Working Paper: CEPR ID: DP2713
Authors: Olivier Blanchard; Francesco Giavazzi
Abstract: Product and labour market deregulation 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 determines the size of rents, and bargaining in the labour 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 labour market regulation as determining the bargaining power of workers. Having characterized the effects of labour 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 behaviour of the labour share. Second, to look at political economy interactions between product and labour market deregulation.
Keywords: rents; unemployment; imperfect competition; deregulation
JEL Codes: J38; K20; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Product market deregulation (L51) | Reduced entry costs (D49) |
| Reduced entry costs (D49) | Increased competition among firms (L13) |
| Increased competition among firms (L13) | Lower unemployment (J68) |
| Increased competition among firms (L13) | Higher real wages (J39) |
| Labor market deregulation (J48) | Shifts distribution of rents in favor of firms (D33) |
| Shifts distribution of rents in favor of firms (D33) | Greater competition (L19) |
| Greater competition (L19) | Lower unemployment (J68) |
| Labor market deregulation (J48) | Lower real wages (J39) |
| If deregulation is correctly implemented (L51) | Recovery of labor share (E25) |
| If deregulation is correctly implemented (L51) | Decrease in equilibrium unemployment (J64) |