Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets

TLDR

Product and labor market deregulation reduce and redistribute rents, leading economic players to adjust, and typically produce distributional and dynamic effects. The study builds a macroeconomic model based on monopolistic competition in goods and bargaining in labor to analyze deregulation effects, and then uses the results to discuss the political economy of deregulation and recent European macroeconomic trends. Product market regulation sets entry costs and competition intensity, while labor market regulation sets workers’ bargaining power. The model shows that deregulation reduces rents and changes their distribution, producing measurable macroeconomic effects.

Abstract

Product and labor market deregulation reduce and redistribute rents, leading economic players to adjust to this new distribution. It typically comes with distribution and dynamic effects. To study these effects, we build a macroeconomic model on two central assumptions: monopolistic competition in the goods market, which determines the size of rents; and bargaining in the labor market, which determines the distribution of rents. Product market regulation determines entry costs and the degree of competition. Labor market regulation determines the bargaining power of workers. We show the effects of deregulation. We then use our results to discuss the political economy of deregulation, and recent macroeconomic evolutions in Europe.