Product Market Deregulation and Labor Market Outcomes

43 Pages Posted: 12 Jan 2004

See all articles by Monique Ebell

Monique Ebell

Humboldt University of Berlin - Faculty of Economics

Christian Haefke

Institute for Advanced Studies (IHS); NYU, Abu Dhabi; IZA Institute of Labor Economics

Date Written: December 2003

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

JEL Classification: E24, J63, L16, O00

Suggested Citation

Ebell, Monique and Haefke, Christian, Product Market Deregulation and Labor Market Outcomes (December 2003). Available at SSRN: https://ssrn.com/abstract=486007 or http://dx.doi.org/10.2139/ssrn.486007

Monique Ebell

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
D-10178 Berlin
Germany
++49-30-2093-5936 (Phone)

HOME PAGE: http://www.wiwi.hu-berlin.de/wpol/html/staff/Monique.html

Christian Haefke (Contact Author)

Institute for Advanced Studies (IHS) ( email )

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1080 Vienna
Austria

NYU, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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