This paper investigates the effects of the education level, product market rigidities and employment protection legislation on growth. It exploits macro-panel data for OECD countries. For countries close to the technological frontier, education and rigidities are significantly related to TFP growth. The contribution of the interaction between product market regulation and labour market rigidity seems particularly substantial.Productivity ; Growth ; Regulations ; Market Rigidities ; Education

Aghion, Ph.

Askenazy, Ph.

Bourlès, R.

Cette, G.

Dromel, N.

English

Research Papers in Economics

  
 
    
DOCUMENT  
 
    
DE TRAVAIL 
 
        
     N° 229 
 
        
 
 
 
   
 
 
DIRECTION GÉNÉRALE DES ÉTUDES ET DES RELATIONS INTERNATIONALES
 
 
 
 
 
 
 
 
 
 
 
EDUCATION, MARKET RIGIDITIES AND GROWTH 
 
 
 
 
 
Philippe Aghion, Philippe Askenazy, Renaud Bourlès 
Gilbert Cette and Nicolas Dromel 
 
 
 
 
 
January 2009 
 
 DIRECTION GÉNÉRALE DES ÉTUDES ET DES RELATIONS INTERNATIONALES 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EDUCATION, MARKET RIGIDITIES AND GROWTH 
 
 
 
 
 
Philippe Aghion, Philippe Askenazy, Renaud Bourlès 
Gilbert Cette and Nicolas Dromel 
 
 
 
 
 
January 2009 
 
 
 
 
 
 
 
 
 
 
 
 
 
Les Documents de Travail reflètent les idées personnelles de leurs auteurs et n'expriment pas 
nécessairement la position de la Banque de France. Ce document est disponible sur le site internet de la 
Banque de France « www.banque-france.fr ». 
 
 
Working Papers reflect the opinions of the authors and do not necessarily express the views of the Banque 
de France. This document is available on the Banque de France Website “www.banque-france.fr”. Forthcoming in Economics Letters 
 
 
 
 
 
 
 
 
 
 
 
EDUCATION, MARKET RIGIDITIES AND GROWTH 
 
 
 
 
 
 
Philippe Aghion 
1, Philippe Askenazy 
2, Renaud Bourlès 
3, 
Gilbert Cette 
4, 5 and Nicolas Dromel 
6 * 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
1 Harvard 
2 Paris School of Economics and IZA 
3 Université de la Méditerranée (GREQAM) 
4 Banque de France (DEMS) 
5 Université de la Méditerranée (DEFI) 
6 Paris School of Economics, Université Paris 1 Panthéon-Sorbonne (CES) 
* Corresponding author. Address correspondence to: Université Paris 1, Maison des Sciences Économiques, 
106-112 boulevard de l’Hôpital, 75647 Paris cedex 13, France. Tel: +33 (0)1 44 07 82 17. 
Email: nicolas.dromel@univ-paris1.fr. 
NB  : The views expressed in this paper are those of the authors and do not necessarily reflect the views of the 
institutions they belong to. 
1 Abstract 
 
This paper investigates the effects of the education level, product market rigidities and employment 
protection legislation on growth. It exploits macro-panel data for OECD countries. For countries close to the 
technological frontier, education and rigidities are significantly related to TFP growth. The contribution of 
the interaction between product market regulation and labour market rigidity seems particularly substantial. 
 
Keywords: Productivity; Growth; Regulations; Market Rigidities; Education 
 
JEL codes: O47; J24; J68; L40; 057 
 
 
 
 
Résumés 
 
Cette étude propose une analyse empirique des effets sur la croissance du niveau d’éducation et des rigidités 
sur les marchés des biens et du travail. Elle mobilise pour cela des données macroéconomiques sur un panel 
de pays de l’OCDE. Pour les pays proches de la frontière technologique, l’éducation et les rigidités de 
marchés sont corrélées positivement avec la croissance de la PGF. La contribution de l’interaction entre les 
rigidités sur le marché des biens et les rigidités sur le marché du travail apparaît importante. 
 
 
Mots clés : Productivité; croissance; régulations; rigidités de marchés; éducation 
 
Codes JEL : O47; J24; J68; L40; 057 
 
2  
1.  Introduction 
 
This paper contributes to the recent literature on growth determinants that emphasises the importance 
of the countries’ positions relative to the technological frontier (see Aghion and Howitt, 2006). Education 
policies or regulations on product and labour markets would not have the same effects on growth, whether 
they are close to or far from that frontier. The hypothesis of complementarity between product and labour 
market regulations, in terms of their effect on growth, is also investigated. 
 
