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The Missing Link: Product Market Regulation, Collective Bargaining and the European Unemployment Puzzle

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  • Christian Haefke
  • Monique Ebell

Abstract

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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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 759.

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Date of creation: 2004
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Handle: RePEc:red:sed004:759

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Keywords: Wage bargaining; European Unemployment Puzzle; product market competition; barriers to entry;

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References

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  1. Van Reenen, John, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U.K. Companies," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 195-226, February.
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Citations

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Cited by:
  1. Monique Ebell, 2006. "Individual Wage Bargaining and Business Cycles," 2006 Meeting Papers 755, Society for Economic Dynamics.
  2. Lei Fang & Richard Rogerson, 2007. "Product Market Regulation and Market Work: A Benchmark Analysis," NBER Working Papers 12891, National Bureau of Economic Research, Inc.
  3. Helge Berger & Stephan Danninger, 2006. "The Employment Effects of Labor and Product Markets Deregulation and their Implications for Structural Reform," CESifo Working Paper Series 1709, CESifo Group Munich.
  4. Bart Hobijn & Aysegül Sahin, 2007. "Firms and flexibility," Staff Reports 311, Federal Reserve Bank of New York.
  5. Winfried Koeniger & Julien Prat, 2007. "Employment Protection, Product Market Regulation and Firm Selection," Economic Journal, Royal Economic Society, vol. 117(521), pages 302-332, 06.
  6. Boulhol, Hervé & Dobbelaere, Sabien & Maioli, Sara, 2006. "Imports as Product and Labor Market Discipline," IZA Discussion Papers 2178, Institute for the Study of Labor (IZA).
  7. Messina, Julian, 2006. "The role of product market regulations in the process of structural change," European Economic Review, Elsevier, vol. 50(7), pages 1863-1890, October.
  8. Zanetti, Francesco, 2009. "Effects of product and labor market regulation on macroeconomic outcomes," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 320-332, June.
  9. Giuseppe Fiori & Giuseppe Nicoletti & Stefano Scarpetta & Fabio Schiantarelli, 2007. "Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?," Boston College Working Papers in Economics 663, Boston College Department of Economics, revised 08 Aug 2008.

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