Employment Outcomes and the Interaction Between Product and Labor Market Deregulation: Are They Substitutes or Complements?

This paper provides a systematic empirical investigation of the effect of product market liberalization on employment when there are interactions between policies and institutions in product and labor markets. Using panel data for OECD countries over the period 1980-2002, we present evidence that product market deregulation is more effective at the margin when labor market regulation is high. Moreover, there is evidence in our sample that product market deregulation promotes labor market deregulation. We show that these results are mostly consistent with the basic predictions of a standard bargaining model (e.g. Blanchard and Giavazzi (2003)), once one allows for a full specification of the fall back position of the unions.