Dynamic effects of regulation and deregulation in goods and labour markets

It has been argued in recent economic literature that deregulation in both product and labour markets has beneficial impacts on employment and on real wages. The results offered to support this argument, however, are controversial. So far the debate has been concerned with comparative static results. This paper reassesses the consequences of deregulation in a dynamic context. In our model—a dynamic counterpart of Blanchard and Giavazzi's prototype model—liberalisation in product and/or labour markets also increases the equilibrium employment and wage rates. However, with boundedly rational firms and trade unions, deregulation may generate endogenous fluctuations.