The role of product market regulations in the process of structural change

The sectoral allocation of labor differs considerably across developed economies, even in the presence of similar patterns of structural change. A general equilibrium model that captures the stylized facts of structural change is presented. In this framework, economy-wide product market regulations hinder the development of dynamic sectors such as service industries. This is consistent with the negative cross-country relationship between product market regulations and the service employment share, discussed in the paper. Additionally, the model suggests that higher service prices and rents in regulated economies reduce labor supply, providing a rationale for the negative association between product market regulations and the employment rate previously found in the literature.