The main purpose of this paper is to provide a critical overview of the recent empirical contributions that use cross-country data to study the effect of product market regulation and reform on a country’s macroeconomic performance. After a review of the theoretical literature and of relevant micro-econometric evidence, the paper discusses the main data and methodological issues related to empirical work on this topic. It then critically evaluates the cross-country evidence on the effect of product market regulation on markups, firm dynamics, investment, employment, innovation, productivity and output growth. A summary of what we learn from the econometric results concludes the paper.

Unemployment and finance: how do financial and labour market factors interact? Donatella Gatti∗and Anne-Gaël Vaubourg† Résumé A partir d’un échantillon de 18 pays de l’OCDE pour la période 1980-2004, nous analysons de quelle manière les interactions entre institutions du marche ́ du travail et structure du système financier déterminent le niveau du chômage. Nous montrons que l’impact des variables financières dépend fortement de la structure du marche ́ du travail. L’accroissement de la capitalisation et la réduction de la concentration bancaire ne réduisent le taux de chômage que si le niveau de réglementation du marche ́ du travail, la densite ́ syndi-cale et le degre ́ de coordination des négociations salariales sont faibles. L’augmentation du recours au crédit intermédie ́ accrôıt le chômage lorsque le marche ́ du travail est faiblement réglemente ́ et coordonne ́ ; il le réduit dans le cas contraire. Ces résultats suggèrent que les vertus respectives du financement de marche ́ et du financement bancaire sont étroitement liées a ̀ la structure des institutions sur le marche ́ du travail.

The availability of rich firm-level data set has recently led researchers to uncover an interesting set of empirical findings on the effects of trade liberalization. Trade openness forces the least productive firms to exit the market and induces surviving firms to increase their innovation efforts. Together with the selection and the innovation effect, trade liber-alization seems to have positive effects on the degree of product market competition. This paper presents a theoretical model aimed at providing a coherent interpretation of these empirical findings. We introduce firm heterogeneity into an innovation-driven growth model. Incumbent firms operating in an oligopolistic environment perform cost-reducing innovation in order to increase their future productivity. In equilibrium more produc-tive firms show higher investment in innovation. The oligopolistic structure implies that markups are endogenously determined by the number of firms competing in same product line. Trade liberalization leads to a higher number of firms and lower markups. This pro-competitive effect of trade forces less efficient firms out of the market and reallocates resources towards more efficient, more innovative, firms; thereby raising aggregate inno-vation and, consequently, aggregate productivity growth. This dynamic selection effect of trade is decreasing in the level of product market competition and, as a consequence, trade liberalization has negligible effects on innovation in highly competitive economies.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar. Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Download this ZEW Discussion Paper from our ftp server: http://ftp.zew.de/pub/zew-docs/dp/dp11057 .pdf Non-technical Summary Distinct settings of labor market institutions like the employment protection or the unemployment benefit system have attracted considerable attention as a potential explanation for differences in the unemployment rates of industrialized countries over the last two decades. A plethora of theoretical and empirical studies have dealt with the identification and quantification of direct labor market effects of institutional reforms. However, while theory predicts that the interplay between individual labor market institutions is as well important to determine the impact of institutional reforms, empirical studies have widely neglected such interdependencies so far. The main problem in empirical studies is that macroeconomic labor market models quickly become very large if interactions are taken into account. Hence, the estimation of a model considering a set of institutional interactions requires either exact and comprehensive theoretical predictions on which interactions to include or a large number of observations to receive reliable results. Unfortunately, theoretical studies mainly focus on broad concepts of institutions like the bargaining power or the firing costs, and empirical data-based models cannot be directly derived from theory. The low number of available observations requires the subjective selection of some interactions, what is also not an appropriate solution because neglecting potentially relevant information can severely bias the outcomes. In this study, I use a bayesian model averaging framework to estimate reliable parameters for all available bivariate interaction terms. Using data on 14 institutional indicators of 5 institutional categories (product market regulation, employment protection, unemployment benefit system, labor tax system, bargaining system), 91 bivariate interactions are analyzed concerning the question whether these interactions can significantly contribute to the explanation of unemployment. On the basis of the model averaging approach, I identify 22 robust and significant bivariate interaction terms. The empirical evidence emphasizes the importance of institutional interactions for the determination of unemployment. More concretely, taking interactions into account significantly improves the explanatory power of the empirical model.

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how do financial and labor market factors interact?

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This paper examines the vulnerability of labour markets to adverse economic shocks. We define labour market exposure as the cumulated amount of excess unemployment generated by a shock before unemployment returns to steady-state. We use a panel of 19 countries covering the period 1985–2010 to assess the influence of labour market policies on labour market exposure, which is also calcu-lated country by country. We find that less generous unemployment insurance, more active labour market policies or a lower minimum wage imply a trade-off between average unemployment and labour market exposure, as they help low-skilled workers to get out of unemployment at the cost of increased vulnerability to adverse shocks. On the other hand, reducing the tax wedge is conducive to both lower steady-state unemployment and labour market exposure. —Alain de Serres and Fabrice Murtin Un em plo ym en t a t ris

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. Using data for 18 OECD countries over the period 1980-2004, we investigate how labour and financial factors interact to determine unemployment. We show that the impact of financial variables depends strongly on the labour market context. Increased market capitalization as well as decreased banking concentration reduce unemployment if the level of labour market regulation, union density and coordination in wage bargaining is low. The above financial variables have no effect otherwise. Increasing intermediated credit worsens unemployment when the labour market is weakly regulated and coordinated, whereas it reduces unemployment otherwise. These results suggest that the respective virtues of bank-based and market-based finance are crucially tied to the strength of labour regulation. JEL Classification: E24, J23, P17