Abstract
Unemployment rate of some OECD countries have been still high since the mid 1970s following the oil shocks and concomitant fall in productivity growth. Yet, as the 1980s progressed, unemployment rate in the USA and some European countries (UK, NL, IR) fell back to earlier levels with deregulation of product and labor markets. As is well known, these countries eliminated obstacles from the product and labor markets, which were often blamed for the relatively poor performance. Since too much rigidity is detrimental to employment, the obvious policy recommendations are to remove obstacles: deregulations of product and labor markets. However, the employed would oppose the deregulation of labor market which might cause their real wages down. Therefore we should pay much attention to the product market deregulation which makes the wages recovered. When these two deregulations are taken at the same time, and if the employed have enough information about the effect of the deregulations to the wages, then they would not oppose these deregulation policies. In this case, the product market deregulation and labor market deregulation are "Policy complementarity"(hereafter PC); it can supplement labor market reforms in combating unemployment. The product market deregulation is important for the point of PC. This paper reviews the effects of these deregulations in a model with capital adjustment monopolistic competition and a non-homogeneous production function, where wages are determined according to an efficiency bargaining model. The availability of these deregulations as a long-term PC is evaluated. We find that the deregulation of product market may have markedly different effects than in the previous works. Our findings stem mainly from the fact each firm usually adjusts not only labor but also capital to survive in response to changes in the competition environment in the long run. Some firms which do not stand a high-competition exit from the market; it leads to shift to the high degree of monopoly, and the deregulation policy becomes less effective as Blanchard and Giavatti (2003). The central results of this paper can be summarized as follows. The results in the long run depend critically on the scale effects of production function. The effects of the deregulation in product market on the employment and wages are as follows: the wages and employment increase if α>1, they are constant if α=1, and they decrease if α<1 although the degree of monopoly is constant in the long run. From the point of PC, the combinations of the product market regulation deregulation (regulation) and labor market deregulation are PC if α>1 (α<1).
