indicators presented in their paper are closely related, with a statistical correlation of 0.73 (significant at the 1% level). In other words, according to these results, restrictive product market regulations are matched by analogous EPL restrictions to generate a tight overall regulatory environment for firms in their product market as well as in the allocation of labour inputs. The strong correlation between regulatory regimes in the product market and EPL also suggests that their influence may have compounded effects on labour market outcomes, making regulatory reform in only one market less effective than simultaneous reform in the two markets. Kugler and Pica (2003) find similar results in the case of the Italian economy. They present a matching model which illustrates how barriers to entry in the product market (product market regulation) mitigate the impact of labor market deregulation, (that is, mitigate the effects of a reduction in the strictness of EPL). In the author's opinion, this means that there are economic complementarities between labor and product market policies in their model, in the sense that the effectiveness of one policy depends on the implementation of the other policy. Thus, an important implication of their model is that labor market deregulation will be less effective in the presence of heavier regulations of entry. Similar results are obtained by Koeniger and Vindigni (2003). On hours per worker Whereas EPL may have not a significant effect on unemployment, strict EPL gives incentives to the firms to resort to other sources of flexibility like overtime, which, as shown by Abraham and Houseman (1994), indeed tends to be used much more in Continental European countries, where the variability of hours per worker is significantly higher than in the Anglo-Saxon labour markets. Economic theory In economic theory, several authors have argued that employment protection can be desirable when there are frictions in the working of markets. For example, Pissarides (2001) and Alvarez and Veracierto (2001) show that employment protection can play an important role in the absence of perfect insurance markets. Schmitz (2004) argues that constraining contractual freedom by legislating employment protection can be welfare-enhancing when principal-agent relationships are plagued by asymmetric information. See also Labour law Labour market Labour market flexibility Microeconomics Occupational licensing Unemployment Important publications in labour economics Job security Notes References KG Abraham and SN Houseman (1994): Does Employment Protection Inhibit Labour Market Flexibility? Lessons from Germany, France and Belgium. In Blank