Product Market Deregulation and Labor Market Outcomes

Monique Ebell and Christian Haefke

No 957, IZA Discussion Papers from IZA Network @ LISER

Abstract: 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 entry 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, individual wage bargaining and barriers to entry. We identify two main channels by which product market competition affects unemployment: the output expansion effect, by which a reduction in monopoly power is beneficial for unemployment, and a countervailing effect due to a hiring externality a la Stole and Zwiebel (1996). Quantitatively, increasing our measure of competition has a surprisingly moderate effect on equilibrium unemployment rates, but a substantial effect on equilibrium wages, indicating that product market competition does indeed have quantitatively significant effects on labor market outcomes. 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. Our analysis suggests that no more than half a percentage point of European unemployment rates can be attributed to the regulation of entry.

Keywords: product market competition; barriers to entry; wage bargaining; monopolistic competition; European Unemployment Puzzle (search for similar items in EconPapers)
JEL-codes: E24 J63 L16 O00 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2003-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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Working Paper: Product market deregulation and labor market outcomes (2003)
Working Paper: Product Market Deregulation and Labor Market Outcomes (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp957

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