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Recent empirical work finds a negative correlation between product market regulation and aggregate employment. The authors examine the effect of product market regulations on hours worked in a benchmark aggregate model of time allocation as well as in a standard dynamic model of entry and exit. They find that product market regulations affect time devoted to market work in effectively the same fashion that taxes on labor income or consumption do. In particular, if product market regulations are to affect aggregate market work in this model, the key driving force is the size of income transfers associated with the regulation relative to labor income, and the key propagation mechanism is the labor supply elasticity.
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