RDP 2007-04: Productivity Growth: The Effect of Market Regulations 6. Conclusion

This paper has extended the existing literature on institutions and productivity in a number of ways. Using data covering 18 OECD countries over the period 1974–2003, we explore the effects of product and labour market regulations on aggregate TFP growth for the business sector. We find some evidence that lower levels of regulation are associated with higher TFP growth over subsequent years. There is also some evidence that labour and product market deregulation have more of an effect in combination. That is, greater flexibility (or efficiency) in one dimension appears to be more beneficial when the other market is also relatively flexible (efficient). It also appears that product market deregulation has a larger positive effect on productivity growth the further a country is from the production (or technological) frontier. However, these results are sensitive to changing the measure of labour market regulation used in our analysis. Furthermore, as with any econometric modelling exercise, the presence of a relationship in the past does not guarantee that this same relationship will necessarily continue into the future. In the case of regulation and productivity, the relationship is likely to depend in part on the specific type of labour and product market deregulation pursued.