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Product Market Regulation and the Benefits of Wage Moderation

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  • Marcello M. Estevão

Abstract

Euro-area real wages have decelerated sharply in the last 20 years, but this has not yet translated into visibly lower unemployment or faster growth. Weak output growth after such a cost shock is somewhat puzzling and has led some to question the benefits of wage moderation. By isolating structural from cyclical factors in a panel of industrial countries, I show that structurally slower real wage growth, that is, "wage moderation," does raise output growth and lower unemployment rates. However, I show that the impact on both variables depends crucially on product market regulation: weaker competition and barriers to entry mute the growth effects of structural real wage changes by allowing incumbent firms to appropriate larger rents. In this context, overly regulated product markets in the euro area are undermining the effects of labor market reforms on output and employment.

Suggested Citation

  • Marcello M. Estevão, 2005. "Product Market Regulation and the Benefits of Wage Moderation," IMF Working Papers 05/191, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:05/191
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Beatrice Pierluigi & Jan Bruha & Roberta Serafini, 2014. "Euro area labour markets: Different reaction to shocks?," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 34-60, November.
    2. Christian Dreger & Manuel Artís & Rosina Moreno & Raúl Ramos & Jordi Suriñach, 2007. "Study on the feasibility of a tool to measure the macroeconomic impact of structural reforms," European Economy - Economic Papers 2008 - 2015 272, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Helge Berger & Stephan Danninger, 2005. "Labor and Product Market Deregulation; Partial, Sequential, or Simultaneous Reform?," IMF Working Papers 05/227, International Monetary Fund.
    4. Alfonso Arpaia & Gilles Mourre, 2012. "Institutions And Performance In European Labour Markets: Taking A Fresh Look At Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 1-41, February.
    5. Olivier Allain, 2006. "La modération salariale : le point de vue des (néo-)kaleckiens," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00196500, HAL.
    6. Arjan Lejour & Hugo Rojas-Romagosa, 2008. "International spillovers of domestic reforms: the joint application of the Lisbon Strategy in the EU," CPB Discussion Paper 105, CPB Netherlands Bureau for Economic Policy Analysis.
    7. Marcello M. Estevão, 2007. "Structural Changes And Labor Productivity Slowdown In The Euro Area," Revista Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 25(53), pages 336-367, January.
    8. Sebastian Weber, 2006. "Labor Market Structures, Trade and their Effect on Unemployment: A Theoretical Analysis and Empirical Investigation," IHEID Working Papers 22-2006, Economics Section, The Graduate Institute of International Studies.
    9. Helge Berger & Stephan Danninger, 2007. "The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform," IMF Staff Papers, Palgrave Macmillan, vol. 54(3), pages 591-619, July.
    10. Luciano Marcello Milone, 2015. "Structural Reforms in the European Union after the Global Crisis: Problems and Prospects," Working Papers 171, University of Rome La Sapienza, Department of Public Economics.
    11. Hans Pitlik & Margit Schratzenstaller, 2011. "Growth Implications of Structure and Size of Public Sectors," WIFO Working Papers 404, WIFO.

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    Keywords

    Wages; Structural change; product market; labor market; reforms; wage; unemployment; employment; unemployment rate; Market Structure and Pricing: General;

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