Barriers to Entry, Deregulation and Workplace Training Andrea Bassanini (OECD, ERMES and IZA) Giorgio Brunello (Padova, Cesifo and IZA)

Motivation Large literature on product market institutions – regulation, barriers to entry – and growth. Large literature on product market institutions – regulation, barriers to entry – and growth. Large empirical literature on competition and performance (productivity, innovation, etc…) Large empirical literature on competition and performance (productivity, innovation, etc…) Empirical work using regulation data: deregulation can foster growth by affecting: Empirical work using regulation data: deregulation can foster growth by affecting: –employment (Kugler and Pica, Fiori et al) –productivity growth (Nicoletti and Scarpetta) –investment in capital stock (Alesina et al) –innovation (Aghion et al) –business startups (Djankov et al)

Does it affect training? Human capital accumulation important engine of productivity growth Human capital accumulation important engine of productivity growth One channel in the relationship between deregulation and productivity growth? One channel in the relationship between deregulation and productivity growth?

Previous literature: Theory Common idea in labour economics: competition   training  because rents  and firms pay for most of workplace training (e.g. Acemoglu and Pischke, 1999) Common idea in labour economics: competition   training  because rents  and firms pay for most of workplace training (e.g. Acemoglu and Pischke, 1999) –Only exception Autor (2001), but limited to induction training (training as a selection device: THS firms)

Training and deregulation (deviations from sectoral means) in energy, transport and communication. 15 EU countries

Our contribution: Theory We develop a model of price competition with identical firms and find that lower barriers to entry increase training We develop a model of price competition with identical firms and find that lower barriers to entry increase training Intuition: two effects Intuition: two effects –Competition reduces rents per unit of output and thus training (rent effect) –Competition increases the sensitivity of output to relative prices (and training reduces relative prices) (business-stealing effect)

Autor shows that training and firm concentration (Herfindhal index) are negatively correlated in the US THS industry Autor shows that training and firm concentration (Herfindhal index) are negatively correlated in the US THS industry Goerlitz and Stiebale (2008) find no effect of mark-ups or firm concentration on training using German data. Goerlitz and Stiebale (2008) find no effect of mark-ups or firm concentration on training using German data. Our previous exploratory work (BBBDL) on a multi-country aggregate panel finds negative correlation between the OECD index of regulation and training Our previous exploratory work (BBBDL) on a multi-country aggregate panel finds negative correlation between the OECD index of regulation and training Previous Literature: Empirics

Our contribution: Empirics We match large industry-level datasets on regulation and training – allowing us to control for all aggregate effects – and we find that deregulation increases training We match large industry-level datasets on regulation and training – allowing us to control for all aggregate effects – and we find that deregulation increases training We also look at the relationship between markups and training, and instrument the former with regulation We also look at the relationship between markups and training, and instrument the former with regulation

Roadmap Motivation Motivation Literature Literature The Theoretical Model The Theoretical Model The Empirical Setup The Empirical Setup The Data The Data Results Results Conclusions Conclusions

Key assumptions Firms and workers are identical: share the same technology, demand elasticity, outside options and training (and hiring) costs. Firms and workers are identical: share the same technology, demand elasticity, outside options and training (and hiring) costs. No exogenous turnover No exogenous turnover Demand elasticity  if number of firms  Demand elasticity  if number of firms  No physical capital. There is only one type of labour No physical capital. There is only one type of labour

Specific training: Time line Stage 0: firms decide entry (m enter) Stage 0: firms decide entry (m enter) Stage 1: Firms hire T workers and provide them with a (costly) amount of training  Stage 1: Firms hire T workers and provide them with a (costly) amount of training  Stage 2: Final wages W and employment L are set; production occurs. Stage 2: Final wages W and employment L are set; production occurs. –Wages and employment are bargained over (Efficient bargaining between union and employer).

Specific training Two alternative settings: Two alternative settings: Commitment: The employer commits to employ all trainees (e.g. long notice periods). Commitment: The employer commits to employ all trainees (e.g. long notice periods). –L = T No Commitment: The employer cannot commit to employ all trainees. No Commitment: The employer cannot commit to employ all trainees. –L < T L>T not feasible: training ONLY in the first period L>T not feasible: training ONLY in the first period

Commitment case: setup (see Blanchard Giavazzi 2003)

Nash Bargaining

Training Decisions

Optimal Training Incidence

Long Run Equilibrium with Entry

Reducing entry barriers Lower barriers rotate the TT curve downwards because they reduce net profits per unit of output Lower barriers rotate the TT curve downwards because they reduce net profits per unit of output Lower barriers increases the number of firms MM shifts out and training increases because output gains from reducing unit costs go up Lower barriers increases the number of firms MM shifts out and training increases because output gains from reducing unit costs go up

