Recent empirical work finds a negative correlation between product market regulation and aggregate employment. We examine the effect of product market regulations on hours worked in a benchmark aggregate model of time allocation as well as in a standard dynamic model of entry and exit. We find that product market regulations affect time devoted to market work in effectively the same fashion that taxes on labor income or consumption do. In particular, if product market regulations are to affect aggregate market work in this model, the key driving force is the size of income transfers associated with the regulation relative to labor income, and the key propagation mechanism is the labor supply elasticity. We show in a two-sector model that industry-level analysis is of little help in assessing the aggregate effects of product market regulation.
JEL classification: E24, J22, L5
Key words: labor supply, product market regulation, entry barriers
The authors thank Berthold Herrendorf, Yongsung Chang, Ellen McGrattan, an anonymous referee, and seminar participants at Arizona State University, New York University, the University of Wisconsin at Madison, the International Monetary Fund, and the University of Tokyo for useful comments. Rogerson acknowledges financial support from the National Science Foundation. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Lei Fang, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8057, , or Richard Rogerson, Department of Economics, W.P. Carey School of Business, Arizona State University, P.O. Box 873506, Tempe, AZ 85287, 480-727-6671, firstname.lastname@example.org.
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