The Impact of Product Market Regulation and Labour Market Institutions on Unemployment and Real Wages : an Instrumental Variables Approach
Koivulampi, Julienne (2017)
2017
Kauppatieteiden tutkinto-ohjelma - Degree Programme in Business Studies
Johtamiskorkeakoulu - Faculty of Management
This publication is copyrighted. You may download, display and print it for Your own personal use. Commercial use is prohibited.
Hyväksymispäivämäärä
2017-05-24
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:uta-201705261696
https://urn.fi/URN:NBN:fi:uta-201705261696
Tiivistelmä
Persistently higher unemployment rates compared to the aftermath of the Second World War continue to perplex governments in many developed countries. Unemployment is costly for individuals and the society in general, which is why it is important to understand the factors affecting unemployment. Research investigating the drivers behind unemployment has traditionally focused on the role of income taxes and labour market institutions but during the last decades there has been a growing interest in how product market regulation (PMR) enters the picture.
Theory predicts that regulation affects the level of rents (i.e. the mark-up) in the economy because it determines how easy it is for firms to enter a market. The mark-up therefore defines the extent of competition in a particular industry. High regulation allows the incumbent to appropriate a mark-up over marginal costs as it can set prices higher and restrict output (i.e. employ less people) compared to a situation of perfect competition. Deregulation leads to new players entering the market, which decreases the mark-up and increases competition. The pressure from competition forces the incumbent to decrease the price and produce more, which is why it needs to hire more people. Workers see their real wages increasing as the price level decreases. On the other hand, trade liberalisation may lead to falling aggregate employment if increased competition from foreign low-cost producers forces local pants to shutting down their businesses.
This thesis explores the impact of product market regulation and labour market institutions on unemployment and real wages for 21 OECD countries over 1985-2013 using an instrumental variables approach. The empirical strategy follows closely the one introduced in Griffith, Harrison and Macartney (2007), with considerable differences regarding the sample, data definitions and variable usage. Regulation in the product market is assumed to influence unemployment and real wages through the degree of economic rents so in the first stage the mark-up is explained by PMR indicators as well as labour market and control variables. Then, the second stage shows the impact of competition on unemployment and real hourly labour costs which is a proxy for real wages.
The results suggest that increased competition in the product market leads to an increase in unemployment and a decrease in real wages. These findings are compatible with the minority of previous empirical work. What is more, certain types of regulation exert a direct effect on unemployment and wages: decreasing tariffs and reducing burdens to creating new businesses result in falling unemployment. Hence, deregulation has direct beneficial impacts on employment. In addition, promoting import competition is likely to decrease real wages. The effects of labour market institutions are fairly similar to previous empirical findings.
Theory predicts that regulation affects the level of rents (i.e. the mark-up) in the economy because it determines how easy it is for firms to enter a market. The mark-up therefore defines the extent of competition in a particular industry. High regulation allows the incumbent to appropriate a mark-up over marginal costs as it can set prices higher and restrict output (i.e. employ less people) compared to a situation of perfect competition. Deregulation leads to new players entering the market, which decreases the mark-up and increases competition. The pressure from competition forces the incumbent to decrease the price and produce more, which is why it needs to hire more people. Workers see their real wages increasing as the price level decreases. On the other hand, trade liberalisation may lead to falling aggregate employment if increased competition from foreign low-cost producers forces local pants to shutting down their businesses.
This thesis explores the impact of product market regulation and labour market institutions on unemployment and real wages for 21 OECD countries over 1985-2013 using an instrumental variables approach. The empirical strategy follows closely the one introduced in Griffith, Harrison and Macartney (2007), with considerable differences regarding the sample, data definitions and variable usage. Regulation in the product market is assumed to influence unemployment and real wages through the degree of economic rents so in the first stage the mark-up is explained by PMR indicators as well as labour market and control variables. Then, the second stage shows the impact of competition on unemployment and real hourly labour costs which is a proxy for real wages.
The results suggest that increased competition in the product market leads to an increase in unemployment and a decrease in real wages. These findings are compatible with the minority of previous empirical work. What is more, certain types of regulation exert a direct effect on unemployment and wages: decreasing tariffs and reducing burdens to creating new businesses result in falling unemployment. Hence, deregulation has direct beneficial impacts on employment. In addition, promoting import competition is likely to decrease real wages. The effects of labour market institutions are fairly similar to previous empirical findings.