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Product Market Regulation and Endogenous Union Formation

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Author Info
Monique Ebell () (Humboldt University of Berlin)
Christian Haefke () (Institute for Advanced Studies, Vienna, Instituto de Análisis Económico, CSIC and IZA Bonn)

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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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Publisher 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
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Handle: RePEc:iza:izadps:dp2222

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

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Find related papers by JEL classification:
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Shigeru Fujita & Garey Ramey, 2005. "The dynamic Beveridge curve," Working Papers 05-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  2. Delacroix, Alain, 2006. "A multisectorial matching model of unions," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 573-596, April. [Downloadable!] (restricted)
  3. Stephen Machin, 2000. "Union Decline in Britain," CEP Discussion Papers dp0455, Centre for Economic Performance, LSE. [Downloadable!]
  4. Monique Ebell & Christian Haefke, 2002. "Product Market Deregulation and Labor Market Outcomes," Economics Working Papers 726, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2003. [Downloadable!]
    Other versions:
  5. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March. [Downloadable!]
  6. Stephen Machin, 2000. "Union Decline in Britain," British Journal of Industrial Relations, Blackwell Publishers Ltd/London School of Economics, vol. 38(4), pages 631-645, December. [Downloadable!] (restricted)
  7. Olivier Blanchard & Francesco Giavazzi, 2001. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," NBER Working Papers 8120, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, André, 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). [Downloadable!]
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  9. 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. [Downloadable!] (restricted)
  10. Smith, Eric, 1994. "Search, Concave Production, and Optimal Firm Size," CEPR Discussion Papers 882, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Blackwell Publishing, vol. 63(3), pages 375-410, July. [Downloadable!] (restricted)
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  1. Winfried Koeniger & Julien Prat, 2007. "Employment Protection, Product Market Regulation and Firm Selection," Working Papers 07-03, Utrecht School of Economics. [Downloadable!]
    Other versions:
  2. Hervé Boulhol, 2006. "Do capital market and trade liberalization trigger labor market deregulation ?," Cahiers de la Maison des Sciences Economiques bla06062, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
    Other versions:
  3. Hervé Boulhol & Sabien Dobbelaere & Sara Maioli, 2009. "Imports as Product and Labour Market Discipline," Tinbergen Institute Discussion Papers 09-002/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  4. Torben Andersen & Jan Skaksen, 2007. "Labour Demand, Wage Mark-ups and Product Market Integration," Journal of Economics, Springer, vol. 92(2), pages 103-135, October. [Downloadable!] (restricted)
  5. Monique Ebell & Christian Haefke, 2009. "Product Market Deregulation and the U.S. Employment Miracle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 479-504, July. [Downloadable!] (restricted)
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  6. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2008. "Chapter 3: The effect of globalisation on Western European jobs: curse or blessing?," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 71-104, 02. [Downloadable!]
  7. Monique Ebell & Albrecht Ritschl, 2007. "Real Origins of the Great Depression: Monopolistic Competition, Union Power, and the American Business Cycle in the 1920s," SFB 649 Discussion Papers SFB649DP2007-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
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