Does product market competition improve the labour market performance?

Does product market competition improve the labour market performance? Gabriele Cardullo November 21, 2006 Abstract Many empirical and theoretical studies have recently emphasized the role of product market competition on labour market outcomes. In this paper, I
construct a general equilibrium model where the labour market exhibits search
frictions, whereas Cournot competition is assumed in the goods market. The
properties of the long run free-entry equilibrium show that a loosely regulated
product market fosters employment growth, a result in accordance with most
of the literature. However, from a normative viewpoint, after having amended
the search externalities by the so-called Hosios condition (stating that workers
bargaining power must be equal to elasticity of the expected duration of lling
a vacancy), both the level of employment and the degree of competition tend
to be ineciently high. Numerical results based on Belgian data conclude that
workers bargaining power should be at least 50 per cent higher than the elasticity
of the expected duration of lling a vacancy in order to bridge the gap between
the optimal and the laissez faire employment rate. Keywords: product market competition; search-matching equilibrium; barriers to entry. I thank Fabien Postel-Vinay, Bruno Van der Linden, Etienne Lehmann, Amina Mahdi, and the participants to the DMMG conference in the University of Algarve for useful discussions and com-
ments. A grant of the Belgian National Bank is gratefully acknowledged . D

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