TY - JOUR

T1 - Deregulation shock in product market and unemployment

AU - Bertinelli, Luisito

AU - Cardi, Olivier

AU - Sen, Partha

PY - 2013

Y1 - 2013

N2 - In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive margin. We find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force. For a calibration capturing alternatively the European and the US labor markets, a deregulation episode, which lowers the markup by 3 percentage points, results in a fall in the unemployment rate by 0.17 and 0.05 percentage point, respectively, while the labor share is almost unaffected in the long-run. The sensitivity analysis reveals that product market deregulation is more effective in countries where product and labor market regulations are high, unemployment benefits are small and labor force is more responsive.

AB - In a dynamic general equilibrium model with endogenous markups and labor market frictions, we investigate the effects of increased product market competition. Unlike most macroeconomic models of search, we endogenize the labor supply along the extensive margin. We find numerically that a model with endogenous labor force participation decision produces a decline in the unemployment rate which is almost three times larger than that in a model with fixed labor force. For a calibration capturing alternatively the European and the US labor markets, a deregulation episode, which lowers the markup by 3 percentage points, results in a fall in the unemployment rate by 0.17 and 0.05 percentage point, respectively, while the labor share is almost unaffected in the long-run. The sensitivity analysis reveals that product market deregulation is more effective in countries where product and labor market regulations are high, unemployment benefits are small and labor force is more responsive.

KW - Imperfect competition

KW - Endogenous markup

KW - Search theory

KW - Unemployment

KW - Deregulation

M3 - Journal article

VL - 37

SP - 711

EP - 734

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 4

ER -