 
2.  Growth and the Complementarity of Reforms 
 
A first strand of the related literature shows a positive effect on growth of competition and entry into the 
product market, particularly within highly innovating sectors (see Aghion and Griffith, 2005, for a survey). 
A second set of papers focuses on the relationship between job protection and growth (see Saint Paul, 1997, 
2002). However, to our knowledge, previous empirical research has not yet confirmed any direct impact 
of job protection or of R&D investment on growth (Bassanini and Ernst, 2002).  
 
The model we estimate in this paper, on macro annual country panel data, aims at characterising the 
effect on total factor productivity (TFP) growth of the level of education in the workforce, rigidities in the 
product and labour markets and variations in the employment rate, in hours worked and in the capacity 
utilisation rate (CUR). TFP growth is measured by the variation in its log (∆tfp). Concerning the level of 
education in the workforce, the selected variable is the percentage of population aged 15 or over having 
some higher education (HIGH). This human capital stock variable can be used as a proxy for educational 
policies since it summarizes their history for a given country. Besides, this relatively stable variable can be 
of particular relevance when assessing the long-run consequences of educational policies as a driver of a 
country’s potential growth. The synthetic indicators EPL (Employment Protection and Legislation) and 
PMR (Product Market Regulation), provided by the OECD, are used to characterise rigidities in the labour 
and product markets, respectively. The most satisfactory estimates are obtained while taking into account the 
interaction between these two rigidities (rather than considering them separately), and with a two-year lag on 
the PMR index. 
 
To disentangle respective effects of education and rigidities, whether the country is close to or far from 
the technological frontier, specific variables are constructed for the two subsets of countries. For a given 
year, a country will be assumed close to the frontier when its structural productivity is higher than or equal 
to x % of the structural productivity in the United States (which display the highest structural productivity 
levels over the whole period). A country's structural productivity is defined as its productivity level 
assuming hours worked and the employment rate (whose returns are strongly decreasing) are the 
same as in the United States.
7 This concept and its computation methods are detailed in Bourlès and Cette 
(2006, 2007). The frontier threshold x is set at 80%, which implies that 40% of the sample is close to the 
technological frontier. A change in this threshold does not affect the estimates significantly: if it is set at 
78% (50% of the sample close to frontier) the conclusions barely differ. 
 
The presence of changes in the employment rate (ER) and hours worked (H) variation makes it possible 
to take into account the decreasing returns from these two variables. The capacity utilisation rate variable 
corrects for cyclical effects. 
 
Many other explanatory variables were alternatively introduced, but their estimated coefficients were not 
significantly different from zero. Amongst these, we can list: (i) concerning education, the percentage of 
population aged 15 or over with some primary or secondary education; (ii) for the labour market, the activity 
rates; (iii) regarding the production and innovation sectors, the share of ICT production in GDP, the ICT 
investment rate, the proportion of ICT in total investment, the share of private investment in total 
investment, the global investment volume or value, the share of public investment and the percentage of 
R&D spending in GDP; (iv) as for the financial conditions, short (3 months) and long (10 years) interest 
                                                 
7 This specification prevents from using a continuous distance to frontier index as it would imply numerous co-linearity 
issues about hours worked, the employment rate and productivity. 
3  
rates, both nominal and real; (v) for fiscal policy, the primary public deficit, public debt and tax proceeds 
over GDP; (vi) for capital market regulation, stock market capitalisation to GDP, liquid liabilities to GDP, 
bank overhead costs as a share of total assets, bank net interest revenue as a share of interest-bearing  assets 
and private credit granted by deposit money banks and other financial institutions over GDP. 
 
The non-significance of ICT variables when education and rigidities are present in the model suggests 
that ICT investment and production, although influencing TFP growth, are strongly correlated with 
education and rigidities. The estimated relation can therefore be understood as a reduced-form model, in 
which the impact of education and rigidities on the labour and product markets are both direct and indirect, 
via ICT production and investment. 
 
The estimated relation is as follows:   
 
∆tfp =  a1.HIGH + a2.HIGH.Ix% + a3.EPL.PMR-2 + a4.EPL.PMR-2.Ix% + a5.∆ER + a6.∆h     (1) 
 +  a7.∆CUR + intercept + u  
 
where Ix%  is a dummy variable characterising the technological frontier, that equals 1 if the country's 
structural productivity is higher than x% of US structural productivity, and 0 otherwise.  
 
