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Product Market Reforms, Labour Market Institutions and Unemployment

40 Pages Posted: 29 Jun 2006  

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Rupert Harrison

Institute for Fiscal Studies (IFS)

Gareth Macartney

Institute for Fiscal Studies (IFS)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2006

Abstract

We analyze the impact of product market competition on unemployment and wages, and how this depends on labour market institutions. We use differential changes in regulations across OECD countries over the 1980s and 1990s to identify the effects of competition. We find that increased product market competition reduces unemployment, and that it does so more in countries with labour market institutions that increase worker bargaining power. The theoretical intuition is that both firms with market power and unions with bargaining power are constrained in their behaviour by the elasticity of demand in the product market. We also find that the effect of increased competition on real wages is beneficial to workers, but less so when they have high bargaining power. Intuitively, real wages increase through a drop in the general price level, but workers with bargaining power lose out somewhat from a reduction in the rents that they had previously captured.

Keywords: Product market regulation, competition, wage bargaining, unemployment

JEL Classification: E24, J50, L50

Suggested Citation

Griffith, Rachel and Harrison, Rupert and Macartney, Gareth, Product Market Reforms, Labour Market Institutions and Unemployment (April 2006). CEPR Discussion Paper No. 5599. Available at SSRN: https://ssrn.com/abstract=913019

Rachel Griffith (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Rupert Harrison

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Gareth Macartney

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)

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