Want more and better jobs? Regulators may be missing half the picture

Policymakers aiming to boost employment often focus on labor market regulations —rules on wages, employment protection, or collective bargaining. These are seen either as critical protections for workers or as barriers to firms’ ability to hire. But what if this framing overlooks half of the picture?

Ultimately, companies only hire more people when there’s demand for what they sell. If the market for their products isn’t growing, they won’t expand their workforce. That’s why the rules that shape competition matter so much too. When regulations make it hard for new businesses to enter or protect existing players too heavily, they can end up holding back the very firms that generate new jobs. In fact, these kinds of product-market rules can sometimes have an even bigger effect on employment than labor laws themselves.

Looking at nearly 200 studies, we found that ignoring the link between product and labor markets comes at a real cost. The two are deeply connected—rules in one area inevitably shape outcomes in the other. That means any strategy to create jobs needs to address both together, not separately.

Without more open and dynamic product markets, changing labor laws alone won’t deliver more or better jobs.

The experience of the Middle East and North Africa shows this clearly. In the region, efforts to tackle youth unemployment by tightening labor rules—like stronger job protections or higher minimum wages—have had limited effect, since they mostly apply to workers in formal jobs. At the same time, rigid product markets, with weak competition, heavy state involvement, and slow business turnover, have held back private sector growth. The result is that small firms struggle, productive firms fail to displace weaker ones, and markets stagnate.

Rules that govern competition in product markets have a big impact on workers.

When markets are open and competitive—so new firms can enter, grow, or exit freely—economies become more dynamic, productivity rises, and consumers benefit from lower prices. This creates more demand for labor, higher wages, and often better-quality jobs.

In middle-income countries, competition rules can even reduce informality. For instance, studies from Brazil show that lowering barriers for formal firms or discouraging informal ones not only boosts formal employment but also shifts workers toward more productive jobs. Research from India points to similar results.

The right mix of reforms depends on context. In middle- and high-income economies, cutting entry barriers for formal firms is often key, while in lower-income countries, the bigger problem often lies in restrictions to foreign investment or restrictive regulations in key sectors like transport or energy. These barriers matter more because so much of the economy is made up of very small, informal firms.

Yet despite their promise, product market regulation reforms rarely top the jobs policy agenda. They face political pushback from powerful incumbents who benefit from restrictive rules. Reforms can also cause short-term job losses in protected industries.

Without strong safety nets to cushion the transition, governments often shy away—choosing instead to adjust labor laws, even when competition reforms could deliver bigger long-term gains.

What happens when labor and product markets are reformed together?

Evidence from advanced economies shows how connected the two are. In OECD countries, for example, employment gains from pro-competitive product market reforms are larger when labor rules give workers bargaining power through unions or collective agreements. Yet those same protections can also make workers support market structures that limit competition, because they preserve benefits even if overall employment suffers.

In other words, labor institutions can amplify benefits in open markets—or perpetuate issues in protected ones. Deregulating one area may make reforming the other simpler or more politically palatable and coordinating changes can also ease the transition. By carefully sequencing changes to both labor and product markets, short-term job losses from isolated reforms can be minimized.  

The lesson is clear: policymakers need to look beyond labor laws.

Labor and product market reforms shouldn’t be treated separately. They interact in powerful ways, and a smart, coordinated approach can better balance trade-offs and ensure both firms and workers benefit in more competitive economies.

This blog presents insights from a new review of the literature on labor and product market regulations, published as Alzate, David; Carranza, Eliana; Duran-Franch, Joana; Packard, Truman G.; Proffen, Celina. How Regulations Impact the Labor Market: A Review of the Literatures on Product and Labor Market Regulations. Policy Research Working Paper WPS10961. Washington, D.C.: World Bank Group.