Product market deregulation and labor market outcomes

We consider the dynamic relationship between product market entry regulationand equilibrium unemployment. The main theoretical contribution is combininga Mortensen-Pissarides model with monopolistic competition in the goods marketand individual wage bargaining. Product market competition affects unemploymentvia two channels: the output expansion effect and a countervailing effect dueto a hiring externality. Competition is then linked to barriers to entry. Acalibrated model compares a high-regulation European regime to a low-regulationAnglo-American one. Our quantitative analysis suggests that under individualbargaining, no more than half a percentage point of European unemployment ratescan be attributed to entry regulation.

Product market deregulation and the U.S. employment miracle

We consider the dynamic relationship between product market entry regulation and equilibrium unemployment. The main theoretical contribution is combining a job matchingmodel with monopolistic competition in the goods market and individual wage bargaining.Product market competition affects unemployment by two channels: the output expansion effect and a countervailing effect due to a hiring externality. Competition is then linked to barriers to entry. We calibrate the model to US data and perform a policy experiment to assess whether the decrease in trend unemployment during the 1980 s and 1990 s could be attributed to product market deregulation. Our quantitative analysis suggests that under individual bargaining, a decrease of less than two tenths of a percentage point of unemployment rates can be attributed to product market deregulation, a surprisingly small amount.

Effects of employment protection and product market regulations on the Italian labor market

Labor market regulations have often being blamed for high and persistentunemployment in Europe, but evidence on their impact remains mixed. Morerecently, attention has turned to the impact of product market regulationson employment growth. This paper analyzes how labor and product marketregulations interact to affect turnover and employment. We present a matchingmodel which illustrates how barriers to entry in the product market mitigatethe impact of labor market deregulation. We, then, use the Italian SocialSecurity employer-employee panel to study the interaction between barriersto entry and dismissal costs. We exploit the fact that costs for unjustdismissals in Italy increased for firms below 15 employees relative to biggerfirms after 1990. We find that the increase in dismissal costs after 1990decreased accessions and separations in small relative to big firms,especially for women. Moreover, consistent with our model, we find evidencethat the increase in dismissal costs had smaller effects on turnover for womenin sectors faced with strict product market regulations.

Interactions between product and labour market reforms

Labour market reforms face very often opposition from the employed workers, because it normally reduces their wages. Also product market regulations are regularly biased towards too much benefitting the firms. As a result there remain many frictions in both the labour and product markets that hinder an optimal functioning of the economy. These issues have recently received a lot of attention in the economics literature and scholars have been looking for politically viable reforms in both markets. However, despite its potential importance, there has been done virtually no research on the interaction between reforms in product and labour markets. We find that when combining reforms, the opposition for reforms decreases considerably. This is because there exist complementarities and the gains in total welfare can be more evenly distributed over the interest groups. Moreover, the interaction of reforms offers a way out for the so-called 'sclerosis' effect.

Financial development, labor and market regulations and growth

This paper investigates the importance that market regulation and financial imperfections have on firm growth. We analyse institutions af- fecting labor market as Employment Protection Laws (EP) and Product Market Regulation (PM). We show that together with the beneficial effects of financial development, a firm will get less financing, and thus investless, in a weak financial market (finance effect), the strictness of product and labor market regulations also affect firm growth (labor effect). In particular, we show that the stricter the rules the more detrimental the influence on growth in sectoral value added for a large number of countries. We also show that the labor effect overcomes the positive finance effect.

Governance mechanisms in Spanish financial intermediaries

This paper examines the governance of Spanish Banks around two main issues. First, does a poor economic performance activate those governance interventions that favor the removal of executive directors and the merger of non-performing banks? And second, does the relationship between governance intervention and economic performance vary with the ownership form of the bank? Our results show that a bad performance does activate governance mechanisms in banks, although for the case of Savings Banks intervention is confined to a merger or acquisition. Nevertheless, the distinct ownership structure of Savings Banks does not fully protect non-performing banks from disappearing. Product-market competition compensates for those weak internal governance mechanisms that result from an ownership form which gives voice to several stakeholder groups.

Trade, firm selection, and innovation: the competition channel

The availability of rich firm-level data sets has recently led researchers to uncover new evidence on the effects of trade liberalization. First, trade openness forces the least productive firms to exit the market. Secondly, it induces surviving firms to increase their innovation efforts and thirdly, it increases the degree of product market competition. In this paper we propose a model aimed at providing a coherent interpretation of these findings. We introducing firm heterogeneity into an innovation-driven growth model, where incumbent firms operating in oligopolistic industries perform cost-reducing innovations. In this framework, trade liberalization leads to higher product market competition, lower markups and higher quantity produced. These changes in markups and quantities, in turn, promote innovation and productivity growth through a direct competition effect, based on the increase in the size of the market, and a selection effect, produced by the reallocation of resources towards more productive firms. Calibrated to match US aggregate and firm-level statistics, the model predicts that a 10 percent reduction in variable trade costs reduces markups by 1:15 percent, firm surviving probabilities by 1 percent, and induces an increase in productivity growth of about 13 percent. More than 90 percent of the trade-induced growth increase can be attributed to the selection effect.

Factor shares, the price markup, and the elasticity of substitution between capital and labor.

In a Walrasian labor market, the labor income share is constant under the assumptions of a Cobb-Douglas production function and perfect competition. Given the observed decline of the labor share in recent decades, this paper relaxes these assumptions, proposes a time-series calculation of the aggregate price mark-up reflecting the degree of imperfect competition in the product market, and provides estimates of the elasticity of substitution under such product market imperfections. We focus on Spain and the U.S. and show that the elasticity of substitution is above one in Spain and below one in the U.S. We also show that the price markup drives the elasticity of substitution away from one, upwards in Spain, downwards in the U.S. These results are used to explain the declining path of the labor income share, common to both economies, and their contrasted patterns in terms of capital deepening.

