The Distributive and Welfare Effects of Product and Labour Market Deregulation

This paper studies the effects of product and labour market deregulation on wage inequality and welfare. By constructing an analytically tractable model in which the level of product market competition and the wages are endogenously distributed, I show that even though deregulation in labour markets raises the aggregate level of employment and the average real wage, the welfare of trade unions may decrease in sectors with a low level of competition. Moreover, removing barriers to entry in the goods market has mixed effects on inequality: the wage variance and the Gini index are lower, but the ratio of the highest over the lowest wage paid in the economy increases. Finally, an interesting result of the model concerns the wage density function. By parameterizing the rates of firms creation and destruction on the basis of Belgian data, the resulting shape of the wage distribution exhibits an empirically accurate form, unimodal and positively skewed