The expected signs are: 0 <a2; a4 < 0; -1 < a5; a6 < 0; 0 < a7 < 1. The signs of a1 and a3 are a priori 
uncertain, as higher education and rigidities on the labour and product markets may as well have positive or 
negative effects on TFP growth far from the technological frontier (see Aghion and Howitt, 2006). 
Empirical analysis was carried out on a panel of 17 OECD countries during the period 1985-2003
8. The 
focus on this particular sub-sample was dictated by the limited availability (in terms of countries and years) 
of time series on selected variables. 
 
The Ordinary Least Squares (OLS) estimates may be biased because of measurement errors or 
simultaneity issues, which can explain some counter-intuitive or unstable results. To remedy these biases, 
the instrumental variable method is implemented. The number of observations seems too small to apply the 
GMM.  
 
Two tests are used to evaluate adjustment quality: the Sargan test (1958), which assesses the overall 
quality of the adjustment and relevance of the instruments, and the Davidson and Mac Kinnon test (1993) to 
check the exogeneity of the instruments. The list of instruments is detailed in Table 1, and the first-stage 
regressions estimates are available in Table 2.  
 
 
3.  Main results 
 
The results (see Table 1) suggest that the estimated coefficient for higher education (HIGH) is 
systematically non-significant, while significantly different from zero (columns 6 through 8) with the 
expected positive sign when only countries close to the technological frontier are considered (HIGH.I80%). 
As regards the rigidities in product and labour markets, the most significant results are obtained when 
crossing rigidities in both markets, taking a two-year lag on the PMR index (columns 6 through 8), and 
separating the effects far from the technological frontier (coefficient of EPL.PMR-2 variable) from those 
close to the frontier (sum of coefficients of EPL.PMR-2 and EPL.PMR–2.I80% variables). Other specifications 
for rigidities variables give estimates non-significantly different from zero. In all estimations, the coefficient 
of the autoregressive term is small and non-significant (column 8). However, the coefficients related to the 
variations in the employment rate, in hours worked and in the CUR are always significant with the expected 
sign and relevant in terms of economic effects. 
 
The most relevant specification seems to be the one in column 6. It turns out that: (i) a one-point increase 
in the percentage of  population aged 15 or over with some higher education has no impact on TFP for 
                                                 
8 The 17 countries selected were: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, 
Italy, Japan, the Netherlands, Portugal, Spain, Sweden, the United-Kingdom and the United States.  
 
4  
5 
countries far from frontier but increases TFP growth by about 0.1 point per year in countries close to 
technological frontier ; (ii) a one-point decrease in the product of contemporaneous EPL with two-year 
lagged PMR reduces TFP growth by about 0.5 point per year for countries far from the frontier, but 
increases TFP growth by 0.2 point per year for countries close to frontier ; (iii) a one-point increase in the 
employment rate reduces TFP by about 0.5 ; (iv) a one-percent increase in hours worked reduces TFP by 
about 0.7 points ; (v) a one-point increase in the CUR (standardised over the whole sample) increases TFP 
by about 0.4 points. 
 
These results are globally robust to the disaggregation of the various components of each indicator of 
rigidities. The detailed estimates are outlined in Aghion et al (2007). Concerning the product market, there 
are four components: barriers to entry, market structure, public sector size and vertical integration. The 
labour market indicator is broken down into employment protection and legislation on regular and 
temporary contracts. As for product market rigidities, the only component having no positive impact on TFP 
growth for countries close to the frontier appears to be the public sector size. This finding is consistent with 
Nicoletti and Scarpetta (2003). The two labour market rigidities components appear to have a similar 
impact. 
 
 
4.  Conclusion 
 
The results presented in this paper confirm that the education level and rigidities in labour and product 
markets have different effects whether the country is far from or close to the technological frontier. This 
recalls the results synthesised in Aghion and Howitt (2006). The presented estimates are consistent with 
previous studies that mainly focused on product market rigidities (see for example Nicoletti and Scarpetta, 
2003) but did not attempt either to characterise the crossed effect of rigidities on labour and product effects 
or to differentiate a specific effect close to the frontier (see Crafts 2006 for a survey). As regards the 
rigidities, an interaction between labour and product market regulations clearly appears; most signification 
results are obtained after lagging product market rigidities by two years. This confirms the results of previous 
analyses, as Blanchard and Giavazzi (2003). Concerning the product market regulations, the “public sector 
size” component appears not to have a significant effect. There is no consensus in the empirical literature on 
the effect of labour and product markets rigidities on growth. Numerous studies assess very disparate results: 
either no effect, or a positive or a negative impact (for a survey emphasising this diversity, see Babetskii and 
Campos, 2007). Pointing out the dependence upon the position relative to the technological frontier, our 
study provides an explanation for this disparity. Ignoring this heterogeneity may lead to various results 
depending on the countries present in the panel and their distance to the technological frontier.  
 
