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Oxford Economic Papers Advance Access originally published online on August 20, 2004
Oxford Economic Papers 2004 56(4):667-686; doi:10.1093/oep/gpf068
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Right arrow E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution
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© Oxford University Press 2004; All rights reserved

Product market competition, job security, and aggregate employment

Bruno Amable{dagger} and Donatella Gatti{ddagger}

{dagger}University of Paris X and CEPREMAP. 48, Boulevard Jourdan, 75014 Paris, France; e-mail: bruno.amable{at}cepremap.ens.fr {ddagger}University of Lyon 2, CEPREMAP and IZA; e-mail: donatella.gatti{at}cepremap.cnrs.fr

Standard economic wisdom generally stresses the benefits of increased competition on the product market. This paper proposes a model of monopolistic competition with an endogenous determination of workers flows in and out of unemployment, where wages are determined according to an efficiency wage mechanism. We show that an increase in product market competition boosts the hiring rate as well as the separation rate thus reducing job security. Hence, the efficiency wage schedule compatible with more competition shifts upward. An adverse effect on workers' incentive is at work which pushes real wages up to the point that increased competition may indeed generate employment losses rather than gains.


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