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Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets

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Author Info
Olivier Blanchard
Francesco Giavazzi

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Abstract

Product and labor market deregulation are fundamentally about reducing and redistributing rents, leading economic players to adjust in turn to this new distribution. Thus, even if deregulation eventually proves beneficial, it comes with strong distribution and dynamic effects. The transition may imply the decline of incumbent firms. Unemployment may increase for a while. Real wages may decrease before recovering, and so on. To study these issues, we build a model based on two central assumptions: Monopolistic competition in the goods market, which determines the size of rents; and bargaining in the labor market, which determines the distribution of rents between workers and firms. We then think of product market regulation as determining both the entry costs faced by firms, and the degree of competition between firms. We think of labor market regulation as determining the bargaining power of workers. Having characterized the effects of labor and product market deregulation, we then use our results to study two specific issues. First, to shed light on macroeconomic evolutions in Europe over the last twenty years, in particular on the behavior of the labor share. Second, to look at political economy interactions between product and labor market deregulation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8120.

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Date of creation: Feb 2001
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Handle: RePEc:nbr:nberwo:8120

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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
L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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  2. Boeri, Tito & Nicoletti, Giuseppe & Scarpetta, Stefano, 2000. "Regulation And Labour Market Performance," CEPR Discussion Papers 2420, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Layard, Richard & Nickell, Stephen, 1990. "Is Unemployment Lower if Unions Bargain over Employment?," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 773-87, August. [Downloadable!] (restricted)
    Other versions:
  4. Julio J. Rotemberg & Michael Woodford, 1999. "The Cyclical Behavior of Prices and Costs," NBER Working Papers 6909, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Samuel Bentolila & Gilles Saint Paul, 1999. "Explaining Movements in the Labor Share," Economics Working Papers 374, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  6. Paz Espinosa, Maria & Rhee, Changyong, 1989. "Efficient Wage Bargaining as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 565-88, August. [Downloadable!] (restricted)
  7. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December. [Downloadable!] (restricted)
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  9. Oliver J. Blanchard, 1997. "The Medium Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-2), pages 89-158. [Downloadable!]
  10. Argia Sbordone, 2002. "An optimizing model of U.S. wage and price dynamics," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
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  11. Paul Joskow & Nancy L. Rose, 1987. "The Effects of Economic Regulation," Working papers 447, Massachusetts Institute of Technology (MIT), Department of Economics.
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  12. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December. [Downloadable!] (restricted)
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