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Product Market Regulation and the Benefits of Wage Moderation

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  • Marcello M. Estevão

Abstract

Euro-area real wages have decelerated sharply in the last 20 years, but this has not yet translated into visibly lower unemployment or faster growth. Weak output growth after such a cost shock is somewhat puzzling and has led some to question the benefits of wage moderation. By isolating structural from cyclical factors in a panel of industrial countries, I show that structurally slower real wage growth, that is, "wage moderation," does raise output growth and lower unemployment rates. However, I show that the impact on both variables depends crucially on product market regulation: weaker competition and barriers to entry mute the growth effects of structural real wage changes by allowing incumbent firms to appropriate larger rents. In this context, overly regulated product markets in the euro area are undermining the effects of labor market reforms on output and employment.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/191.

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Length: 30
Date of creation: 01 Sep 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/191

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Related research

Keywords: Labor markets; Unemployment; wage; wages; employment; unemployment rate; labor demand; unemployment rates; benefits; labor income; compensation; unemployed; employment protection; low unemployment; unemployment benefits; labor compensation; effect on employment; employment equations; low unemployment rates; employment effects; worker; high unemployment; employment increase; local unemployment; high unemployment rates; wage bargaining;

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References

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  1. John M. Abowd & Francis Kramarz, 1992. "A Test of Negotiation and Incentive Compensation Models Using Longitudinal French Enterprise Data," NBER Working Papers 4044, National Bureau of Economic Research, Inc.
  2. David Card, 1995. "The Wage Curve: A Review," Working Papers, Princeton University, Department of Economics, Industrial Relations Section. 722, Princeton University, Department of Economics, Industrial Relations Section..
  3. Blanchflower, David G & Oswald, Andrew J, 1990. " The Wage Curve," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 92(2), pages 215-35.
  4. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
  5. Kugler, Adriana & Pica, Giovanni, 2003. "Effects of Employment Protection and Product Market Regulations on the Italian Labor Market," IZA Discussion Papers 948, Institute for the Study of Labor (IZA).
  6. Kugler, Adriana & Pica, Giovanni, 2003. "The effects of employment protection and product market regulations on the Italian labor market," Discussion Paper Series In Economics And Econometrics 0310, Economics Division, School of Social Sciences, University of Southampton.
  7. Sanz de Galdeano, Anna & Turunen, Jarkko, 2005. "Real wages and local unemployment in the euro area," Working Paper Series, European Central Bank 0471, European Central Bank.
  8. Marcello M. Estevão, 2003. "Do Active Labor Market Policies Increase Employment?," IMF Working Papers 03/234, International Monetary Fund.
  9. repec:fth:prinin:343 is not listed on IDEAS
  10. Bowsher, Clive G., 2002. "On testing overidentifying restrictions in dynamic panel data models," Economics Letters, Elsevier, Elsevier, vol. 77(2), pages 211-220, October.
  11. Monique Ebell & Christian Haefke, 2002. "Product market deregulation and labor market outcomes," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003.
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Citations

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Cited by:
  1. Alfonso Arpaia & Gilles Mourre, 2009. "Institutions and performance in European labour markets: taking a fresh look at evidence," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 391, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Roberta Serafini & J. Bruha & B. Pierluigi, 2011. "Euro area labour markets: different reaction to shocks?," EcoMod2011 2970, EcoMod.
  3. Hans Pitlik & Margit Schratzenstaller, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers, WIFO 404, WIFO.
  4. Berger, Helge & Danninger, Stephan, 2006. "The employment effects of labor and product markets deregulations and their implications for structural reform," Discussion Papers 2006/10, Free University Berlin, School of Business & Economics.
  5. Sebastian Weber, 2006. "Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation," IHEID Working Papers, Economics Section, The Graduate Institute of International Studies 22-2006, Economics Section, The Graduate Institute of International Studies.
  6. Christian Dreger & Manuel Art�s & Rosina Moreno & Raúl Ramos & Jordi Suri�ach, 2007. "Study on the feasibility of a tool to measure the macroeconomic impact of structural reforms," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 272, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  7. Helge Berger & Stephan Danninger, 2005. "Labor and Product Market Deregulation," IMF Working Papers 05/227, International Monetary Fund.
  8. Olivier Allain, 2006. "La modération salariale : le point de vue des (néo-)kaleckiens," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00196500, HAL.
  9. repec:hal:journl:halshs-00196500 is not listed on IDEAS
  10. Arjan Lejour & Hugo Rojas-Romagosa, 2008. "International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU," CPB Discussion Paper 105, CPB Netherlands Bureau for Economic Policy Analysis.

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