LMM
Source: Commission modelling inventory and knowledge management system (MIDAS)
Date of Report Generation: Thu Mar 06 2025
Dissemination: Public
© European Union, 2025
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Overview
Acronym
LMM
Full title
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.
Summary
The LMM uses actual economic data to estimate how an economy might react to changes in labour market policies, reforms or external factors. It provides results for each EU Member State as well as for the EU aggregate. The model has been developed by external experts from EcoAustria.
The LMM is a dynamic computable general equilibrium model with a detailed description of the labour market and the public sector (tax- and public social system). It can be used for comparative-static (comparing an initial equilibrium to a new equilibrium after a change) and dynamic simulations (observing an economy’s transition over time from one equilibrium to the other)It is based on an in-depth micro-foundation for the actors involved, namely households and firms. The specific structure of the model allows for results to be split by 8 age groups (based on overlapping generations, starting from 15-19 to 85+). and 3 skill groups (low-, medium- and high skilled). Based on an Overlapping Generations approach, household behaviour and all labour market variables are modelled for eight different age groups.
The LMM is used to provide a theoretical and empirical basis for identifying the possible direction and intensity of the effects of policies, rather than to make forecasts/projections of future developments. For instance, such policies can comprise changes in direct and indirect taxation, active and passive labour market policies, employment protection legislation (EPL), training subsidies, pension regimes, direct support to vulnerable groups (such as low-income employment), and demographic shocks (e.g., migration). Simulation results indicate the effects of policy reforms on macroeconomic and labour-market specific variables (such as GDP, investment, private consumption, unemployment, employment, and wages). Household-specific variables can either be presented on an aggregate level or on a more disaggregated level, such as age- and/or skill-dependent. Based on the model, inter- as well as intra-generational and inter-temporal effects can be analysed.
Model categories
Economy
Model keywords
labour marketoverlapping generations
Model homepage
Ownership and Licence
Ownership
EU ownership (European Commision)
Ownership details
Licence type
No information available
Details
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.
Input and parametrization
- 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.
Main output
- GDP
- Investment
- Gross & net wage rate
- Participation rate
- Employment and unemployment rate
- Welfare change
- Public consumption
- Labour productivity
Spatial & Temporal extent
The output has the following spatial-temporal resolution and extent:
| Parameter | Description |
|---|---|
| Spatial extent / country coverage | EU Member states 27 |
| Spatial resolution | National |
| Temporal extent | Other |
| steady state comparison, not linked to specific periods but changes tend to be longer-term | |
| Temporal resolution | Years |
Quality & Transparency
Quality
Model uncertainties
Models are by definition affected by uncertainties (in input data, input parameters, scenario definitions, etc.). Have the model uncertainties been quantified? Are uncertainties accounted for in your simulations?
- response
- no
- details
- 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.
- url
Sensitivity analysis
Sensitivity analysis helps identifying the uncertain inputs mostly responsible for the uncertainty in the model responses. Has the model undergone sensitivity analysis?
- response
- no
- details
- Sensitivity analysis can be embedded in each of the scenarios simulated.
- url
Have model results been published in peer-reviewed articles?
- response
- no
- details
- url
Has the model formally undergone scientific review by a panel of international experts?
Please note that this does not refer to the cases when model results were validated by stakeholders.
- response
- no
- details
- url
Model validation
Has model validation been done? Have model predictions been confronted with observed data (ex-post)?
- response
- not applicable
- details
- Not possible to observe ex-post outcomes.
- url
Transparency
To what extent do input data come from publicly available sources?
This may include sources accessible upon subscription and/or payment
- response
- Based on both publicly available and restricted-access sources
Is the full model database as such available to external users?
Whether or not it implies a specific procedure or a fee
- response
- no
- details
- For the moment, only EC users will have full access to the model and thus to the underlying input data.
- url
Have model results been presented in publicly available reports?
Note this excludes IA reports.
- response
- yes
- details
- ESDE annual publications.
Have output datasets been made publicly available?
Note this could also imply a specific procedure or a fee.
- response
- no
- details
- url
Is there any user friendly interface presenting model results that is accessible to the public?
For instance: Dashboard, interactive interfaces...
- response
- no
- details
- User-friendly excel output available but not available to the public for the moment.
- url
Has the model been documented in a publicly available dedicated report or a manual?
Note this excludes IA reports.
- response
- no
- details
Is there a dedicated public website where information about the model is provided?
- response
- no
- details
- url
Is the model code open-source?
- response
- no
- details
Can the code be accessed upon request?
- response
- not applicable
- details
The model’s policy relevance and intended role in the policy cycle
The model is designed to contribute to the following policy areas
- Economy, finance and the euro
- Employment and social affairs
The model is designed to contribute to the following phases of the policy cycle
- Anticipation – such as foresight and horizon scanning
- Formulation – such as ex-ante Impact Assessments
The model’s potential
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.
Previous use of the model in ex-ante impact assessments of the European Commission
Use of the model in ex-ante impact assessments since July 2017.