deregulatory product market reforms dependent on the labor market regulations in place. They proxy workers’ bargaining power with the share of workers whose wages are determined by union agreements, regardless of whether they belong to a union (“bargaining coverage”). When workers’ bargaining power is high, increased competition reduces unemployment more than when it is low. For example, when firm profitability drops by 3 percentage points, unemployment is estimated to decrease by only 0.6 percentage points in economies with low bargaining power (a coverage of 53%, for example), while it decreases by 1.1 percentage points in high bargaining power (97% coverage) settings.<sup>31</sup> This is in line with Nicoletti and Scarpetta (2005), who find that the positive employment effects of deregulating product markets are larger when labor markets are more restrictive. Interestingly, real wages increase less after the increased competition when bargaining power is high than when it is low.

Again, based on OECD data, Bassanini and Duval (2009) estimate reduced-form unemployment equations consistent with standard job-search and wage-setting models. In the average sample country, less stringent PMR is consistently associated with decreases in aggregate unemployment. However, the results are not consistent across countries when analyzing interaction between individual pairs of policies and accounting for their endogeneity. The authors argue the entire regulatory framework (not always just a pair of two policies) is the more relevant dimension to consider when evaluating the effectiveness of a policy given its context.

They proceed to construct a measure capturing how ‘employment-friendly’ the overall regulatory framework is within individual countries. The measure consists of the sum of the linear unemployment effects of individual regulations. In subsequent regressions, this measure is interacted with each individual regulation. The results show consistently that there are reinforcing effects between the individual policies and the overall regulatory framework: any reform that reduces regulations which are detrimental to employment (for example, anti-competitive PMR), would have a larger impact the more employment-friendly the overall policy stance. This stands in some contrast to other findings from the literature, albeit the framework implemented by Bassanini and Duval (2009) is difficult to compare to those in other studies. In addition, the authors find some evidence between reform complementarities: two employment-enhancing reforms can have larger impacts when implemented simultaneously.

Aghion et al. (2008) analyze an episode of liberalization in the manufacturing sector in India that began in the 1980s. Their unique setting allows for investigating the effects of delicensing individual industries under varying labor market regimes, as the reforms occurred at the level of individual manufacturing industries, while labor market regulations were put in place regionally. In general, delicensing led to statistically significant increases in the number of factories of around 6%, but no significant increase in real output. In their main model specification, the authors find that the effect of delicensing on both the number of firms and firm productivity is significantly more negative when labor market regulations are historically more employer-friendly. This key result also holds when implementing an instrumental variable specification that tackles remaining endogeneity concerns

> 31For comparison, initial coverage was relatively low in Canada or the UK, with 39% and 64%, respectively, and relatively high in Austria with 99%. As a robustness check, the authors proxy workers’ bargaining power with the share of workers who are members of a union. The estimated effect is much smaller but qualitatively consistent.

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