Working Paper: NBER ID: w12891
Authors: Lei Fang; Richard Rogerson
Abstract: Recent empirical work finds a negative correlation between product market regulation and aggregate employment. We examine the effect of product market regulations on hours worked in a benchmark aggregate model of time allocation. We find that product market regulations affect time devoted to market work in effectively the same fashion as do taxes on labor income or consumption. In particular, if product market regulations are to affect aggregate market work in this model the key driving force is the size of income transfers associated with the regulation relative to labor income, and the key propagation mechanism is the labor supply elasticity. We show in a two sector model that industry level analysis is of little help in assessing the aggregate effects of product market regulation.
Keywords: product market regulation; labor market outcomes; time allocation; entry costs
JEL Codes: E2; J2; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| product market regulations (L10) | hours worked (J22) |
| size of income transfers associated with regulation (H23) | hours worked (J22) |
| elasticity of labor supply (J22) | hours worked (J22) |
| product market regulations (L10) | labor income taxes (J39) |
| product market regulations (L10) | consumption taxes (H25) |
| entry barriers (L13) | hours worked (J22) |