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Product Market Deregulation and Labor Market Outcomes

Recently, the interactions between product market structure and labor market outcomes have come under increased scrutiny. This paper considers the dynamic relationship between product market regulation and equilibrium unemployment and wages, both theoretically and quantitatively. The main elements of our model are Mortensen-Pissarides-style search and matching frictions, monopolistic competition in the goods market, multi-worker firms and barriers to entry. Our measure of competition has a strong impact on equilibrium unemployment rates and on equilibrium wages, indicating that product market competition does indeed have quantitatively significant effects on labor market outcomes. Most of the impact is achieved by moving from a monopoly to four to five competing firms per industry. Hence, a little bit of competition goes a long way. Competition is then linked to a specific regulatory institution, namely barriers to entry. Data on entry costs are used to compare labor market performance under two regimes: a high-regulation European regime and a low-regulation Anglo-American one. When firms are short-lived, greater European product market regulation can account for unemployment rates that are one to two full percent points greater that the corresponding Anglo-American values.

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Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 02.08.

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Length: 38 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:szg:worpap:0208
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  1. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August.
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  5. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
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  7. Dunne, T. & Roberts, M.J. & Samuelson, L., 1988. "Pattenrs Of Firm Entry And Exit In U.S. Manufacturing Industries," Papers 1-88-2, Pennsylvania State - Department of Economics.
  8. Aghion, Philippe & Howitt, Peter, 1991. "Growth and Unemployment," CEPR Discussion Papers 577, C.E.P.R. Discussion Papers.
  9. Audretsch, David B, 1991. "New-Firm Survival and the Technological Regime," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 441-50, August.
  10. Ljungqvist, Lars & Sargent, Thomas J., 1997. "The European Unemployment Dilemma," Working Paper Series 481, Research Institute of Industrial Economics.
  11. John M. Abowd & Thomas Lemieux, 1991. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," NBER Working Papers 3808, National Bureau of Economic Research, Inc.
  12. Oswald, A. J., 1995. "Efficient contracts are on the labour demand curve: Theory and facts," Labour Economics, Elsevier, vol. 2(1), pages 102-102, March.
  13. Marianne Bertrand & Francis Kramarz, 2001. "Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry," Working Papers 2001-12, Centre de Recherche en Economie et Statistique.
  14. Wagner, Joachim, 1994. "The Post-entry Performance of New Small Firms in German Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 141-54, June.
  15. Nickell, Stephen, 1999. "Product markets and labour markets1," Labour Economics, Elsevier, vol. 6(1), pages 1-20, March.
  16. Djankov, Simeon & La Porta, Rafael & López-de-Silanes, Florencio & Shleifer, Andrei, 2001. "The Regulation of Entry," CEPR Discussion Papers 2953, C.E.P.R. Discussion Papers.
  17. Christopher A. Pissarides, 2002. "Company Start-Up Costs and Employment," CEP Discussion Papers dp0520, Centre for Economic Performance, LSE.
  18. Lars Ljungqvist & Thomas J. Sargent, 2004. "European Unemployment and Turbulence Revisited in a Matching Model," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 456-468, 04/05.
  19. Marianne Bertrand & Francis Kramarz, 2001. "Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry," Working Papers 2001-12, Centre de Recherche en Economie et Statistique.
  20. Alan B. Krueger & Jorn-Steffen Pischke, 1997. "Observations and Conjectures on the U.S. Employment Miracle," NBER Working Papers 6146, National Bureau of Economic Research, Inc.
  21. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
  22. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
  23. Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
  24. Eric Smith, 1999. "Search, Concave Production, and Optimal Firm Size," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 456-471, April.
  25. Lars A. Stole & Jeffrey Zwiebel, 2003. "Organizational Design and Technology Choice under Intrafirm Bargaining: Reply," American Economic Review, American Economic Association, vol. 93(1), pages 456-457, March.
  26. Gersbach, Hans, 2000. "Promoting Product Market Competition to Reduce Unemployment in Europe: An Alternative Approach?," Kyklos, Wiley Blackwell, vol. 53(2), pages 117-33.
  27. Jordi Gali, 1995. "Non-Walrasian Unemployment Fluctuations," NBER Working Papers 5337, National Bureau of Economic Research, Inc.
  28. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  29. Asher Wolinsky, 2000. "A Theory of the Firm with Non-Binding Employment Contracts," Econometrica, Econometric Society, vol. 68(4), pages 875-910, July.
  30. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  31. Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002. "Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms," CEPR Discussion Papers 3510, C.E.P.R. Discussion Papers.
  32. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Organizational Design and Technology Choice under Intrafirm Bargaining," American Economic Review, American Economic Association, vol. 86(1), pages 195-222, March.
  33. Peretto, Pietro F., 1998. "Market Power, Growth and Unemployment," Working Papers 98-16, Duke University, Department of Economics.
  34. Sébastien Jean & Giuseppe Nicoletti, 2002. "Product Market Regulation and Wage Premia in Europe and North America: An Empirical Investigation," OECD Economics Department Working Papers 318, OECD Publishing.
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  37. repec:cup:macdyn:v:5:y:2002:i:05:p:742-747_03 is not listed on IDEAS
  38. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  39. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(05), pages 742-747, November.
  40. Jo Seldeslachts, 2002. "Interactions Between Product and Labour Market Reforms," UFAE and IAE Working Papers 519.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  41. Stole, Lars A & Zwiebel, Jeffrey, 1996. "Intra-firm Bargaining under Non-binding Contracts," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 375-410, July.
  42. Audretsch, David B & Mahmood, Talat, 1995. "New Firm Survival: New Results Using a Hazard Function," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 97-103, February.
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