employment during the year of the reform. A typical reform in their sample increases real value added in the deregulated industry by about 10 percent after 5 years. Real wages increase significantly while labor productivity and employment increase, but these increases are borderline insignificant.

Some papers are concerned with heterogeneous responses to product market deregulation across sectors. Gal and Hijzen (2016) use a local projection approach and find that, on average, such deregulatory reforms raise firm capital by 4 percent, output by 3 percent, and employment by 1.5 percent after 2 years. These effects do, however, differ across sectors. Although most reforms occur in the service sector, they benefit firms’ output in retail trade and professional services at least as much as those in the service sector itself, indicating important downstream spillovers. Furthermore, the authors find evidence that within sectors, it is usually the most efficient firms that benefit from deregulation. In network industries, small firms tend to increase employment most, while larger incumbents react by downsizing. In retail trade, large businesses tend to benefit more than smaller ones. There are no significant differences across firm sizes in the professional service sector. However, the authors document an important role of credit constraints, which significantly weaken the positive impact of product market reform on firm investment.

Messina (2006) also highlights how PMR are connected to the sectoral employment patterns, and relates this to observed structural change dynamics across countries. Regressing countries’ service sector employment share on the degree of OECD PMR indicators suggests that a reduction of one standard deviation in entry barriers would result in a 1.6 to 2.3 percentage points increase in the service employment share for an average income country in the sample. Calculations imply that differences in regulations can account for about one-fifth of the cross-country differences in service sector employment shares after controlling for income levels. Against this background, the paper builds a model featuring non-homothetic preferences in agriculture and services, monopolistic competition in all three sectors, and differences in the rate of productivity growth across sectors. Product market regulations enter in the form of economy-wide fixed costs that all firms must pay in every period. Increases in regulatory costs obstruct the natural pattern of structural change, hindering the development of those sectors whose demand is more income-elastic, i.e., especially the service sector. In a counterfactual model exercise, the author lowers the regulatory barriers from OECD to US levels. EU countries would experience a 3.8 percent increase in overall employment, a 1 percent increase in their service employment share, and a 1.04 percent gain in welfare after this reform.

Finally, there is some research analyzing how pro-competitive PMR matter across business cycles. The OECD (2018b) uses the term dynamic efficiency to describe the fact that product markets become more flexible as competition increases. When entry barriers are lowered, new firms often bring in new ideas, while incumbents face incentives to innovate. Relatedly, research has documented that well-designed regulations can improve the resilience of labor markets to adverse economic conditions. Intuitively, when markets are less constrained by procedural rules and entry/exit barriers, they can operate more smoothly, finding faster solutions to overcome moments of crisis. For example, De Serres et al. (2012) show that unemployment after crises is less persistent 17