## 1. The Effect of Wage Curve Shifts on Business GDP per Capita

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---

### Key findings and overview
- Euro-area real wages have decelerated, particularly during the past decade, but this has not yet translated into visibly lower unemployment or higher growth.
- Euro-area unemployment rate:
  - "still hovers around 9 percent."
  - "has decreased somewhat since the mid-1990s" but "bottomed out at a high level (around 8 percent) in 2001 before climbing again."
- Per capita business GDP growth:
  - "in the last 10 years, averaging 1.9 percent a year, was lower than in the previous decade, when it reached 2.6 percent."
- Real hourly compensation growth in the business sector:
  - "declined from about 6 percent at the beginning of the 1970s to 1 percent recently."
- The share of labor income in business sector value added "has declined markedly since the 1980s," leaving more income to capital owners.
- Bivariate correlations (1983–2003, euro area and 20 OECD countries):
  - Weak effect of wage moderation on unemployment rates but not on output in simple bivariate fits.
  - Example fitted regressions:
    - Euro area, real hourly compensation growth vs. unemployment rate changes (1983-2003): y = 0.56x - 1.5; R2 = 0.01.
    - Euro area, real hourly compensation vs. GDP per capita growth (1983-2003): y = 0.29x + 1.6; R2 = 0.31.
    - 20 OECD countries, real hourly compensation growth vs. unemployment rate changes (1983-2003): y = 0.96x - 2.88; R2 = 0.03.
    - 20 OECD countries, real hourly compensation vs. GDP per capita growth (1983-2003): y = 0.31x + 1.67; R2 = 0.20.
  - Ireland and Switzerland are treated as outliers in some fitted curves.

### Theoretical framework: wage curve, labor demand, and product market competition
- Model setup and assumptions:
  - Wages are bargained by workers and firms; firms set employment to maximize profits.
  - Firms operate in imperfectly competitive product markets: product price P is a decreasing function of output Y.
  - Short-run returns to labor are diminishing; capital stock K is fixed; technology A is labor augmenting: Y = Y(AN), Y’(AN) > 0, Y’’(AN) < 0.
  - Firms maximize P(Y(AN)) * Y(AN) – W * N, where W is the bargained wage.
- Profit-maximizing employment first-order condition (notation preserved):
  - A w = P W A N Y’(AN) = μ
  - Interpretation: firms set the marginal revenue product equal to the real wage in efficiency units; μ is a markup over labor costs.
- Role of product market regulation and markups:
  - More stringent limitations to product market competition increase the markup, make the labor demand curve steeper, and limit the effect of labor cost variations on employment and production.
  - In extreme lack of competitive pressures, cost changes could be absorbed by markup increases, leaving prices and quantities unchanged.
- Wage curve specification and determinants (qualitative):
  - w/A = f(u,b,m,τ) with f_m > 0, f_b > 0, f_τ > 0, and f_u < 0.
  - m: workers’ relative bargaining power and preferences; b: unemployment income; τ: ratio of fiscal wedge on labor income to fiscal wedge on unemployment income; u: unemployment rate.
- Interpretation of wage-curve shifts:
  - Movements along the wage curve capture cyclical factors; shifts capture structural changes ("wage moderation" when downward).
  - Downward shifts driven by reductions in b, reductions in τ, changes in m, or union preference changes (example: 1982 Wassenaar agreement).

### Short-run and long-run effects and the role of product market regulation
- Short-run:
  - A downward shift in the wage curve raises employment and output less when labor demand is steeper (higher μ); more regulated product markets mute the effect of wage moderation.
- Long-run adjustment:
  - Wage moderation raises profitability, prompting entry or higher investment until wages in efficiency units equal the user cost of capital ("LLD: w/A = ucc").
  - Long-run labor demand becomes horizontal at the user cost of capital; equilibrium employment and output increase (point E3).
- Product market regulation effects:
  - Can delay or damp both short-run and long-run adjustments by reducing competition, creating barriers to entry, and concentrating state ownership or interventions that distort market signals.

