Structural reforms have the potential to reinvigorate growth in the euro area in both the short and longer run. In the euro area growth rates have fallen as a result of several limiting factors. An increased unemployment rate is one of the factors that have retarded growth. The rigidities of the labour market as well as stiff competition in member states are also contributing factors of the same. To promote growth structural reforms especially in the sectors that are lagging the economy backwards are needed and it is through this that some positive changes will occur.
One of the areas where structural reforms are subjected to is in the market competition and regulation. Studies have revealed that mark ups in services are larger than in manufacturing sectors. This is based on the fact that there is high international competition in the manufacturing sector which limits the ability of manufacturing to reap large profits. Reforms in this include the increase in competition force in firms to reduce prices by lowering their mark ups. Reduced prices attract a higher demand for goods and services and this triggers firms to produce more. To ensure that there is enough output to cope with the high market demand the firms will employ more and this eventually cuts down the problem of unemployment.
Reduction of entry barriers for startups in manufacturing sector is also another area where reforms are needed. Reduction of entry barriers in the market lowers fixed cost of firms and also encourages product innovation which results to a wider variety of goods produced in a country. This will bring about increased investment which eventually opens up more job opportunities thereby increasing incomes and consumption which in turn promotes the growth of a country since important tax bases are established through this.
Reforms on taxation are also necessary as a way to stimulate growth. These reforms revolve around shifting the burden of taxation from labour incomes to consumption. This reform makes the returns to labour income more attractive thereby boosting employment especially on the lower end of the wage scale. This shifting of the tax burden away from wage income reduces total distortions on employment decisions and eventually leads to an increase in employment and output.
Reforms on unemployment benefits are also necessary for growth. Reduction in the unemployment benefits reduces pressure on wages and this boosts the supply of labour. Benefit replacement rate help in the reduction of the reservation wage and also the effects of these is that more wages are used in consumption and investment since the disposable incomes of labourers are increased. In the labour markets reforms such as raising the participation rates for women helps the economy to grow. Active labour market policies also affect labour market outcomes by improving the matching process and through this employment is promoted.
Human capital investment reforms are important since they affect the labour force directly. This can be affected through changes in the quality of education to match what is required in the labour market. This will help match individuals with available jobs and reduce the unemployment problem. Policies to increase the number or share of high skilled workers are also part of the reforms that will help build labour productivity. Subsidies and tax credit on R&D investments are also important considerations in reforms. Policies to reallocate skilled workers to research and increasing the demand for high skilled workers is also an important move that promotes growth.
All these reforms are necessary for countries in the euro zone to undertake since they are measures to clear the barriers that inhibit economic grow