Is Imperfect Competition in the Product Market Relevant for Labour Markets?

Recent research in macroeconomics emphasises the importance ofimperfect competition in the product market for labour market outcomes. Weinvestigate one aspect of this issue by specifying a dynamic labour demand modelwhere firms face different degrees of competition in the product market and test itspredictions for 299 US manufacturing industries. We find that the long-runequilibrium level of industry employment as well as the speed of labour demandadjustment decreases with market power. Our results imply that imperfectcompetition in the product market explains part of the observed labour marketrigidities and also sheds new light on two ‘‘stylized facts’’ in industrial organisation,the observation of procyclical movements in productivity and price–cost margins inconcentrated industries.