Ebell, Monique
Haefke, Christian
Recently, the interactions between product market structure and labor market outcomes have
come under increased scrutiny. This paper considers the dynamic relationship between
product market entry regulation and equilibrium unemployment and wages, both theoretically
and quantitatively. The main elements of our model are Mortensen-Pissarides-style search
and matching frictions, monopolistic competition in the goods market, multi-worker firms,
individual wage bargaining and barriers to entry. We identify two main channels by which
product market competition affects unemployment: the output expansion effect, by which a
reduction in monopoly power is beneficial for unemployment, and a countervailing effect due
to a hiring externality a la Stole and Zwiebel (1996). Quantitatively, increasing our measure of
competition has a surprisingly moderate effect on equilibrium unemployment rates, but a
substantial effect on equilibrium wages, indicating that product market competition does
indeed have quantitatively significant effects on labor market outcomes. Competition is then
linked to a specific regulatory institution, namely barriers to entry. Data on entry costs are
used to compare labor market performance under two regimes: a high-regulation European
regime and a low-regulation Anglo-American one. Our analysis suggests that no more than
half a percentage point of European unemployment rates can be attributed to the regulation
of entry.
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