Reproducibility package for On The Principle Of Second Best In Labor Markets

This paper presents an integrated framework to identify the determinants of growth in jobs, wages, and wage inequality using harmonized firm-level data for 13 European and Central Asian countries during the period 2006-2024. The paper shows that policies that increase firms’ revenues are more effective than those that reduce labor costs to generate new jobs. Reducing sales taxes, rather than labor taxes is more effective to raise employment. A 1 p.p reduction in sales taxes increases jobs by 0.07% percent. Allowing imperfect competition in labor and product markets also increase jobs. But the effect of markups on employment is 14.3 times larger than that of markdowns. The paper also shows that imperfect competition both in labor and product markets are relevant to explain jobs, wages, and wage dispersion. The results show that if imperfect competition in labor markets cannot be addressed, then it’s better to have imperfect competition in product markets, as the positive effect of markdowns on jobs is exacerbated by markups, while the negative effect on wages is attenuated by them. Equity-wise, allowing imperfect competition in both markets is a better policy choice than allowing monopolistic or oligopolist market structures only in the labor market.