### Empirical measurement of wage-curve shifts and cross-country variation
- Empirical wage curve:
  - ln(Wit/CPit * Ait) = -θ ln(uit) + ξit, where θ is wage elasticity with respect to unemployment and ξit is the intercept (position) of the wage curve.
  - Many studies find θ ≈ 0.1; this paper uses "0.1".
- Measurement of wage-setting (structural) shifts:
  - Defined as log changes in compensation per hour in the business sector divided by the PCE deflator, minus log changes of labor-saving technology, minus log changes of the unemployment rate multiplied by 0.1.
- Cross-country patterns (20 OECD countries, ξit normalized to 100 in 1970):
  - Overall improvement in wage-setting conditions since the early 1990s, except Greece, Japan, and Switzerland.
  - Ireland: sharp and continuous improvements since the 1970s.
  - Netherlands: significant improvements since the early-1980s.
  - Finland: large improvements since the early-1990s.
  - France and Italy: wage moderation since the 1980s.
  - Belgium, Germany, Spain: wage moderation starting mid-1990s.
  - UK, US, Australia, Canada: deteriorated through early-1980s but improved continuously thereafter.

### Methods and measurement (labor-saving technology and real wages)
- Labor-saving technology, A, in the business sector:
  - Determined by (i) calculating a Solow residual using hours of work, the capital stock, real value added, and the share of labor income in value added; (ii) weighing the Solow residual by the share of labor income in value added; and (iii) creating indices with 1970=100.
- Real wages:
  - Constructed using the consumption expenditures deflator (PCE) to enhance identification of wage curve shifts.
- Functional form:
  - Log-log specification used; a semi-logarithmic specification (semi-elasticity of 1 wrt unemployment) was considered but results are insensitive to switching specifications.

### Wage-setting changes and the real economy — empirical correlations
- Cross-country scatter plots (1970–2003):
  - Change in UR = 2.5 * wage shock + 3.9, R2 = 0.44 (Figure 6 top panel).
  - GDP per capita growth = -0.23 * wage shocks + 2.2, R2 = 0.17 (Figure 6 bottom panel).
- Shorter period 1983–2003 bivariate fits weaken:
  - y = 0.63x + 0.37, R2 = 0.02 for changes in unemployment (Figure 7 top-left).
  - y = -0.15x + 2.6, R2 = 0.04 for GDP per capita growth (Figure 7 top-right).
- Excluding Ireland and Switzerland preserves correlations.

### Role of product market regulation — measurement and interaction evidence
- Product market regulation measure:
  - Average of OECD indices for regulation in seven industries: airlines, postal services, telecommunications, electricity, gas, railways, and roads. Indices available only from 1975 to 1998 for some estimates.
- Interaction evidence (1983–2003):
  - Interactive regressions using product market regulation * wage-setting shocks improved fit:
    - Effect on unemployment (interactive): y = 0.59x + 1.92, R2 = 0.13 (bottom-left of Figure 7).
    - Effect on business GDP per capita (interactive): y = -0.10x + 1.85, R2 = 0.24 (bottom-right of Figure 7).
- Theoretical interpretation of panel regression (equation (4)):
  - φ1 captures average elasticity of economic performance to wage shocks (when regit = 0).
  - φ2 captures direct effect of product market regulation on real variables.
  - φ3 measures how deviations of regulation from the sample average affect pass-through of wage shocks (positive φ3 in the GDP equation implies regulation dampens beneficial pass-through).

