The Macroeconomics of Market Regulation

• DOI: http://doi.org/10.1111/infi.12077
• Author: Giuseppe Fiori,Matteo Cacciatore
• Date: 01 December 2015
• Published date: 01 December 2015

BOOK REVIEW

The Macroeconomics of Market

Regulation

Matteo Cacciatore

y

and Giuseppe Fiori

z

y

HEC Montr

eal, and

z

North Carolina State University.

Boeri,T.,M.Castanheira,R. Faini and V. Galasso, eds., Structural Refor ms Without

Prejudices. Oxford: Oxford University Press. 2006.

Sch ind le r, M., H . Ber ge r, B. B. Ba kke r and A. Sp ili mbe rg o, ed s., Jobs an d Growth:

Supporting the European Recovery. Washington, D.C.: International Monetar y Fund. 2014.

Solow, R., ed., Structural Reform an d Economic Policy. Basingstoke: Palgrave Macmi llan.

2004.

I. Introduction

In each country, a complex set of laws and institut ions regulates the funct ioning of

product and lab our markets. Broadly d efined, the regulati on of labour directly

affects hiring and firing decisions , the number of working hours, the i ntensity of

job search and wage dynam ics. Examples inclu de employment protection le gislation,

the generosity a nd duration of unemp loyment benefits, restrictions on the length of

contracts, the level of centralization in wage bargaining, labour unions and

International Finance 18:3, 2015: pp. 343–360

DOI: 10.1111/infi.12077

© 2015 John Wiley & Sons Ltd

minimum wages. Product market regulation affects producer entry and exit in a

given market or industr y, the incentives to create and commercializ e goods and

services, and t he behaviour of prices. Exampl es include the procedures governin g

market entry (e.g. the legal requirements to be met for a business to start

operating), the l aws and institutions t hat limit the market supply of goods a nd

services, a nd price controls.

The rationale for the e mergence and consoli dation of such laws and insti tutions

has been related to various factors, in cluding the promotion of so cial equity goals,

the correc tion of ma rket imper fectio ns (e.g. financial market incompleteness,

imperfect infor mation, etc.) an d the strategic behaviour of politic ians who use

regulation to create rents to be extrac ted through campaign contribut ions, votes and

bribes.

By the beginning of the 1980s, as employment performance started to diverge

across developed countries , the debate about the mac roeconomic consequences of

market regulation gath ered momentum. In partic ular, the strong record of job

creation and low unemploym ent in the United States relative to much of Europe

raised question s about whether Europe’s more str ingent labour regul ation might be

a contributing fac tor. Controversy about the implications of market regulation for

economic efficiency h as continued since then.

The wave of crises that began in 2008 reheated the debate. Calls for market

deregulation have been par t of policy discussi ons on both sides of the Atlanti c.

Policies aimed at deregulat ing product and labour ma rkets, the so-called ‘structural

reforms’, have been the cornerston es of internationa l agencies’policy a dvice to the

euro-area peripher y since the onset of the recession. T he argument is that more

flexible markets would foster a more rap id recovery and, in genera l, would result in

better economic perf ormance. Deregulat ion of product mar kets would help accom-

plish this by facilit ating producer entry, boosting bu siness creation and e nhancing

competition; deregu lation of labour markets would do so by facilitating reallocation

of resources and speeding up adjus tment to shocks.

However, opposing views persist, with m any fearing that reforms would e ntail

short-run adjust ment costs, includin g increased unempl oyment and higher bu siness

cycle volatility. These concern s are often expressed in relation to curre nt macroeco-

nomic developments, as recent call s for deregulation have come at a time of fiscal

retrenchment and when the ability to use monetary policy is limited by the zero

lower bound on interest rates and/or exchange -rate commitments ( such as in the

eurozone). A recurrent argument is that the inability to manage transition dynamics

with demand-s ide macroeconomic polic ies may result in more sizable t ransition

costs, discouragi ng the implementat ion of reforms.

In light of the se arguments an d discussions, it is not surpris ing that a va st

academic literatu re studies, both theoretica lly and empirically, the macroeconomic

consequences of goods- and labour-mar ket regulation. Broad ly defined, this litera-

ture addresses four research questions:

344 Matteo Cacciatore and Giuseppe Fiori

© 2015 John Wiley & Sons Ltd