Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets

49 Pages Posted: 26 Jan 2001  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Francesco Giavazzi

Bocconi University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2000

Abstract

Product and labor market deregulations are fundamentally about reducing and redistributing rents, leading economic players to adjust in turn to this new distribution. Thus, even if deregulation eventually proves beneficial, it comes with strong distribution and dynamic effects. The transition may imply the decline of incumbent firms. Unemployment may increase for a while. Real wages may decrease before recovering, and so on.

To study these issues, we build a model based on two central assumptions: Monopolistic competition in the goods market, which determine the size of rents; and bargaining in the labor market, which determines the distribution of rents between workers and firms. We then think of product market regulation as determining both the entry costs faced by firms, and the degree of competition between firms. We think of labor market regulation as determining the bargaining power of workers.

Having characterized the effects of labor and product market deregulation, we then use our results to study two specific issues. First, to shed light on macroeconomic evolutions in Europe over the last twenty years, in particular on the behavior of the labor share. Second, to look at political economy interactions between product and labor market deregulation.

Keywords: Macroeconomics, regulation, deregulation, rents, bargaining, labor share, unemployment, labor market, product market

JEL Classification: E1, E25, E24, L16, L51, J50

Suggested Citation

Blanchard, Olivier J. and Giavazzi, Francesco, Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets (January 22, 2000). MIT Dept. of Economics Working Paper No. 01-02. Available at SSRN: https://ssrn.com/abstract=257542 or http://dx.doi.org/10.2139/ssrn.257542

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Francesco Giavazzi

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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