### Econometric specification (equation (4)) and dynamics
- Annual changes in a real variable ∆rit (either ∆yit or ∆uit) related to:
  - Wage-curve shifts ∆ξit
  - Product market regulation regit (deviations from sample average)
  - Interaction regit * ∆ξit
  - Year dummies βt, country fixed effects αi, residuals ηit
  - Lag function ψ(L) captures adjustment dynamics; number of lags set to wipe out serial correlation in ηit
- Equation (4) (as in source): rit it it it it it it rL reg reg cr η ψ ξ φ φ ξ φ βα + ∆ + ∆ + ∆ + ∆ *( ***) (4)

### Key econometric results — Growth of business GDP per capita (selected estimates from Table 1)
- Dependent variable: Growth of business GDP per capita (percent) = ∆gdpit.
- Selected coefficient estimates (standard errors in parentheses):
  - ∆ξit: -0.364** (0.017) in column (1, OLS).
  - ∆ξit: -0.371** (0.020) in column (2, OLS).
  - ∆ξit: -0.360** (0.016) in column (3, OLS).
  - ∆ξit: -0.377** (0.017) in column (4, GMM).
  - ∆ξit: -0.367** (0.019) in column (5, OLS).
  - ∆ξit: -0.390** (0.019) in column (6, GMM).
- Interaction (∆ξit * regult):
  - Column (2): 0.078** (0.023).
  - Column (5): 0.057** (0.022).
  - Column (6): 0.070** (0.022).
- Regulation (regult) direct coefficient:
  - 0.001 (0.002) in column (2); 0.000 (0.002) in column (6) — not statistically different from zero.
- Dynamics:
  - ∆gdpit-1 coefficients around 0.250** to 0.215**.
- Model diagnostics:
  - Number of countries = 20 in all columns.
  - Samples vary across columns (1971-2003; 1975-1998; 1972-2003; 1973-2003; 1975-1998; 1976-1998).
  - Sargan tests reported: Chi2(495)=429.0 , p-value=0.98 (column 4); Chi2(344)=355.05 , p-value=0.33 (column 6).
  - Adjusted R2 up to Adj. R2 = 0.66 in some columns.

### Key econometric results — Unemployment rate (selected estimates from Table 2)
- Dependent variable: Changes in the unemployment rate (percentage points) = ∆uit.
- Selected coefficient estimates (standard errors in parentheses):
  - ∆ξit: 0.065** (0.008) in column (1, OLS).
  - ∆ξit: 0.078** (0.010) in column (2, OLS).
  - ∆ξit: 0.067** (0.007) in column (3, OLS).
  - ∆ξit: 0.072** (0.008) in column (4, GMM).
  - ∆ξit: 0.079** (0.009) in column (5, OLS).
  - ∆ξit: 0.096** (0.009) in column (6, GMM).
- Interaction (∆ξit * regult):
  - Column (2): -0.058** (0.011).
  - Column (5): -0.043** (0.010).
  - Column (6): -0.059** (0.010).
- Regulation (regult) direct coefficient:
  - 0.000 (0.001) in column (2); 0.000 (0.001) in column (5); -0.001 (0.001) in column (6) — not statistically different from zero.
- Dynamics:
  - ∆uit-1 coefficients around 0.480** to 0.440**; ∆uit-3 ≈ -0.183** to -0.211** where included.
- Model diagnostics:
  - Number of countries = 20 in all columns.
  - Samples vary across columns (1971-2003; 1975-1998; 1974-2003; 1975-2003; 1975-1998; 1976-1998).
  - Sargan tests: Chi2(490)=417.5 , p-value=0.99 (column 4); Chi2(342)=330.9 , p-value=0.66 (column 6).
  - Adjusted R2 up to Adj. R2 = 0.54 in some columns.

### Quantitative impacts and long-run effects
- Long-run effects under the model calculated as (1/(1-ψ(L))) * (φ1 + φ3 * regit).
- Dynamics accumulate over time; example from the source:
  - "For instance, a one-time 5 percent downward shift in the wage curve in an economy with average levels of regulation increases GDP per capita level by about 2.5 percent by the end of the third year. The level of the unemployment rate after three years of adjustment is near one percentage point lower, while the static specification implies half of this effect."
- Cross-country disparity:
  - Elasticities of GDP and unemployment with respect to structural wage-setting changes differ substantially across countries depending on product market regulation.

