This study explores the effects of market deregulation on employment growth.
Empirical analysis of an OECD country panel (1990-2004) suggests that lower
levels of product and labor market regulation foster employment growth,
including through sizable interaction effects. A theoretical framework is
developed for evaluating deregulation strategies in the presence of reform
costs. Optimal deregulation takes various forms depending on the deregulation
costs and the strength of reform interactions. Compared to the first best,
decentralized decision-making can lead to excessive or insufficient
deregulation. Securing the first best requires coordinating deregulation
activities across sectors and overcoming the partial perspective of decision
makers