Product Market Regulation and Wage Premia in Europe and North-America: An Empirical Investigation

Abstract

Using new cross-country data on industry-specific product market regulations, this paper investigates the relationship between wage premia and some of the policy determinants of product market rents. Hourly wage premia in 2-digit manufacturing and non-manufacturing industries are estimated from detailed data on wage earnings in (or around) 1996 by category of worker (age, sex, education and type of contract) in 12 European and North-American countries. The effects of regulation on these wage premia are estimated by panel data regression techniques. We find that product market regulation restricting competition has a significant positive impact on wage premia in both manufacturing and non-manufacturing industries. However, in the latter industries, this effect is offset by a negative effect of legal public monopolies on wage premia. Since public ownership per se shows no relation to premia, we interpret this result as evidence of either a low-productivity trap due to x-inefficiency in heavily regulated industries or the existence of rent-sharing in the form of non-pecuniary rents, such as job stability and/or low worker effort in public monopolies. Our data is unable to discriminate among these two possibilities.

Keywords: Regulation, competition, wage premia, rent-sharing, panel data

JEL Classification: J31, L51, C23