Market Power, Growth and Unemployment

Abstract

Unemployment occurs because workers and firms have control over wages and prices. The exercise of market power over wages interacts with its exercise over prices. Understanding this interaction sheds new light on the effects of policy interventions on unemployment and growth. Reforms that result in lower labor costs raise employment, reduce unemployment, and boost growth because they expand the scale of the economy and generate more competition in the product market. The reduction in unemployment is larger than one would expect if the pro-competitive effect of the reforms were ignored. These reforms, thus, are even more attractive when one considers the endogenous structure of the product market. Product market reforms that foster innovation raise employment and reduce unemployment because they attract entry and generate more competition in the product market. The expansion of the economy's scale of activity attracts further entry, which further boosts R&D spending by firms and growth.

JEL Classification: E10, L16, O31, O40