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Product Market Regulation and the Benefits of Wage Moderation
Author:
Mr. Marcello M. Estevãonull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 191
Language:
English
Publication Date:
01 Sep 2005
DOI:
https://doi.org/10.5089/9781451862102.001
ISBN:
9781451862102
ISSN:
1018-5941
Pages:
30
Keywords:
WP; product market; product market regulation; wage curve; labor market reform; Structural change; labor market; reforms; sequencing product market; wage-curve shift; product market reform; product market competition; Commodity markets; Wages; Wage bargaining; Unemployment rate; Real wages
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2005: Issue 191