Productivity and the welfare of nations

We show that the welfare of a representative consumer can be related to observable aggregatedata. To a first order, the change in welfare is summarized by (the present value of) the Solowproductivity residual and by the growth rate of the capital stock per capita. We also show thatproductivity and the capital stock suffice to calculate differences in welfare across countries, withboth variables computed as log level deviations from a reference country. These results hold forarbitrary production technology, regardless of the degree of product market competition, and applyto open economies as well if TFP is constructed using absorption rather than GDP as the measureof output. They require that TFP be constructed using prices and quantities as perceived byconsumers. Thus, factor shares need to be calculated using after-tax wages and rental rates, andwill typically sum to less than one. We apply these results to calculate welfare gaps and growthrates in a sample of developed countries for which high-quality TFP and capital data are available.We find that under realistic scenarios the United Kingdom and Spain had the highest growth ratesof welfare over our sample period of 1985-2005, but the United States had the highest level ofwelfare.

Managerial incentives for mergers

We study managerial incentives in a model where managers take notonly product market but also takeover decisions. We show that the optimalcontract includes an incentive to increase the firm's sales, under bothquantity and price competition. This result is in contrast to the previousliterature and hinges on the fact that with a more aggressive manager rivalfirms earn lower profits and are willing to sell out at a lower price. \\However, as a side--effect of such a contract, the manager might take overmore rivals than would be profitable.

Globalization and the provision of incentives inside the firm: The effect of foreign competition

This paper studies the effect of changes in foreign competition on the structureof compensation and incentives of U.S. executives. We measure foreign competitionas import penetration and use tariffs and exchange rates as instrumental variables toestimate its causal effect on pay. We find that higher foreign competition leads tomore incentive provision in a variety of ways. First, it increases the sensitivity of payto performance. Second, it increases whithin-firm pay differentials between executivelevels, with CEOs typically experiencing the largest wage increases, partly becausethey receive the steepest incentive contracts. Finally, higher foreign competition is alsoassociated with a higher demand for talent. These results indicate that increased foreigncompetition can explain some of the recent trends in compensation structures.

Expertise and finance: Mergers motivated by technological change

This paper argues that a large technological innovation may lead to a merger wave by inducing entrepreneurs to seek funds from technologically knowledgeable firms -experts. When a large technological innovation occurs, the ability of non-experts (banks) to discriminate between good and bad quality projects is reduced. Experts can continue to charge a low rate of interest for financing because their expertise enables them to identify good quality projects and to avoid unprofitable investments. On the other hand, non-experts now charge a higher rate of interest in order to screen bad projects. More entrepreneurs, therefore, disclose their projects to experts to raise funds from them. Such experts are, however, able to copy the projects and disclosure to them invites the possibility of competition. Thus the entrepreneur and the expert may merge so as to achieve product market collusion. As well as rationalizing mergers, the model can also explain various forms of venture financing by experts such as corporate investors and business angels.

Explaining movements in the labor share

In this paper we study the evolution of the labor share in the OECD since 1970. We show it is essentially related to the capital-output ratio; that this relationship is shifted by factors like the price of imported materials or the skill mix; and that discrepancies between the marginal product of labor and the real wage (due to, e.g., product market power, union bargaining, and labor adjustment costs) cause departures from it. We provide estimates of the model with panel data on 14 industries and 14 countries for 1973-93 and use them to compute the evolution of the wage gap in Germany and the US.

Factor shares, the price markup, and the elasticity of substitution between capital and labor

[spa] La participación del trabajo en la renta nacional es constante bajo los supuestos de una función de producción Cobb-Douglas y competencia perfecta. En este artículo se relajan estos supuestos y se investiga si el comportamiento no constante de la participación del trabajo en la renta nacional se explica por (i) una elasticidad de sustitución entre capital y trabajo no unitaria y (ii) competencia no perfecta en el mercado de producto. Nos centramos en España y los U.S. y estimamos una función de producción con elasticidad de sustitución constante y competencia imperfecta en el mercado de producto. El grado de competencia imperfecta se mide a través del cálculo del price markup basado en laaproximación dual. Mostramos que la elasticidad de sustitución es mayor que uno en España y menor que uno en los US. También mostramos que el price markup aleja la elasticidad de sustitución de uno, lo aumenta en España, lo reduce en los U.S. Estos resultados se utilizan para explicar la senda decreciente de la participación del trabajo en la renta nacional, común a ambas economías, y sus contrastadas sendas de capital.

Factor shares, the price markup, and the elasticity of substitution between capital and labor

[spa] La participación del trabajo en la renta nacional es constante bajo los supuestos de una función de producción Cobb-Douglas y competencia perfecta. En este artículo se relajan estos supuestos y se investiga si el comportamiento no constante de la participación del trabajo en la renta nacional se explica por (i) una elasticidad de sustitución entre capital y trabajo no unitaria y (ii) competencia no perfecta en el mercado de producto. Nos centramos en España y los U.S. y estimamos una función de producción con elasticidad de sustitución constante y competencia imperfecta en el mercado de producto. El grado de competencia imperfecta se mide a través del cálculo del price markup basado en laaproximación dual. Mostramos que la elasticidad de sustitución es mayor que uno en España y menor que uno en los US. También mostramos que el price markup aleja la elasticidad de sustitución de uno, lo aumenta en España, lo reduce en los U.S. Estos resultados se utilizan para explicar la senda decreciente de la participación del trabajo en la renta nacional, común a ambas economías, y sus contrastadas sendas de capital.