Labour market regulation and fiscal parameters: A structural model for European regions.

Deregulation of the labour market and public budget balance are usually consid- ered a fundamental requirement for economic performance. This study analyses the long term relationship between these indicators and gross value added (GVA) for a panel of European regions from 1995 to 2008. Following Olley and Pakes (1996) and Levinsohn and Petrin (2003), a structural equation is estimated using a two stages semi-parametric procedure. Results suggest no univocal evidence of a detri- mental effect of labour protection on long term GVA, while public deficit spending is positively associated with higher output. A negative relationship with debt arises only for economies with very high debt/GDP ratios.