### Cross-country dispersion in product market policies (1998 and after)
- In 1998, "8 euro-area countries were among the 10 most regulated OECD economies in 1998."
- Intra-EU regulatory divergences "have shrunk since 1998 but remain significant."
- Despite overall product market flexibilization in the OECD since 1998, "barriers to entrepreneurship have fallen relatively less and impediments to competition persist."
- "Barriers to entry in non-manufacturing industries (the most important determinant of product market regulations used in this paper) are still quite relevant."
- Product market regulation indicator:
  - OECD indicator measured on a scale "from 0 (most liberal) to 6 (most restrictive)".
  - The product market regulation index used here is "a simple arithmetic average of all indices for the seven industries."

### Policy implications and recommendations
- Main policy-relevant conclusion:
  - Downward wage-curve shifts ("wage moderation") raise output and lower unemployment, but magnitude critically depends on product market regulation: more regulated product markets allow incumbents to appropriate gains via higher rents, muting effects on employment and output.
  - Because product markets are more regulated in the euro area than in other industrial countries, wage moderation has a weaker effect on production and unemployment there, implying labor market reforms alone are less effective in raising euro area growth potential without accompanying product market deregulation.
- Complementarity and sequencing of reforms:
  - Product market reforms increase the economic benefits of labor market reforms, making them more acceptable for workers.
  - Evidence and political-economy arguments suggest product market reforms should come first to lower barriers to entry and foster competition, thereby increasing real wages and reducing unemployment and easing implementation of labor market reforms.
- Policy concern:
  - "Highly regulated product markets are undermining the effectiveness of labor market reform in the euro area."
  - Without additional progress in product market deregulation, calls for more labor market reforms to lower unemployment and increase production "may continue to be questioned by wide segments of society."

*Source: _wp05191 - 1. The Effect of Wage Curve Shifts on Business GDP per Capita (PDF chapter/section).*

### 1. The Effect of Wage Curve Shifts on Business GDP per Capita ..........................................21

### 1. The Effect of Wage Curve Shifts on Business GDP per Capita

### Key findings and overview
- Euro-area real wages have decelerated, particularly during the past decade, but this has not yet translated into visibly lower unemployment or higher growth.
- The euro-area unemployment rate:
  - "still hovers around 9 percent."
  - "has decreased somewhat since the mid-1990s" but "bottomed out at a high level (around 8 percent) in 2001 before climbing again."
- Per capita business GDP growth:
  - "in the last 10 years, averaging 1.9 percent a year, was lower than in the previous decade, when it reached 2.6 percent."
- Real hourly compensation growth in the business sector:
  - "declined from about 6 percent at the beginning of the 1970s to 1 percent recently."
- The share of labor income in business sector value added "has declined markedly since the 1980s," leaving more income to capital owners.
- Bivariate correlations (1983–2003, euro area and 20 OECD countries) indicate:
  - A weak effect of wage moderation on unemployment rates but not on output.
  - Example fitted regressions from the figures:
    - Euro area, real hourly compensation growth vs. unemployment rate changes (1983-2003): y = 0.56x - 1.5; R2 = 0.01.
    - Euro area, real hourly compensation vs. GDP per capita growth (1983-2003): y = 0.29x + 1.6; R2 = 0.31.
    - 20 OECD countries, real hourly compensation growth vs. unemployment rate changes (1983-2003): y = 0.96x - 2.88; R2 = 0.03.
    - 20 OECD countries, real hourly compensation vs. GDP per capita growth (1983-2003): y = 0.31x + 1.67; R2 = 0.20.
- Ireland and Switzerland are treated as outliers in some fitted curves; regressions noted exclusions where applicable.

