Product Market Regulation and the Benefits of Wage Moderation
IMF Working Papers, September 1, 2005
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Bibliographic details
- Authors: Marcello M. Estevão
- Published: September 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451862102.001
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.
- By isolating structural from cyclical factors in a panel of industrial countries, the author shows that structurally slower real wage growth ("wage moderation") does raise output growth and lower unemployment rates.
- The impact of wage moderation on output growth and unemployment 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.
- Overly regulated product markets in the euro area are undermining the effects of labor market reforms on output and employment.
Key findings
- Structurally slower real wage growth increases output growth.
- Structurally slower real wage growth lowers unemployment rates.
- Product market regulation moderates these benefits:
- Weaker competition and barriers to entry allow incumbent firms to appropriate larger rents.
- This appropriation reduces the transmission of wage moderation into higher output and lower unemployment.
- The euro area’s overly regulated product markets dilute the positive effects of labor market reforms.
Mechanism and analysis approach
- Method: Isolates structural from cyclical factors in a panel of industrial countries to identify the effects of wage moderation.
- Mechanism: When product markets are less competitive (presence of barriers to entry), incumbent firms capture more of the gains from lower labor costs as rents rather than expanding output or employment.
- Implication: The same structural reduction in real wage growth can have different macroeconomic outcomes depending on the degree of product market regulation.
Policy implications and recommendations
- Labor market reforms that achieve wage moderation will have limited growth and employment benefits unless accompanied by product market reforms that increase competition and lower entry barriers.
- Sequencing and complementary reforms: To realize the full benefits of wage moderation on output and unemployment, reforms should address both labor and product market rigidities.
Subjects and keywords
- Subjects: 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
Marcello M. Estevão, "Product Market Regulation and the Benefits of Wage Moderation", September 1, 2005, Working Paper No. 2005/191, 30 pages, DOI: https://doi.org/10.5089/9781451862102.001