No commitment case: Starting from the commitment equilibrium Starting from the commitment equilibrium –Bargaining over L leads to L>T (not feasible) –Reason: the parties consider training costs as bygones Accomodating strategy in the first stage: set T large enough to accommodate L=T in second stage Accomodating strategy in the first stage: set T large enough to accommodate L=T in second stage –Any large-T strategy is always dominated by a small-T strategy Intuition: training costs are not internalised in the bargaining stage, therefore training costs can be cut only by tying own hands and setting a non accommodating strategy with lower T Commitment equilibrium holds even in absence of commitment Commitment equilibrium holds even in absence of commitment Key reason: firms cannot train in the second period Key reason: firms cannot train in the second period

General training If hiring costs > training costs: as above If hiring costs > training costs: as above Otherwise: no firm trains, training paid by workers, wages set by the market (as in Becker) Otherwise: no firm trains, training paid by workers, wages set by the market (as in Becker) Workers invest till MB=MC Workers invest till MB=MC Firms demand training to max profits Firms demand training to max profits

General training: equilibrium

Empirical strategy: Compare a group of industries affected by deregulation (certain services plus utilities) to a group not (or less) affected (manufacturing) Compare a group of industries affected by deregulation (certain services plus utilities) to a group not (or less) affected (manufacturing) Cross-country data: add country variation in deregulation measures: the intensity of deregulation varies across countries for each sector (more variation and possibility of controlling for macroeconomic effects) Cross-country data: add country variation in deregulation measures: the intensity of deregulation varies across countries for each sector (more variation and possibility of controlling for macroeconomic effects) Confounders are controlled by a set of country by time, country by sector and sector by time dummies Confounders are controlled by a set of country by time, country by sector and sector by time dummies

Empirical Setup

Data OECD industry-specific regulatory indicators OECD industry-specific regulatory indicators Eurostat Labour Force Survey Eurostat Labour Force Survey OECD STAN database on output, imports and labour OECD STAN database on output, imports and labour

Definition of training in the data Training flow in the 4 weeks preceding the interview Training flow in the 4 weeks preceding the interview Sensitivity: we also estimate training stocks using the inventory method (Dearden, Reed and van Reenen 2006, Conti 2005) Sensitivity: we also estimate training stocks using the inventory method (Dearden, Reed and van Reenen 2006, Conti 2005) We focus on fully employed individuals aged 25 to 54 We focus on fully employed individuals aged 25 to 54 We collapse data by country year and industry We collapse data by country year and industry

(mean) educ4wn YEAR training participation rate training incidence – affected industries - average across EU

OECD regulation indicators Cover 3 industries: utilities (electricity gas), transport (air road rail) and communication Cover 3 industries: utilities (electricity gas), transport (air road rail) and communication Detailed indicators of sector specific entry barriers, public ownership, market share of dominant player, vertical integration and price controls Detailed indicators of sector specific entry barriers, public ownership, market share of dominant player, vertical integration and price controls Range from 0 – no regulation – to 6, maximum regulation Range from 0 – no regulation – to 6, maximum regulation We focus on barriers to entry indicators (but also check with broader ones) We focus on barriers to entry indicators (but also check with broader ones)

Indicators BEVI: legal limitations on number of companies and rules on vertical integration of industries BEVI: legal limitations on number of companies and rules on vertical integration of industries REGNO: BEVI plus price controls REGNO: BEVI plus price controls

YEAR BEVIREGNO regulation indicators – affected industries - average across EU

Services and manufacturing Following the SMP in 1992, the time profile of regulation in manufacturing can be taken as flat for most EU countries, while regulation has changed in services Following the SMP in 1992, the time profile of regulation in manufacturing can be taken as flat for most EU countries, while regulation has changed in services Diff in diff approach: regulation constant in manufacturing and time varying in services Diff in diff approach: regulation constant in manufacturing and time varying in services Final post-SMP sample: 15 countries, 13 sectors at most 7 years (more than 1200 obs.) Final post-SMP sample: 15 countries, 13 sectors at most 7 years (more than 1200 obs.)

Additional confounders at country x sector x time level Industry-specific import-weighted real exchange rates Industry-specific import-weighted real exchange rates Employment growth (growing industries may train more) Employment growth (growing industries may train more) Cyclical effects – employment and worked hours gaps using the HP filter Cyclical effects – employment and worked hours gaps using the HP filter Gender Gender Education Education Union density Union density EPL interacted with US job turnover by industry EPL interacted with US job turnover by industry R&D Intensity R&D Intensity

Sensitivity to country coverage

Empirical Setup: GLM

Conclusions An increase in product market deregulation generates a sizeable increase in training incidence (10 percent reduction in regulation increases training incidence by 2.8 to 5 percent in the exposed industries An increase in product market deregulation generates a sizeable increase in training incidence (10 percent reduction in regulation increases training incidence by 2.8 to 5 percent in the exposed industries These findings suggest that an important link in the relationship between deregulation and productivity growth is the investment in human capital taking place in firms These findings suggest that an important link in the relationship between deregulation and productivity growth is the investment in human capital taking place in firms

Thank you!! –