### Theoretical framework: wage curve, labor demand, and product market competition
- Model setup and assumptions:
  - Wages are bargained by workers and firms; firms set employment to maximize profits.
  - Firms operate in imperfectly competitive product markets: product price P is a decreasing function of output Y.
  - Short-run returns to labor are diminishing; capital stock K is fixed; technology A is labor augmenting: Y = Y(AN), Y’(AN) > 0, Y’’(AN) < 0.
  - Firms maximize P(Y(AN)) * Y(AN) – W * N, where W is the bargained wage.
- First-order condition (profit-maximizing employment) expressed as (notation preserved as in source):
  - A w = P W A N Y’(AN) = μ
  - Interpreted: firms set the marginal revenue product equal to the real wage in efficiency units; μ is a markup over labor costs.
- Role of product market regulation and markups:
  - More stringent limitations to product market competition increase the markup, make the labor demand curve steeper, and limit the effect of labor cost variations on employment and production.
  - In extreme lack of competitive pressures, cost changes could be absorbed by markup increases, leaving prices and quantities unchanged.
- Wage curve specification and determinants:
  - Wage curve relationship (qualitative): w/A = f(u,b,m,τ) with f
    m > 0, f
    b > 0, f
    τ > 0, and f
    u < 0.
  - m: structural parameter capturing workers’ relative bargaining power and preferences; b: unemployment income; τ: ratio of fiscal wedge on labor income to fiscal wedge on unemployment income; u: unemployment rate (dampening effect on wage demands).
- Interpretation of wage-curve shifts:
  - Movements along the wage curve capture cyclical factors; shifts of the wage curve capture structural wage-setting changes (defined as "wage moderation" when downward).
  - Factors behind downward shifts include:
    - reductions in unemployment benefits (b),
    - reductions in the tax wedge (τ),
    - changes in workers’ bargaining power (m),
    - changes in union preferences toward employment (example: 1982 Wassenaar agreement in the Netherlands).

### Short-run and long-run effects of wage moderation and the role of product market regulation
- Short-run: a downward shift in the wage curve raises employment and output less when labor demand is steeper (higher μ), implying more regulated product markets mute the effect of wage moderation.
- Long-run adjustment:
  - Wage moderation raises profitability, prompting entry or higher investment by incumbents until wages in efficiency units equal the user cost of capital ("LLD: w/A = ucc").
  - Graphically, the long-run labor demand becomes horizontal at the user cost of capital; equilibrium employment and output increase (point E3).
- Product market regulation can delay or dampen both short-run and long-run adjustments by:
  - reducing competition among incumbents,
  - creating barriers to entry,
  - concentrating state ownership or interventions that distort market signals.

### Empirical measurement of wage-curve shifts and cross-country variation
- Measuring wage-curve shifts:
  - Empirical wage curve typically written as:
    - ln(Wit/CPit * Ait) = -θ ln(uit) + ξit
    - Where θ is wage elasticity with respect to unemployment, ξit measures the position/intercept of the wage curve.
  - Many studies find θ ≈ 0.1; this paper uses an estimate of "0.1".
- Cross-country evidence (20 OECD countries):
  - Shifts in the wage-curve intercept ξit normalized to 100 in 1970 show:
    - Overall improvement in wage-setting conditions at least since the early 1990s, except in Greece, Japan, and Switzerland.
    - Ireland: sharp and continuous improvements since the 1970s.
    - Within the euro area:
      - Netherlands: significant improvements since the early-1980s (Wassenaar agreement).
      - Finland: large improvements since the early-1990s.
      - France and Italy: wage moderation since the 1980s.
      - Belgium, Germany, Spain: wage moderation starting mid-1990s.
    - Outside the euro area (UK, US, Australia, Canada): wage-setting deteriorated through early-1980s but improved continuously thereafter.

### Main policy-relevant conclusion
- Downward wage-curve shifts ("wage moderation") do raise output and lower unemployment, but the magnitude critically depends on product market regulation:
  - In more regulated product markets, incumbent firms can appropriate part of improved labor supply conditions via higher rents (markups), muting the positive effect of wage moderation on employment and output.
  - Because product markets are more regulated in the euro area than in other industrial countries, wage moderation has a weaker effect on production and unemployment there, implying labor market reforms alone are less effective in raising euro area growth potential without accompanying product market deregulation.

