Product Market Deregulation and Labor Market Outcomes

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 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 and barriers to entry. Our measure of competition has a strong impact on equilibrium unemployment rates and on equilibrium wages, indicating that product market competition does indeed have quantitatively significant effects on labor market outcomes. Most of the impact is achieved by moving from a monopoly to four to five competing firms per industry. Hence, a little bit of competition goes a long way. 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. When firms are short-lived, greater European product market regulation can account for unemployment rates that are one to two full percent points greater that the corresponding Anglo-American values.