The Impact of Product and Labour Market Reform on Growth: Evidence for OECD Countries Based on Local Projections

Jakob De Haan,Rasmus Wiese

doi:10.2139/ssrn.3642391

Abstract

This paper examines 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, i.e. whether there are fiscal expansions or adjustments. Our local projection results suggest that controlling for endogeneity of reforms and the stance of fiscal policy is crucial. To control for endogeneity, we use the Augmented Inverse Probability Weighted estimator. Our results suggest 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

Regulation is widely believed to play a role in explaining cross-country growth differences, as regulation limits the competitive pressures that challenge firms to thrive (Aghion & Griffith, 2005; Cette et al, 2016; Nicoletti & Scarpetta, 2003; Syverson, 2011)
Our findings indicate that controlling for endogeneity of reforms and the stance of fiscal policy is crucial
The Pesaran test statistics indicate cross-sectional dependence in some models, but to account for the imported uncertainty from the first-stage logit estimation we report cluster-bootstrapped standard errors with 500 repetitions in parentheses. *p < 0.10. **p < 0.05. ***p < 0.01

Summary

| INTRODUCTION

Regulation is widely believed to play a role in explaining cross-country growth differences, as regulation limits the competitive pressures that challenge firms to thrive (Aghion & Griffith, 2005; Cette et al, 2016; Nicoletti & Scarpetta, 2003; Syverson, 2011). 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. Consider a model with m possible structural breaks: yt 1⁄4 δj þ μt ðt 1⁄4 1, ..., T; j 1⁄4 1, ...m þ 1Þ ð1Þ where yt is the dependent variable, in our case, the cyclically adjusted primary budget balance in each individual country, δj is a vector of estimated constants, that is, the mean of the m + 1 different segments of the time series yt, and ut is the error term. Table SA2.1 provides a description of all variables used and their sources

| ESTIMATION METHODS

| MAIN RESULTS

Yes Yes

Findings

| CONCLUSIONS