The Employment Effects of Labor and Product Market Deregulation and Their Implications for Structural Reform

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Abstract: This study explores the effects of labor and product market deregulation on employment growth. Our empirical results, based on an Organization for Economic Cooperation and Development country sample from 1990 to 2004, suggest that lower levels of product and labor market regulation foster employment growth, including through sizable interaction effects. Based on these findings, the paper discusses a theoretical framework for evaluating deregulation strategies in the presence of reform costs. Optimal deregulation takes various forms depending on the deregulation costs and the strength of reform interactions. Compared with the first-best policy, decentralized decision making can lead to excessive or insufficient deregulation. [JEL L51, E24, J50]