Media Briefings

Promoting Product Market Compertition: The huge potential for boosting jobs and growth

• Published Date: February 2012

Policies to promote competition in Europe’s markets for good and services could raise the potential for job creation at little or no cost for the public purse. That is the central message of research by Giuseppe Fiori, Giuseppe Nicoletti, Stefano Scarpetta and Fabio Schiantarelli, published in the February 2012 issue of the Economic Journal.

Reviewing the experience of 20 OECD countries over more than 20 years, their study provides clear evidence that stimulating competition and making it easier for new firms to enter markets leads to better employment outcomes. What’s more, over time, product market reforms lead to labour market reforms that enhance the positive effect on employment – what the research team calls a ‘double dividend’.

Their analysis shows, for example, that in heavily regulated countries, product market reforms could raise the overall employment rate – the percentage of people in the working-age population who are employed – by as much as 5.4 percentage points.

This finding is of particular importance at present as many countries in Europe and elsewhere emerge from the Great Recession with a hangover of high unemployment and an urgent need to rein in large public deficits and growing public debt.

Most OECD countries have carried out wide-ranging reforms over the past two decades to foster competition in the markets for goods and services and ultimately boost productivity growth. This study asks whether these reforms also helped to create greater job opportunities.

The authors draw on a comprehensive set of indicators of anti-competitive regulations from the OECD database of international product market regulation. These indicators are intended to capture the size of barriers to entry created by unnecessarily restrictive regulations in different sectors. They include information on border barriers to foreign direct investment (FDI).

The indicators suggest that over the past two decades, regulatory approaches in product markets have converged in most areas and sectors across OECD countries towards a more pro-competitive stance. Convergence has taken place in particular in energy, transport and communication as well as in border barriers to FDI.

But in retail trade and business services, there remain persistent differences in the regulatory stance between countries. So despite convergence, differences in regulation persist, indicating that competitive pressures still differ considerably across both countries and sectors.

The main findings of the new study are as follows:

• Pro-competitive product market reforms can generate substantial employment gains in OECD countries when labour market policies are tight, thereby increasing the bargaining power of workers. The intuition is that countries with rigid labour markets are further away from full employment and hence, the scope for pro-competitive product market reforms to increase employment is greater.
• In this context, a product market reform that would have brought heavily regulated countries with also rigid labour markets to best practice could have raised the employment rate by 2.8 percentage points in the long run.
• Product market reforms have hardly happened in isolation; they have often been accompanied by reforms of the labour market aimed at facilitating the mobility of workers across firms and the incentives of the unemployed to return quickly to employment. There is evidence that, over time, product market reforms lead to labour market reforms that enhance the overall employment effect. A plausible explanation is that the push for reforming rigid labour markets becomes stronger and more effective when competitive pressures on firms increase and the total rents that can be shared between firms and workers decrease.
• Taking account of the linkages between product and labour market reforms, bringing product market regulations in heavily regulated countries to best practice could raise the employment rate by 5.4 percentage points, when all the effects have been realised. In other words, product market reforms could imply a ‘double dividend’ in terms of employment gains in the long run.

ENDS


Notes for editors: ‘Employment Effects of Product and Labour Market Reforms: Are There Synergies?’ by Giuseppe Fiori, Giuseppe Nicoletti, Stefano Scarpetta and Fabio Schiantarelli is published in the February 2012 issue of the Economic Journal.

Giuseppe Fiori is at the University of Sao Paolo and will be joining North Carolina State University. Giuseppe Nicoletti, Stefano Scarpetta are at the OECD. Fabio Schiantarelli is at Boston College.

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com); or Giuseppe Fiori via email: giuseppefiori@gmail.com