*Source: _wp05191 - 1. The Effect of Wage Curve Shifts on Business GDP per Capita*

### 0.1 elasticity for a panel of OECD countries.

### _wp05191 - 0.1 elasticity for a panel of OECD countries.

### Methods and measurement
- Labor-saving technology, A, in the business sector:
  - Determined by (i) calculating a Solow residual using hours of work, the capital stock, real value added, and the share of labor income in value added; (ii) weighing the Solow residual by the share of labor income in value added; and (iii) creating indices with 1970=100.
- Real wages:
  - Constructed using the consumption expenditures deflator (to enhance identification of wage curve shifts).
- Wage-setting (structural) shifts:
  - Defined as log changes in compensation per hour in the business sector divided by the PCE deflator, minus log changes of labor-saving technology, minus log changes of the unemployment rate multiplied by the elasticity of wages with respect to unemployment (0.1).
- Functional form:
  - Log-log specification used; a semi-logarithmic specification (semi-elasticity of 1 wrt unemployment) was considered and found to generate more moderate worsening in wage-setting conditions for countries with very low unemployment in 1970, but ordering and econometric results are insensitive to switching specifications.

### Wage-setting changes and the real economy — empirical correlations
- Cross-country scatter plots (1970–2003) show:
  - Positive correlation between wage-curve shifts and changes in the unemployment rate.
  - Negative correlation between wage-curve shifts and per capita business GDP growth.
  - Excluding Ireland and Switzerland (large outliers) preserves these correlations; reported linear fits:
    - Change in UR = 2.5 * wage shock + 3.9, R2 = 0.44 (Figure 6 top panel).
    - GDP per capita growth = -0.23 * wage shocks + 2.2, R2 = 0.17 (Figure 6 bottom panel).
- For the shorter period 1983–2003 the bivariate fits weaken (lower R2):
  - y = 0.63x + 0.37, R2 = 0.02 for changes in unemployment (Figure 7 top-left).
  - y = -0.15x + 2.6, R2 = 0.04 for GDP per capita growth (Figure 7 top-right).

### Role of product market regulation
- Product market regulation measure:
  - Average of OECD indices for regulation in seven industries: airlines, postal services, telecommunications, electricity, gas, railways, and roads. Indices available only from 1975 to 1998 (reduced sample for some estimates).
- Interaction evidence:
  - Regulations curbing competition dampen the positive effect of wage moderation on economic performance.
  - Interactive regressions (1983–2003) show improved fit when using product market regulation * wage-setting shocks:
    - Effect on unemployment: y = 0.59x + 1.92, R2 = 0.13 (bottom-left of Figure 7 using interactive variable).
    - Effect on business GDP per capita: y = -0.10x + 1.85, R2 = 0.24 (bottom-right of Figure 7 using interactive variable).
- Theoretical interpretation:
  - In the panel regression (equation (4)) the coefficient φ1 captures average elasticity of economic performance to wage shocks (effect when regit = 0).
  - Coefficient φ2 captures direct effect of product market regulation on real variables.
  - Coefficient φ3 measures how deviations of regulation from the sample average affect the pass-through of wage-setting shocks to real variables (a positive φ3 in the GDP equation implies regulation dampens the beneficial pass-through).

### Econometric specification (equation (4))
- Annual changes in a real variable ∆rit (either ∆yit or ∆uit) related to:
  - Wage-curve shifts ∆ξit
  - Product market regulation regit (deviations from sample average)
  - Interaction regit * ∆ξit
  - Year dummies βt, country fixed effects αi, residuals ηit
  - Lag function ψ(L) captures adjustment dynamics; number of lags set to wipe out serial correlation in ηit
- Equation (4) (as in source):
  - rit it it it it it it rL reg reg cr η ψ ξ φ φ ξ φ βα + ∆ + ∆ + ∆ + ∆ *( ***) (4)

