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Product Market Regulation and Endogenous Union Formation

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Author Info

  • Ebell, Monique

    ()
    (Humboldt University Berlin)

  • Haefke, Christian

    ()
    (New York University, Abu Dhabi)

Abstract

We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in an attempt to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are threefold. First, we show that the choice of bargaining regime is crucial for the effect of product market competition on unemployment rates, being substantial under collective bargaining and considerably more modest under individual bargaining. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of product market competition. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution under high degrees of product market competition. This also allows us to link product market competition and collective bargaining coverage rates. Our results suggest that the strong decline in collective bargaining coverage and unionization in the US and UK over the last two decades might have been a direct consequence of the Reagan/Thatcher product market reforms of the early 80’s. Finally, we calibrate the model to assess the quantitative magnitude of our results. We find that moving from the US low regulation-individual bargaining economy to the EU high regulation-collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9 % in the model economy.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2222.

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Length: 60 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2222

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Related research

Keywords: wage bargaining; product market competition; European Unemployment Puzzle; overhiring;

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References

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  1. Monique Ebell & Christian Haefke, 2002. "Product Market Deregulation and Labor Market Outcomes," Working Papers 02.08, Swiss National Bank, Study Center Gerzensee.
  2. Shigeru Fujita & Garey Ramey, 2005. "The dynamic Beveridge curve," Working Papers 05-22, Federal Reserve Bank of Philadelphia.
  3. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc.
  4. Blanchard, Olivier J & Giavazzi, Francesco, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labour Markets," CEPR Discussion Papers 2713, C.E.P.R. Discussion Papers.
  5. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
  6. Stephen Machin, 2000. "Union decline in Britain," LSE Research Online Documents on Economics 20191, London School of Economics and Political Science, LSE Library.
  7. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
  8. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  9. Eric Smith, 1999. "Search, Concave Production, and Optimal Firm Size," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 456-471, April.
  10. Stephen Machin, 2000. "Union Decline in Britain," CEP Discussion Papers dp0455, Centre for Economic Performance, LSE.
  11. Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002. "Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms," IZA Discussion Papers 582, Institute for the Study of Labor (IZA).
  12. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April.
  13. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
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