outcomes. Finally, in subsection 3.3.2, we deal with PMR affecting firm ownership structures and their effects on workers.

# **3.3.1 The Special Role of Upstream Sector Regulations**

Production linkages across sectors imply that regulations affecting one can have non-trivial implications for others. For example, if a new PMR leads to increased levels of competition in an upstream sector, that can have significant impacts on dependent downstream sectors through reduced prices and an increased supply of intermediate inputs (Duval and Furceri, 2018). Conversely, a pro-competitive PMR in an downstream sector can trigger spillovers in upstream sectors, for example through increased demand for intermediate inputs of production.

Network and professional service sectors are particularly important upstream sectors, as they provide intermediate inputs that build the foundation for the functioning of most other sectors.<sup>5</sup> They affect firm’s ability to invest in “new business opportunities and better production technology, to exploit economies of scale by concentrating production in fewer locations, to manage inventories efficiently, and to make coordinated decisions with their suppliers and consumers” (Arnold et al., 2016). For example, most companies rely on telecommunications and legal services for the operation of their business. Due to firms’ great interconnectedness, policies affecting professional service and network sectors have particularly large multiplier effects on other sectors (Dauda, 2020; Hong, 2022).

A further reason why the focus on professional service and network sectors is essential is that research points to LMICs having much scope for welfare improvement through deregulation in these areas (Vitale et al., 2020). For example, MENA countries often strongly restrict the firm structure of regulated professions such as accountants, lawyers, architects, and engineers (Islam et al., 2022). Lewis et al. (2022) document that in Indonesia, network sectors are particularly prone to state involvement, as most incumbent firms are owned or substantially controlled by the government. In addition, prices in the network sectors are often either directly regulated or subject to government pricing guidelines. Similarly, in Kazakhstan, retail price controls and regulations are particularly high in the network sector (OECD, 2018a). For example, the government regulates or approves the retail tariffs in air transportation, electricity, and gas sectors, and influences prices for gasoline and liquefied petroleum gas.

A well-developed literature shows that the deregulation of professional services and network sectors is associated with sizable increases in (total factor) productivity, that goes well beyond these upstream sectors (see, for example, Arnold et al., 2008, 2011, 2016; Bourl`es et al., 2013; Duggan et al., 2013; Fernandes and Paunov, 2012; Fried and Lagakos, 2020; Van der Marel et al., 2016). There is still relatively little evidence on the labor market effects of such measures. That said, the existing studies mostly suggest that of pro-competitive reforms in the professional services and network sectors are associated with improved labor market outcomes, even beyond the directly targeted sectors themselves. We summarize these studies below.

Barone and Cingano (2011) conduct research using industry-level data from OECD countries. They

> 5In line with the literature, this section will refer to the professional service and network sectors interchangeably as service sectors.

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