### Key econometric results — Growth of business GDP per capita (Table 1)
- Dependent variable: Growth of business GDP per capita (percent) = ∆gdpit.
- Selected coefficient estimates (standard errors in parentheses):
  - ∆ξit: -0.364** (0.017) in column (1, OLS)
  - ∆ξit: -0.371** (0.020) in column (2, OLS)
  - ∆ξit: -0.360** (0.016) in column (3, OLS)
  - ∆ξit: -0.377** (0.017) in column (4, GMM)
  - ∆ξit: -0.367** (0.019) in column (5, OLS)
  - ∆ξit: -0.390** (0.019) in column (6, GMM)
- Interaction (∆ξit * regult):
  - Column (2): 0.078** (0.023)
  - Column (5): 0.057** (0.022)
  - Column (6): 0.070** (0.022)
- Regulation (regult) direct coefficient:
  - Reported as 0.001 (0.002) in column (2) and 0.000 (0.002) in column (6) — not statistically different from zero.
- Dynamics:
  - ∆gdpit-1 included in several specifications with coefficients around 0.250** to 0.215**.
- Model diagnostics and samples:
  - Number of countries = 20 in all columns.
  - Samples vary: 1971-2003; 1975-1998; 1972-2003; 1973-2003; 1975-1998; 1976-1998.
  - Sargan test: Chi2(495)=429.0 , p-value=0.98 (column 4); Chi2(344)=355.05 , p-value=0.33 (column 6).
  - Adjusted R2 reported up to Adj. R2 = 0.66 in some columns.

### Key econometric results — Unemployment rate (Table 2)
- Dependent variable: Changes in the unemployment rate (percentage points) = ∆uit.
- Selected coefficient estimates (standard errors in parentheses):
  - ∆ξit: 0.065** (0.008) in column (1, OLS)
  - ∆ξit: 0.078** (0.010) in column (2, OLS)
  - ∆ξit: 0.067** (0.007) in column (3, OLS)
  - ∆ξit: 0.072** (0.008) in column (4, GMM)
  - ∆ξit: 0.079** (0.009) in column (5, OLS)
  - ∆ξit: 0.096** (0.009) in column (6, GMM)
- Interaction (∆ξit * regult):
  - Column (2): -0.058** (0.011)
  - Column (5): -0.043** (0.010)
  - Column (6): -0.059** (0.010)
- Regulation (regult) direct coefficient:
  - Reported as 0.000 (0.001) in column (2), 0.000 (0.001) in column (5), and -0.001 (0.001) in column (6) — not statistically different from zero.
- Dynamics:
  - Specifications include ∆uit-1 with coefficients around 0.480** to 0.440** and additional lags (∆uit-2, ∆uit-3) where ∆uit-3 ≈ -0.183** to -0.211**.
- Model diagnostics and samples:
  - Number of countries = 20 in all columns.
  - Samples vary: 1971-2003; 1975-1998; 1974-2003; 1975-2003; 1975-1998; 1976-1998.
  - Sargan test: Chi2(490)=417.5 , p-value=0.99 (column 4); Chi2(342)=330.9 , p-value=0.66 (column 6).
  - Adjusted R2 reported up to Adj. R2 = 0.54 in some columns.

### Quantitative impacts and long-run effects
- Under the model, long-run effects are calculated as (1/(1-ψ(L))) * (φ1 + φ3 * regit).
- Dynamics accumulate over time; example reported in the source:
  - "For instance, a one-time 5 percent downward shift in the wage curve in an economy with average levels of regulation increases GDP per capita level by about 2.5 percent by the end of the third year. The level of the unemployment rate after three years of adjustment is near one percentage point lower, while the static specification implies half of this effect."
- Cross-country disparity:
  - Elasticities of GDP and unemployment with respect to structural wage-setting changes differ substantially across countries depending on product market regulation.

