Does the degree of product market regulation determine how labor supply shocks affect labor market outcomes? We answer this question using the fall of the Berlin Wall and the resulting immigration of people from the former German Democratic Republic to the West German labor market as a supply shock. Within three years after the fall of the Berlin Wall in 1989, more than 1.3 million Germans from East Germany migrated to West Germany. We find that product market regulation plays an important role when it comes to the question of how labor supply shocks affect wages and employment. Product markets with firm entry barriers shield the insiders from wage competition by outsiders, whereas native West Germans in product markets without entry barriers experience a decline in wage growth. In markets with firm entry barriers insider employment growth decreases owing to the supply shock, in the market without barriers to firm entry the finding is less pronounced. |
