Paper #726

Title:

Product market deregulation and labor market outcomes

Authors:

Monique Ebell and Christian Haefke

Date:

December 2002 (Revised: December 2003)

Abstract:

We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a Mortensen-Pissarides model with monopolistic competition in the goods market and individual wage bargaining. Product market competition affects unemployment via two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. A calibrated model compares a high-regulation European regime to a low-regulation Anglo-American one. Our quantitative analysis suggests that under individual bargaining, no more than half a percentage point of European unemployment rates can be attributed to entry regulation.

Keywords:

Product market competition, barriers to entry, wage bargaining, European Unemployment Puzzle

JEL codes:

E24, J63, L16, O00

Area of Research:

Macroeconomics and International Economics

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