Research on the employment effects of PMR has repeatedly found that the institutional and economic context in which pro-competitive reforms are enacted matter greatly for their effect size and direction (Vitale et al., 2020). Bordon et al. (2016) show that the employment effect of product and LMR varies dependent on the macroeconomic context of the reform implementation. Using local projection methods and reform shocks based on OECD PMR indicators, they find that product market deregulation leads to positive effects on employment (significant after 2 years), which becomes larger and more significant until year 5. In a second step, they include an interaction of the reform variable crossed with a measure of the business cycle at the time of the introduction of the reform. Product market deregulation launched during “good times” has an immediate positive and significant effect on the employment rate. They do not have statistically significant effects on employment in “bad times.” This reassuringly implies that the additional supply capacity created by structural reforms will be absorbed even when aggregate demand is weak and does not necessarily lead to deflationary pressures. The authors also find more positive effects on employment when reforms coincide with non-restrictive monetary policy.

Again relying on recent OECD PMR indicators data, Piton and Rycx (2019) find that an average product market reform over 1998–2013 is associated with a one percentage point reduction in the unemployment rate. Interestingly, highly educated individuals seem less impacted than low- and middle-educated workers. In contrast, men and women are equally affected by deregulation. Such heterogeneous effects on different worker types are also addressed in De Serres et al. (2012), who find more pronounced effects for women and youth, two groups considered vulnerable population subgroups at times of crisis. Their paper emphasizes how decreased regulation of product markets helps make economies more resilient to shocks. They show that more competition-friendly PMR can reduce structural unemployment while raising turnover. Such regulations also seem to decrease the persistence of unemployment.

A common element of all research presented above is that more pro-competitive PMR are associated with increases in aggregate employment. Some papers reassess this finding by estimating local projections based on different data, i.e. not the OECD PMR indicators. Duval and Furceri (2018) rely on a narrative database on labor and product market reforms in 26 advanced economies since 1970 to construct regulatory shocks. They find that past product market deregulation shocks increased GDP by about 1.5 percent on average after 5 years. This positive impact becomes statistically significant only after 3 years and fully materializes after about 7 years at 2.25 percent GDP growth. They find no significant effects on employment and labor productivity. In addition, the authors find that the effects of product market reforms do not depend significantly on the business cycle conditions, which stands in stark contrast to their own findings for labor market reforms.

Using the same narrative reform data, Bouis et al. (2020) shed light on the differential effects of PMR deregulation in the short versus long run. Using local projection methods, they find that output effects become significantly positive only 3 to 4 years after the reform, as prices start dropping. They do not find evidence of any transitory cost, apart from a short-lived drop in Single Market Program.

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