We analyze the impact of product market competition on unemployment and wages, and how
this depends on labour market institutions. We use differential changes in regulations across
OECD countries over the 1980s and 1990s to identify the effects of competition. We find that
increased product market competition reduces unemployment, and that it does so more in
countries with labour market institutions that increase worker bargaining power. The theoretical
intuition is that both firms with market power and unions with bargaining power are constrained
in their behaviour by the elasticity of demand in the product market. We also find that the effect
of increased competition on real wages is beneficial to workers, but less so when they have high
bargaining power. Intuitively, real wages increase through a drop in the general price level, but
workers with bargaining power lose out somewhat from a reduction in the rents that they had
previously captured
