Employment Effects of Product and Labour Market Reforms: Are there Synergies?

This article investigates the effect of product market liberalisation on employment allowing for interactions between policies and institutions in product and labour 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 labour market regulation is high. The data also suggest that product market liberalisation may promote employment-enhancing labour market reforms. Over the past two decades, many OECD countries have sought to promote productivity and long-term growth by improving the efficiency of goods and services markets through liberalisation and privatisation programmes. There is a growing body of evi-dence suggesting that these programmes have indeed boosted productivity perform-ances in the sectors concerned,1 but there is less evidence on their impacts on employment. A few recent theoretical and empirical studies suggest that product market deregulation may stimulate aggregate employment, yet firm conclusions are still lacking.2 In assessing the effect of product market regulatory reforms, it is crucial to take into account that these reforms have been implemented in countries with very different labour market settings. This raises two related questions. First, do the