Product Market Regulation and Endogenous Union Formation

60 Pages Posted: 1 Aug 2006

See all articles by Christian Haefke

Christian Haefke

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

Monique Ebell

Humboldt University of Berlin - Faculty of Economics

Date Written: July 2006


We contribute to the growing literature which aims to link product market regulation and competition to labor market outcomes, in an attempt to explain the divergent US and continental European labor market performance over the past two decades. The main contributions of this paper are threefold. First, we show that the choice of bargaining regime is crucial for the effect of product market competition on unemployment rates, being substantial under collective bargaining and considerably more modest under individual bargaining. Since the choice of bargaining institution is so important, we endogenize it. We find that the bargaining regime which emerges endogenously depends crucially on the degree of product market competition. When product market competition is low, collective bargaining is stable, while individual bargaining emerges as the stable institution under high degrees of product market competition. This also allows us to link product market competition and collective bargaining coverage rates. Our results suggest that the strong decline in collective bargaining coverage and unionization in the US and UK over the last two decades might have been a direct consequence of the Reagan/Thatcher product market reforms of the early 80's. Finally, we calibrate the model to assess the quantitative magnitude of our results. We find that moving from the US low regulation-individual bargaining economy to the EU high regulation-collective bargaining economy leads to a substantial increase in equilibrium unemployment rates from 5.5% to 8.9% in the model economy.

Keywords: product market competition, European Unemployment Puzzle, overhiring

JEL Classification: E24, J63, L16

Suggested Citation

Haefke, Christian and Ebell, Monique, Product Market Regulation and Endogenous Union Formation (July 2006). IZA Discussion Paper No. 2222, Available at SSRN: or

Christian Haefke (Contact Author)

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna

NYU, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072

Monique Ebell

Humboldt University of Berlin - Faculty of Economics ( email )

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


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