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Deregulation Shock In Product Market And Unemployment

  • LUISITO BERTINELLI

    (University of Luxembourg CREA)

  • OLIVIER CARDI

    (University Panthéon-Assas ERMES and Ecole Polytechnique)

  • PARTHA SEN

    (Department of Economics, Delhi School of Economics, Delhi, India)

In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the e®ects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive mar- gin. We ¯nd numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with ¯xed labor force. For a calibration capturing alternatively European and the U.S. labor markets, a deregulation episode, which lowers the markup by 3 percent- age points, results in a fall in the unemployment rate by 0.17 and 0.07 percentage point, respectively, while the labor share is almost una®ected in the long-run. The sensitivity analysis reveals that product market deregulation is more e®ective in countries where labor market regulation is high, product markets are initially highly regulated, unemployment bene¯ts are smaller and labor force is more responsive.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 221.

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Length: 48 pages
Date of creation: Nov 2012
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Handle: RePEc:cde:cdewps:221
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