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Market Power, Growth and Unemployment

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  • Peretto, Pietro F.

Abstract

The modern view of the labor market holds that unemployment is high in economies where unions are strong and the government and other institutions impose on firms obligations that raise the cost of labor. This view is generally correct and yields a clear policy implication: more competition in the labor market reduces unemployment. This simple prescription has been challenged on the grounds that liberalizing the labor market alone cannot solve the unemployment problem when there are frictions in the product and capital markets that limit the economy's ability to create jobs through entrepreneurship. According to this view, competition in the product market is as important as competition in the labor market for keeping unemployment low. Unemployment in Europe, for example, is higher than in the US because both the labor and the product markets are less competitive. I argue that this view is correct in pointing out that explanations that locate the source of unemployment exclusively in the labor market ignore several factors that operate in the product market that are, in fact, crucial. I show, however, that its main conclusion is wrong: labor market reforms that reduce the cost of labor have effects in the product market that

Suggested Citation

  • Peretto, Pietro F., 1998. "Market Power, Growth and Unemployment," Working Papers 98-16, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:98-16
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    Cited by:

    1. Lutz G. Arnold, 2006. "Does the Choice between Wage Inequality and Unemployment Affect Productivity Growth?," German Economic Review, Verein für Socialpolitik, vol. 7, pages 87-112, February.
    2. Carmeci, Gaetano & Mauro, Luciano, 2003. "Imperfect labor market and convergence: theory and evidence for some OECD countries," Journal of Policy Modeling, Elsevier, vol. 25(8), pages 837-856, November.
    3. Monique Ebell & Christian Haefke, 2002. "Product Market Deregulation and Labor Market Outcomes," Working Papers 02.08, Swiss National Bank, Study Center Gerzensee.
    4. Palokangas, Tapio K., 2005. "Economic Integration, Market Power and Technological Change," IZA Discussion Papers 1592, Institute for the Study of Labor (IZA).
    5. Gersbach, Hans & Schniewind, Achim, 2002. "Uneven Technical Progress and Unemployment," IZA Discussion Papers 478, Institute for the Study of Labor (IZA).
    6. Palokangas, Tapio K., 2003. "Labour Market Regulation, Productivity-Improving R&D and Endogenous Growth," IZA Discussion Papers 720, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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