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Product market reforms, labour market institutions and unemployment

Griffith, R.; Harrison, R.; Macartney, G.; (2006) Product market reforms, labour market institutions and unemployment. (IFS Working Papers W06/06). Institute for Fiscal Studies: London, UK. Green open access

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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.

Type: Working / discussion paper
Title: Product market reforms, labour market institutions and unemployment
Open access status: An open access version is available from UCL Discovery
Publisher version: http://dx.doi.org/10.1920/wp.ifs.2006.0606
Language: English
Keywords: JEL classification: E24, J50, L50. Product market regulation, competition, wage bargaining, unemployment
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/2689
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