Entry Regulation and Labour Market Power: Evidence from the Italian Service Sector

Abstract:

We provide new evidence on the effects of lowering barriers to firm entry on employers' monopsonistic power in the labour market. We exploit a wave of product-market deregulation reforms introduced in Italian service sectors between 2010 and 2015 and administrative data at both firm and worker-level. Combining a fine-sector index of entry regulation with a difference-in-differences design for continuous treatment variation, we estimate the effects of deregulation on markups, wage markdowns, full-time equivalent wages, and job-separation elasticities. We find that deregulation lowered wage markdowns and raised wages and employment. The decrease in employers' monopsonistic power is also corroborated by an increase in labour supply elasticity estimated from job separations. Product-market deregulation may therefore improve workers' welfare by intensifying competition among employers.