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Anti-competitive product market regulation
Barriers to firm entry are predicted to reduce gross worker flows…
There is a large consensus in the economic literature that regulations increasing the cost for firms of establishing new businesses in a specific market reduce both entry and exit of firms. If entry costs are lowered by a regulatory reform, ex-ante expected benefits from entry will be higher, thereby lowering the expected-productivity threshold at which a firm decides to set up its business. However, if the same regulatory reform does not affect each firm’s potential operating costs, net of starting costs, productivity shocks will more frequently force low-productivity newly entered firms out of the market (e.g. Hopenhayn and Rogerson, 1993). Given that entry and exit account for about one-third of gross job flows (see OECD, 2009), barriers to entry are likely to have an important impact on labour reallocation. Moreover, entering firms might be more efficient than incumbents, thereby forcing the latter to downsize and, possibly, exit the market (e.g. Aghion and Howitt, 1998). Finally, entering firms are likely to progressively expand, as they learn-by-doing how to run their business efficiently (e.g. Bahk and Gort, 1993).
… but other types of regulations might increase them…
Other types of regulation, such as price controls and public authorisation of strategic decisions, by potentially affecting normal operating costs of firms, have theoretically ambiguous effects on gross job reallocation. In fact, changes in these costs can increase or decrease the reactivity of firms to productivity shocks. On the one hand, an increase in operating costs also makes entry less attractive, which by reducing the number of firms increases equilibrium prices. On the other hand, each firm has to spend more on operating costs, which reduces net profits. In equilibrium, the net effect on profits is likely to be less negative/more positive for the most efficient firms, which gain more from higher prices. This might imply that, in order to survive, firms need to be more efficient in more regulated markets with higher operating costs, which would imply a greater sensitivity to productivity shocks (Asplund and Nocke, 2006; Koeniger and Prat, 2007). Finally, the increase in trade competition due to globalisation and trade liberalisation is generally considered to increase restructuring at least in the short-run, thereby increasing job destruction but also job creation (see Melitz, 2003; and OECD, 2007 for a survey).
… and there is only limited evidence on the impact of product market regulation on labour reallocation
There is extensive cross-country empirical evidence on the negative association between product market regulation and firm entry and exit (see Schiantarelli, 2008, for a survey). This evidence is supported by the microeconometric literature, which typically tries to identify the impact of deregulation by evaluating the effects of specific reforms (see e.g. Aghion et al., 2008). However, while there is abundant research on deregulation and employment and earnings (see e.g. Hirsch and Macpherson, 2000; Black and Strahan, 2001; Wozniak, 2007), there are fewer studies that look directly at the effect of deregulation on gross job and worker flows, and most of this literature focuses on the impact of trade with mixed results, particularly on job-to-job transitions (see e.g. OECD, 2007; Bloom et al., 2010). Using a difference-in-differences estimator on a cross-section of industry-level data for several OECD and non-OECD countries, Haltiwanger et al. (2008) find a weakly-positive relationship between overall product market regulation and job turnover.
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