The above analysis should of course be viewed with the usual caution. They rely on inevitably fragile 
estimates conducted on a small panel of industrialised countries. The estimates, nevertheless, suggest 
important gains in productivity growth, i.e. in potential growth, that may be achieved in some industrialised, 
mainly European, countries after undertaking ambitious reforms to increase the education level in the 
workforce and decrease rigidities in labour and product markets.  
 
 
 
Acknowledment 
 
The authors thank an anonymous referee, seminar and conference participants at various places for useful 
comments and suggestions.  
 REFERENCES 
 
 
Aghion P., Askenazy P., Bourlès R., Cette G. and Dromel N. (2007): “Education supérieure, Rigidités de marché et 
Croissance”, CEPREMAP Working Paper, Docweb n° 0705, September, www.cepremap.ens.fr  
 
Aghion P. and Howitt P. (2006): “Joseph Schumpeter Lecture – Appropriate Growth Policy : A Unifying Framework”, 
Journal of the European Economic Association, Vol. 4, Issue 2-3, April-May 
 
Bassanini A. and Ernst E. (2002): “Labour Market Institutions, Product Market Regulation, and Innovation: Cross-
Country Evidence”, OECD Economics Department Working Papers No. 316 
 
Babetskii I. and Campos N. F. (2007): “Does reform work? An econometric examination of the reform-growth puzzle”, 
CEPR, Discussion Paper Series, n° 6215, April 
 
Blanchard O. and Giavazzi F. (2003): “Macroeconomic effects of regulation and deregulation in goods and labour 
markets”, Quarterly Journal of Economics, August, 879-907 
 
Bourlès R. and Cette G. (2006): “A comparison of structural productivity levels in the major industrialised countries”, 
OECD Economic Studies, n°41 96–138 
 
Bourlès R. and Cette G. (2007): “Trends in Structural Productivity Levels in the Major Industrialised Countries”, 
Economic Letters vol. 95 
 
Crafts N. (2006): “Regulation and productivity performance”, Oxford Review of Economic Policy, Vol. 22, n° 2 
 
Davidson and McKinnon (1993), “Estimation and Inference in Econometrics”, Oxford University Press, New York, 874 pages 
 
Nicoletti G. and Scarpetta S. (2005): “Regulation and Economic Performance: Product Market Reforms and 
Productivity in the OECD”, OECD Economic Department Working Paper, n° 460 
 
Saint-Paul G. (1997): “Is labour rigidity harming Europe's competitiveness? The effect of job protection on the pattern 
of trade and welfare”, European Economic Review, 41, 499-506 
 
Saint-Paul G. (2002): “Employment protection, international specialisation and innovation”, European Economic 
Review, 46, 375-395 
 
Sargan J. (1958):  “The Estimation of Economic Relationships Using Instrumental Variables”, Econometrica, 26 (3), 
393-415 
6 Documents de Travail 
 
 
 
 
229.  Ph. Aghion, Ph. Askenazy, R. Bourlès, G. Cette and N. Dromel, “Education, Market 
Rigidities and Growth,” january 2009 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pour accéder à la liste complète des Documents de Travail publiés par la Banque de France veuillez consulter le site :  
http://www.banque-france.fr/fr/publications/publications.htm 
 
 
For a complete list of Working Papers published by the Banque de France, please visit the website: 
http://www.banque-france.fr/gb/publications/publications.htm 
 
Pour tous commentaires ou demandes sur les Documents de Travail, contacter la bibliothèque de la Direction Générale 
des Études et des Relations Internationales à l'adresse suivante : 
 
For any comment or enquiries on the Working Papers, contact the library of the Directorate General Economics and 
International Relations at the following address : 
 
    BANQUE DE FRANCE 
    49- 1404  Labolog 
    75049 Paris Cedex 01 
    tél : 0033 (0)1 42 92 49 55 ou 62 65 ou 48 90 ou 69 81 
    fax :0033 (0)1 42 92 62 92 
   email  :  thierry.demoulin@banque-france.fr 
   jeannine.agoutin@banque-france.fr 
   veronique.jan-antuoro@banque-france.fr 
   nathalie.bataille-salle@banque-france.fr 
 

Education supérieure, Rigidités de marché et Croissance”, CEPREMAP Working Paper, Docweb n° 0705, September, www.cepremap.ens.fr Aghion

Education, Market Rigidities and Growth.

http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT229.pdf

Education, Market Rigidities and Growth.

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics