March 2003

IZA DP No. 747: Sectoral Structure and Entry Regulations

revised version published as 'The role of product market regulations in the process of structural change' in: European Economic Review, 2006, 50 (7), 1863-1890

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 barriers to entry hinder the development of dynamic sectors such as service industries. Moreover, 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. Empirical evidence presented shows that regulatory entry barriers help explaining differences in the sectoral allocation of labor across OECD countries.