Product Market Regulation and the Benefits of Wage Moderation

September 1, 2005

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Format: Chicago

Marcello M. Estevão Product Market Regulation and the Benefits of Wage Moderation, (USA: International Monetary Fund, 2005) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Euro-area real wages have decelerated sharply in the last 20 years, but this has not yet translated into visibly lower unemployment or faster growth. Weak output growth after such a cost shock is somewhat puzzling and has led some to question the benefits of wage moderation. By isolating structural from cyclical factors in a panel of industrial countries, I show that structurally slower real wage growth, that is, "wage moderation," does raise output growth and lower unemployment rates. However, I show that the impact on both variables depends crucially on product market regulation: weaker competition and barriers to entry mute the growth effects of structural real wage changes by allowing incumbent firms to appropriate larger rents. In this context, overly regulated product markets in the euro area are undermining the effects of labor market reforms on output and employment.

Subject: Commodity markets, Financial markets, Labor, Real wages, Unemployment rate, Wage bargaining, Wages

Keywords: Commodity markets, Labor market, Labor market reform, Product market, Product market competition, Product market reform, Product market regulation, Real wages, Reforms, Sequencing product market, Structural change, Unemployment rate, Wage bargaining, Wage curve, Wage-curve shift, Wages, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/191
Stock No:

WPIEA2005191
ISBN:

9781451862102
ISSN:

1018-5941

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