What will it be, sir – fast productivity growth or tough market regulation?

This one should make the PM happy. A new Reserve Bank discussion paper shows that employment protection legislation lowers productivity growth.

Productivity Growth: The Effect of Market Regulations
Christopher Kent, John Simon
This paper explores the effects of product and labour market regulation on growth in total factor productivity (TFP) using panel data from 1974–2003 for 18 OECD countries. Our regressions are specified so that labour and product market regulations can affect productivity both individually and in combination. While noting that the results are sensitive to the measure of labour market regulation used, we find some support for the hypothesis that lower initial levels of regulation are associated with higher TFP growth over subsequent years, and that labour and product market deregulation have more of an effect in combination. It also appears that product market deregulation has a larger positive effect on productivity growth the further a country is from the technological frontier.

I’m a little troubled by their chosen indicator of labour market regulation (days lost to strikes), but the finding accords with much of the previous literature, including this oft-cited paper.

Of course, the negative relationship between productivity growth and regulation doesn’t mean that market regulations are bad – just that they represent a tradeoff between equity and efficiency.

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8 Responses to What will it be, sir – fast productivity growth or tough market regulation?

  1. derrida derider says:

    I though this topic had already been done to death by the OECD, with the upshot being the banal one Kent and Simon found – results are bloody fragile. Which suggests:
    1) The effects are small; and/or
    2) They’re very non-linear (Calmfors and Drifill’s inverted-U curve?); and/or
    3) There’s serious problems with our measure of regulation.

    As for “days lost to strikes” as a regulation measure, that’s ridiculous. For a start there’s obvious endogeneity – in countries and periods (eg the late 1970s) of low productivity growth there is bound to be more distributional conflict (note that even some more sophisticated measures of regulation will suffer a bit of this too – the choice of how much to regulate is not completely independent of the current state of the economy).

  2. Kevin Cox says:

    I would have thought that if regulation was measured by the number of pages of regulations this would say that work choices will give bad productivity outcomes. Funny about that.

  3. Bring Back CL's blog says:

    Kevin beat me to the obvious.

    don’t academics waste time and effort on silly regressions!

  4. John Humphreys says:

    Andrew… regulation doesn’t indicate equity. It shows that some people want to try and regulate for equity, but if good intentions were good enough then we wouldn’t have many economic debates left in the world.

    Poor people can’t eat good intentions.

  5. Bruce Wilder says:

    The whole thing is farcical, in its ideological ignorance.

    One of the most effective things a government can do, to accelerate productivity growth, is to institute product regulation. A well-informed, professional economist should be able to reel off a dozen illustrative examples.

    As always, of course, the details of the policy matter a great deal.

  6. Andrew Leigh says:

    Bruce, it’s probably the case that some regulation is good for growth – but that doesn’t mean that more is always better.

  7. reason says:

    maybe Bruce was saying (or should have been saying) it is not the AMOUNT of regulation that counts, but the quality. Even harder to measure of course.

  8. Julian Evans says:

    This paper is all well and good, but really total factor productivity is much more of an outcome not so much of the efficiency of single inputs to production (including labour) but how much allocative efficiency drives input efficiency. To wit, the more market forces are able to be the driver of decision making, the more they are likely to result in more efficient outcomes in allocative decision making. Reforming labour market’s is all well and good, but it is no substitute for reforming product markets. Does this government’s decisions on Wheat Export Marketing, National broadcasting and telecommunications, Slow-downs on Tariff reduction, Special “Temporary” Adjustment Levies (Airlines, Milk, Sugar), Competition Policy failures, education and training regulation, etc tell you a story of a govt committed to improving efficiency of national resource allocation? I don’t think so.

    Moreover if you believe that 1500 pages of detailed legislation and regulations (since expanded) with explicit Ministerial determination at the heart of it, is deregulation, then I would hate to see what a regulated labour market looks like.

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