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Product Market Regulation and the Benefits of Wage Moderation


Marcello M. Estevão


International Monetary Fund (IMF) - Western Hemisphere Department

September 2005

IMF Working Paper No. 05/191

Abstract:     
Euro-area real wages have decelerated sharply in the last 20 years, but this has not yet translated into visibly lower unemployment or faster growth. Weak output growth after such a cost shock is somewhat puzzling and has led some to question the benefits of wage moderation. By isolating structural from cyclical factors in a panel of industrial countries, I show that structurally slower real wage growth, that is, "wage moderation," does raise output growth and lower unemployment rates. However, I show that the impact on both variables depends crucially on product market regulation: weaker competition and barriers to entry mute the growth effects of structural real wage changes by allowing incumbent firms to appropriate larger rents. In this context, overly regulated product markets in the euro area are undermining the effects of labor market reforms on output and employment.

Number of Pages in PDF File: 30

Keywords: Structural changes, labor market, product market, reforms

JEL Classification: E24, E61, D40

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Date posted: November 2, 2005  

Suggested Citation

Estevão, Marcello M., Product Market Regulation and the Benefits of Wage Moderation (September 2005). IMF Working Paper No. 05/191. Available at SSRN: http://ssrn.com/abstract=829705 or http://dx.doi.org/10.2139/ssrn.829705

Contact Information

Marcello M. Estevao (Contact Author)
International Monetary Fund (IMF) - Western Hemisphere Department ( email )
700 19th St., NW
HQ1-10-115
Washington, DC 20431
United States
202-623-6038 (Phone)
202-589-6038 (Fax)
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