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Deregulation shock in product market and unemployment

  • Luisito Bertinelli

    ()

    (Faculty of Law, Economics and Finance - University of Luxembourg [Luxembourg])

  • Olivier Cardi

    ()

    (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche, Department of Economics, Ecole Polytechnique - Polytechnique - X - CNRS)

  • Partha Sen

    (Dehli School of Economics - Dehli School of Economics)

In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive margin. We show that beneficial effects in labor market outcomes require that the condition for saddle-path stability must be fulfilled whereas instability yields detrimental effects. Additionally, we find numerically that most of the decline in the unemployment rate can be attributed to the increase in the labor force, while the number of job seekers remains fairly unchanged. For a calibration capturing alternatively European and the U.S. labor markets, a deregulation episode, which lowers the markup by 3 percentage points, results in a fall in the unemployment rate by 0.1 and 0.05 percentage point, respectively, while the labor share is almost unaffected in the long-run.

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Date of creation: 28 Apr 2011
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Handle: RePEc:hal:wpaper:hal-00589228
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