Firm entry deregulation, competition and returns to education and skill

•We study the effect of firm entry deregulation on the returns to skill and education.•We use employer-employee data and an episode of entry deregulation as a quasi-natural experiment.•The deregulation increased the number of new firms within municipalities and industries.•Results suggest that the reform increased competition within industries and municipalities.•The returns to a university degree and the returns to skill increased following the deregulation.

This paper studies the effect of firm entry deregulation on the returns to skill and education. We exploit a comprehensive episode of entry deregulation, unique in the industrialized world, as a quasi-natural experiment. Using matched employer-employee data for the universe of workers and firms in Portugal, we show that increased product market competition, which resulted from deregulation, increased the returns to a university degree and the returns to skill. We verify that our results are not driven by changes in employment composition, and are unlikely to be driven by skill-biased technical change, or by workers who change skill levels after the deregulation.