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Product Market Regulation, Firm Selection and Unemployment

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  • Felbermayr, Gabriel

    (University of Munich)

  • Prat, Julien

    (CREST)

Abstract

This paper analyzes the effect of Product Market Regulation (PMR) on unemployment in a search model with heterogeneous multiple-worker firms. In our setup, PMR modifies the distribution of firm productivities, thereby affecting the equilibrium rate of unemployment. We distinguish between PMR related to entry costs and PMR that generates recurrent fixed costs. We find that: (i) higher entry costs raise the rate of unemployment mainly through our novel selection effect, (ii) higher fixed costs lower unemployment through the selection effect and increase it through the competition effect analyzed in Blanchard and Giavazzi (2003). We propose econometric evidence consistent with the unemployment effects of sunk versus recurring costs.

Suggested Citation

  • Felbermayr, Gabriel & Prat, Julien, 2007. "Product Market Regulation, Firm Selection and Unemployment," IZA Discussion Papers 2754, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2754
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    More about this item

    Keywords

    search model; unemployment; product market regulation; firms heterogeneity;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • O00 - Economic Development, Innovation, Technological Change, and Growth - - General - - - General

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