We examine product market regulation as an explanation for divergent US and continental European labor market performance. 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 and negligible under individual bargaining. Since the choice of bargaining institution is important, we endogenize it. When product market competition is low, collective bargaining emerges endogenously, while individual bargaining emerges under higher competition. In the calibrated model, we find that increasing entry costs from US to European levels causes equilibrium unemployment rates to increase from 5.5% to 8.3%. Our results also 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 Reagen/Thatcher product market reforms of the early 80's
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
759.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:759
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