### Policy implications and interpretation
- Product market reforms increase the economic benefits of labor market reforms by raising the pass-through from wage moderation to growth and employment.
- Empirical evidence supports theoretical/political economy arguments for combining and sequencing reforms:
  - Product market reforms first can lower barriers to entry and foster competition, increase real wages (via lower prices), reduce unemployment, and thereby improve acceptability of labor market reforms to unions.
- The paper highlights that restrictive product market regulation dampens the positive effects of wage moderation on both employment and GDP per capita.

*Source: _wp05191 - 0.1 elasticity for a panel of OECD countries. (PDF chapter/section, staff estimates and OECD Analytical Database as reported in the source content provided).*

### 1998. Cross-country dispersion in product market policies has also shrunk.

### _wp05191 - 1998. Cross-country dispersion in product market policies has also shrunk.

### Cross-country dispersion and the euro area
- In 1998, "8 euro-area countries were among the 10 most regulated OECD economies in 1998."
- Intra-EU regulatory divergences "have shrunk since 1998 but remain significant."
- Despite overall product market flexibilization in the OECD since 1998, "barriers to entrepreneurship have fallen relatively less and impediments to competition persist."
- "Barriers to entry in non-manufacturing industries (the most important determinant of product market regulations used in this paper) are still quite relevant."
- "Despite some regulatory convergence in recent years, large differences between countries with 'relatively liberal' and 'relatively restrictive' (including many euro-area countries) regulatory environments persist."

### Empirical findings on wage moderation and product market regulation
- Wage moderation has been the "rule" rather than the "exception" across industrial countries in the last 20 years, with large cross-country variation, especially within the euro area (examples: Ireland, the Netherlands, Portugal — sustained moderation since the 1970s or early-1980s; Belgium, Germany, Spain — moderation is a 1990s event).
- Econometric evidence for a sample of "20 OECD countries" shows:
  - "Restrictions to product market competition dampen the effects of wage moderation."
  - In less regulated product markets, improvements in wage-setting conditions generate fiercer competition for market shares, leading to larger increases in output and employment.
  - In more regulated product markets, softer competitive pressures allow incumbent firms to "expropriate a larger share of the cost reduction in the form of higher rents."
- The average elasticities of GDP per capita growth and changes in unemployment rate with respect to changes in wage-setting conditions shown in Figure 8 include the dynamic effects captured by the lagged dependent variable in equation (4).

### Product market regulation measurement and indicators
- The OECD indicator of economy-wide regulation is measured on a scale "from 0 (most liberal) to 6 (most restrictive)" (Conway and others (2005) description).
- Figure 9 presents the "Strength of Anti-Competitive Product Market Regulation, 1998 and 2003" on the 0–6 scale (economy-wide).
- The OECD International Regulation Database covers "21 OECD countries" (listed in the Appendix) and seven non-manufacturing industries:
  - electricity and gas supply (generation, transmission, distribution)
  - road freight
  - air passenger transport
  - rail transport
  - post (basic letter, basic parcel and express mail)
  - telecommunications (fixed and mobile)
- Entry conditions are ranked in all seven industries; information on the extent of public ownership is available for 6 industries. Other dimensions (market structure, extent of vertical separation) are available for some industries.
- The regulatory indicators "measure restrictions on competition and private governance on a scale from 0 to 6 (from least to most restrictive)."
- The product market regulation index used here is "a simple arithmetic average of all indices for the seven industries."

### Conclusions and policy implications
- "Product market reforms increase the economic benefits of labor market reforms, thus making them more acceptable for workers."
- Findings are consistent with the complementarity of labor and product market reforms: some studies suggest product market reforms should come first because by lowering barriers to entry and fostering competition they tend to "increase real wages and reduce unemployment," which can buy goodwill from unions and ease implementation of labor market reforms.
- Policy concern: "Highly regulated product markets are undermining the effectiveness of labor market reform in the euro area."
- Policy implication: "Without additional progress in this area calls for more labor market reforms to lower unemployment and increase production may continue to be questioned by wide segments of society."

*Source: _wp05191 - 1998. Cross-country dispersion in product market policies has also shrunk.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp05191.pdf_