How do product and labor market regulations affect aggregate employment, inequalities and job polarization? a general equilibrium approach.

Summary In this paper, we extend our previous analysis (Albertini, Hairault, Langot and Sopraseuth (2015)) along two dimensions. Firstly, we introduce an endogenous number of firms à la Melitz (2003) in order to account for interactions between good and labor markets, and their respective institutions. Secondly, rather than focusing on the historical path of ou prototypical economies as in the previous paper we now want to forecast their future dynamics as spurred by large changes in technology. Hence, for each economy we analyze the transitional dynamics from today to a new world, i.e. the path along which structural technological changes remove the competitive advantages of workers in the middle of the wage distribution, leading them to move to new opportunities at the bottom of the wage distribution. By nature, this phenomenon takes time (searching for a job in a new occupation is time consuming), and it can be blocked if redistributive policies, by increasing the outside option of the poorest, cancel the potential profits of new jobs in the service sector.3 Beyond he comparison of the initial and final steady states, we also solve the transitional dynamics. Further, our paper goes beyond the traditional analysis of PMR and LMIs’ effects on labor market outcomes by focusing on their effects on the reallocation from routine to manual tasks.