approach with any key assumptions, limitations and simplifications

details on model structure and approach

Based on an Overlapping Generations approach, household behaviour and all relevant labour market variables are modelled for eight different age groups. Four of these groups belong to the working-age population, three have already reached retirement age and do not participate in the labour market, while the so-called mixed age group includes people of working age who are already eligible to retire. Importantly, the model features three different skill groups (low-, medium-, and high-skilled persons), endogenous skill choice, as well as complementarity between capital formation and skills.

Decisions of households and firms are the result of an optimisation of lifetime utility and firm value, respectively. Households decide on the allocation of private consumption over the life cycle, labour supply along several margins (participation in the labour market, the intensity of job search if unemployed, number of hours worked if employed, and retirement age) and investment in human capital (educational decisions at the beginning of a lifetime and lifelong learning decisions during active life). Firms choose the optimal amount of physical investment, the number of vacancies, the lay-off rate, and the amount of investment in firm sponsored training. The model applies a static search model. The specific structure of the model allows for age- and skill-specific labour markets and unemployment rates. Wages are the result of a bargaining process between firms and households. The model captures a detailed description of public revenues and expenditures, as well as relevant institutions (e.g., passive labour market policies or EPL).

The model derives firms’ and worker’s labour market and economic behaviour from some general intertemporal utility/profit maximisation problems. Most of the resulting equations are assumed to be similar across the different Member States, while country-specific differences are implemented via different values of the same parameter.

model inputs

EU SILC
LFS
HBS
MISSOC

To calibrate the model, a considerable amount of data input from various data sources is required. To the extent possible, we use harmonised data. Basically, part of the calibration procedure is based on methods that are similar across countries (e.g., age- and skill-specific labour market variables derived from disaggregated household micro data or macroeconomic indicators), while other parts of the calibration method (e.g., institutional settings) require considerable additional effort for each country.

model outputs

GDP
Investment
Gross & net wage rate
Participation rate
Employment and unemployment rate
Welfare change
Public consumption
Labour productivity

Intended field of application

policy role: The model can be used to understand the possible direction and intensity of the effects of labour market policies. It is not meant to serve as a short-term forecast of future development but can identify general trends and tendencies in the long-term. Past analyses have included modelling the impact of an increase in the statutory retirement age for several MS, the provision of training to workers and unemployed, the effects of demographic change on key labour market outcomes and the effect of additional migration on labour markets.

policy areas

Economy, finance and the euro
Employment and social affairs

Model transparency and quality assurance

Are uncertainties accounted for in your simulations?: NO - The model is not meant to be used as a definitive forecast but rather to illustrate the direction and magnitude of effects of certain reforms.

Has the model undergone sensitivity analysis?: NO - Sensitivity analysis can be embedded in each of the scenarios simulated.

Has the model been published in peer review articles?: NO

Has the model formally undergone scientific review by a panel of international experts?: NO

Has model validation been done? Have model predictions been confronted with observed data (ex-post)?: NOT_APPLICABLE - Not possible to observe ex-post outcomes.

To what extent do input data come from publicly available sources?: Based on both publicly available and restricted-access sources

Is the full model database as such available to external users?: NO - For the moment, only EC users will have full access to the model and thus to the underlying input data.

Have model results been presented in publicly available reports?: YES

Have output datasets been made publicly available?: NO

Is there any user friendly interface presenting model results that is accessible to the public?: NO - User-friendly excel output available but not available to the public for the moment.

Has the model been documented in a publicly available dedicated report or a manual?: NO

Intellectual property rights

Licence type: No information available

application to the impact assessment

Please note that in the annex 4 of the impact assessment report, the general description of the model (available in MIDAS) has to be complemented with the specific information on how the model has been applied in the impact assessment.

See Better Regulation Toolbox, tool #11 Format of the impact assessment report).