Product and Labour Market Interactions in OECD Countries

Abstract

This paper analyses several of the cross-market effects of policies aimed at influencing outcomes in product and labour markets. Focusing on subsets of OECD countries, we look at the implications of product market competition for industry wages and overall employment, and the implications of labour market arrangements for industrial structure and innovation potential. We also look at the potential implications of regulatory reform for employment security and income inequality. We provide empirical evidence on long-run policy interactions by exploiting the cross-country and intersectoral dimensions of the data, though the analysis of employment uses also the time-series dimension.To this end, we relie on a large set of indicators of (economy-wide) labour market policies and institutions and (economy-wide, industry-specific and time-varying) product market regulations. We find that: (a) anticompetitive product market regulations have significant negative effects on non-agricultural employment rates; (b) wage premia generally increase with product market regulations that curb competition, although premia tend to revert to lower levels as market mechanisms are displaced by regulation (e.g. public monopolies); (c) the effects of employment protection policies on innovation activity are significant, with their sign and magnitude depending on industrial relations and technological regimes; (d) countries having stricter regulations tend to specialise in industries with relatively lower R&D intensity and wages; (e) labour market policies and institutional arrangements have significant unintended effects on the size distribution of firms; (f) product market liberalisation may lead to less job security in the most regulated industries, but no empirical support was found for concerns that it could result in a permanent increase in earnings inequality.

Keywords: Regulation, industrial relations, employment, wage premia, firm size, industry specialisation, innovation, panel data

JEL Classification: L50, J50, E24, J31, L10, O31