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Product market reforms, labour market institutions and unemployment

  • Rachel Griffith

    ()

    (Institute for Fiscal Studies and IFS and Manchester)

  • Rupert Harrison

    (Institute for Fiscal Studies)

  • Gareth Macartney

    ()

    (Institute for Fiscal Studies and University College London)

We analyze the impact of product market competition on unemployment and wages, and how this depends on labour market institutions. We use differential changes in regulations across OECD countries over the 1980s and 1990s to identify the effects of competition. We find that increased product market competition reduces unemployment, and that it does so more in countries with labour market institutions that increase worker bargaining power. The theoretical intuition is that both firms with market power and unions with bargaining power are constrained in their behaviour by the elasticity of demand in the product market. We also find that the effect of increased competition on real wages is beneficial to workers, but less so when they have high bargaining power. Intuitively, real wages increase through a drop in the general price level, but workers with bargaining power lose out somewhat from a reduction in the rents that they had previously captured.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W06/06.

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Length: 39 pp.
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:ifs:ifsewp:06/06
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  1. Belot, M.V.K. & van Ours, J.C., 2001. "Unemployment and Labor Market Institutions : An Empirical Analysis," Discussion Paper 2001-50, Tilburg University, Center for Economic Research.
  2. Giuseppe Nicoletti & Stefano Scarpetta, 2005. "Product Market Reforms and Employment in OECD Countries," OECD Economics Department Working Papers 472, OECD Publishing.
  3. Bertrand, Marianne & Kramarz, Francis, 2001. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," CEPR Discussion Papers 3039, C.E.P.R. Discussion Papers.
  4. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
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