SYNCHRONISING DEREGULATION IN PRODUCT AND LABOUR MARKETS
| DOI | http://doi.org/10.1111/j.1467-9485.2008.00467.x |
| Published date | 01 November 2008 |
| Date | 01 November 2008 |
| Author | Jo Seldeslachts |
SYNCHRONISING DEREGULATION IN
PRODUCT AND LABOUR MARKETS
Jo Seldeslachts
n
Abstract
Deregulation typically comes with redistribution of rents and thus with opposition
from the losing interest groups. We show that, by exploiting complementarities,
synchronising deregulation across markets makes this opposition lower. Indeed, a
particular deregulation may reduce rents for one interest group, but may result in
gains for another interest group. Synchronising reforms can therefore offer a way
out of the ‘sclerosis’ of especially European markets. For this effect, we build a
microeconomic model based on two assumptions: Cournot competition a
`la Vives in
the product markets and firms hiring workers in accordance with an efficiency wage
in the labour markets. As being particularly relevant for European economies,
we focus on product market regulation that determines the degree of market
integration and labour market regulation that determines the degree of employ-
ment protection.
I Intro ductio n
General agreement exists that there is a strong link between too much
regulation, called ‘market frictions’, and economic underperformance. Indeed,
a growing body of literature claims market frictions are to blame for the
divergent performance in productivity and employment of continental European
vs. US economies during the 1980s and 1990s.
1
But, if European markets
should be deregulated, why doesn’t it happen? While product market reforms
are slow moving in Europe and some sectors are still virtually served by
n
Wissenschaftszentrum Berlin (WZB)
1
See, e.g. Schiantarelli (2005) for an overview of product market regulation on macro-
economic performance. More specifically, Nicoletti and Scarpetta (2003) show that a lack of
regulatory reforms in the product market underlies the bad productivity performance of some
European countries. For labour markets, e.g. Nickell et al. (2005) discover more rigid labour
market institutions to explain a large part of the rise of European unemployment from the
1960s to the first half of the 1990s. Investigating cross-effects, Bertrand and Kramarz (2002)
show that the French regions which regulated firm entry more, experienced slower job growth.
Boeri et al. (2000) evidence that product market regulation explains part of the divergence in the
European and US labour market performances. Griffith et al. (2007) and Ebell and Haefke
(2008) show that more product market competition has a positive impact on employment and
wages. The effects of labour market institutions on product markets are less investigated;
Nicoletti et al. (2001) detect labour market policies to have significant effects on the size
distribution of firms.
Scottish Journal of Political Economy, Vol. 55, No. 5, November 2008
r2008 The Author
Journal compilation r2008 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
591
monopolies, labour market deregulation is even less pronounced (Go
¨nenc¸ et al.,
2000).
Most explanations stress the role of interest groups in determining
government intervention. Any reform that reduces the market power of firms
proves difficult to implement.
2
Also the main reason for frictions to stay in
European labour markets, says Saint-Paul (2000), is that reforms face
opposition from employed workers. The high frictions in Europe are said to
provoke a ‘European Sclerosis’. Because frictions in European product and
labour markets are high, interest groups enjoy high rents and oppose changes
more. Thus, the markets that need most a reform are most stuck.
The contribution of the current paper is threefold. First, it looks for a way
out of this impasse by exploiting the complementarities that exist between some
deregulatory reforms in product and labour markets. We combine a product
market where firms are involved in Cournot competition a
`la Vives (2002) and a
labour market where employers are hiring in accordance with an efficiency wage
(Shapiro and Stiglitz, 1984). Using the degree of market integration and
employment protection legislation (EPL) as measures for product and labour
market regulation, respectively, we find that the losing side of one reform is the
winning side of the other reform. This means that synchronising reforms across
markets makes a more performing economy easier to accomplish. We claim
further that when synchronising reforms, higher frictions in the one market
make it easier to deregulate the other market. Therefore, a sclerosis in one
market can cancel out a sclerosis in the other market. Second, we argue that
complementarities between reforms can explain the observed high positive
correlation between frictions in both markets. Table 1, taken from Nicoletti
et al. (2000) and based on work on the OECD countries, makes the point. The
cross-country relation between the two indexes is striking; a positive correlation
of 0.73 is found (significant at the 1% level). In countries where product markets
are highly regulated, such as Italy and Greece, workers tend to be highly
protected. This may be explained by the fact that deregulation in one market
may be easier accomplished if it is done in synchronisation with the other
market. Third, it is a first theoretical attempt to claim that product market
frictions can be removed by the deregulation of labour markets.
This work confirms the basic result of Blanchard and Giavazzi (2003) on the
political economy of deregulation; there exist interactions between product and
labour market reforms. But ours differs on some important issues. Whereas
Blanchard and Giavazzi (2003) argue that deregulation should be done
sequentially, i.e. product market deregulation should preclude labour market
deregulation, our setup prescribes synchronising reforms. The reason for
deregulation to be done sequentially, Blanchard and Giavazzi (2003) claim in
their firm-workers bargaining setup, is that more product market competition
reduces the rents of firms, which in turn reduces incentives for workers to fight
2
Kroszner and Strahan (1999) evidence for the banking industry that firms influence
regulatory reform; Li et al. (2003) reach similar conclusions for the telecom sectors.
JO SELDESLACHTS592
r2008 The Author
Journal compilation r2008 Scottish Economic Society
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