Labour market reforms boost private investment by 5 percent

Analyzing 354 major reform episodes across 26 OECD economies from 1975 to 2020, ECB researchers found that structural deregulation yields measurable medium-term gains for private capital formation.

Major labour market reforms increase real private investment by a cumulative 5 percent after six years, whereas product market reforms produce a 3 percent increase.

The empirical framework combines local projections with augmented inverse probability weighting to correct for endogeneity and crisis-induced reform timing.

For both reform categories, investment gains accumulate gradually and require approximately three years to achieve statistical significance.

Product market reforms show smaller effects because they frequently target specific network industries rather than the broader economy.

The study demonstrates that structural reforms do not work in isolation.

Their effectiveness depends heavily on institutional quality and financial development.

In countries with strong rule of law, the private investment response to labour market reforms reaches 7 percent over six years, compared to a temporary peak of 2.7 percent in weaker legal environments.

Similarly, deep credit markets and high stock market capitalization double the investment impact of labour market reforms to 10 percent, as accessible external finance allows firms to fund expansion opportunities.