Regulations, Innovation and Local Labor Markets – RILLM

Since the 2008 financial crisis, European governments have implemented numerous reforms on the anticompetitive Product Market Regulation (PMR), which are the laws and rules in network and service industry that may restrict competition and firm choices. These reforms are supported by international organizations, such as the IMF and the OECD, and by an abundant literature finding a negative impact of PMR on innovation and productivity. However, the PMR impact on labor market outcomes are mostly unknown. As labor markets performances are bad in most European countries, it’s essential to fill this gap and the main objective of this project is to investigate the PMR impact on employment rate, wage inequality, notably between men and women, and other labor market outcomes for 31 European countries.

To understand in depth the impact of PMR on labor market outcomes, the empirical investigations will be supported by original theoretical contributions and both empirical and theoretical contributions will emphasize the major role played by innovation. Moreover, we will pay special attention to environmental innovations, as they are particularly important for sustained growth, but also because they may have very different effects on the labor market. In addition, we will take into account the PMR complementarities with labor market regulations, particularly employment protection legislation, unemployment benefit and minimum wage, to enrich our analyses and prevent omission bias in the investigation of PMR impact.

Most papers analysing the PMR impact on innovation use cross-country-industry panel data, as PMR are implemented at this level. However, workers are mobile between industries, so the industry level data are less relevant to investigate the global impact on labor market outcomes. In the same time, firm level investigations may identify the regulation impact on innovative firm employment and wages, but miss the spillover effects on the other firms due to the creative-destruction process. Our identification strategy will bring together industry and local labor market data to overcome this challenge. A local labor market is a geographical area within which most workers reside and work, and in which establishments can find most of the labour force needed to fill the jobs offered. Therefore, this is a relevant level of analysis for employment rate, inequality and other labor market outcomes.

Our approach will allow to test whether the PMR impact on a local labor market depend on the industry composition of this market. Specifically, we will tests two hypotheses. First, that the impact of an industry regulation on a local labor market depend of its share of workers employed in this regulated industry. Second, that the impact of an industry regulation on a local labor market depend also of its share of workers employed in industries using intermediate inputs produced by the regulated industry. These tests results will provide interesting insights on the causality between PMR and labor market evolutions. These empirical investigations will benefit from an individual database using data from the Eurostat Labor Force Survey database merged with the Community Innovation Survey and several industry level OECD databases, to cover 281 European local labor markets and the 1985-2016 period. These investigations will also benefits from an estimator for multi-dimensional panels developed in this project.

Our project will allow to assess the potential impact of PMR and labor market regulation reforms on labor market outcomes for 31 European countries and 281 local labor markets, and notably to identify among these lasts the potential winners and losers from reforms. The impact of this project on the national and international debate as well as on the policymakers will be reinforced by the free provision of a software allowing to compute easily the numerous expected effects of PMR and labor market regulation reforms.