The impact of product and labour market reform on growth: Evidence for OECD countries based on local projections

Jakob De Haan,Rasmus Wiese

doi:10.1002/jae.2890

Abstract

SummaryWe examine the impact of labour and product market reforms on economic growth in 25 OECD countries between 1985 and 2013, and tests whether this impact is conditioned by the fiscal policy stance. Our local projection results suggest that controlling for endogeneity of reforms (by the Augmented Inverse Probability Weighted estimator) and fiscal policy is crucial. Our results show that product market reforms mostly cause slight negative growth, except when implemented during periods of neutral fiscal policy. Labour market reforms hurt growth under tight and neutral fiscal policy, but are conducive to economic growth if introduced during periods of expansionary fiscal policy.

Highlights

Productivity growth is the most important component of economic growth
Our findings indicate that controlling for endogeneity of reforms and the stance of fiscal policy is crucial
Our results suggest that product market reforms mostly cause slight negative growth

Summary

Introduction

Productivity growth is the most important component of economic growth. Regulation is widely believed to play a role in explaining cross-country productivity differences, as regulation limits the competitive pressures that challenge firms to thrive (Nicoletti and Scarpetta, 2003; Aghion and Griffith, 2005; Cette et al, 2016). Another paper that is strongly related to our work is Duval and Fuceri (2018) who use local projections and the same database as the current paper These authors examine the effects of labour and product market reforms on output, employment and productivity, and analyse how these vary with prevailing macroeconomic conditions and policies. Out of the more than 1000 actions, major reforms are identified based on three criteria: (1) the OECD Economic Survey uses strong normative language to define the action, suggestive of an important measure; (2) the policy action is mentioned repeatedly across different editions of the OECD Economic Survey for the country considered; (3) the OECD indicator of product and labour market regulation displays a very large change.

Estimation methods

Robustness analysis

Findings

Conclusion