Labour market reforms involve policies to make labour markets more flexible e.g. reduce the power of trades unions, reduce unemployment benefits and reduce cost of firing workers.
Product market reforms include policies to make firms more competitive, for example privatisation may encourage efficiency, a stronger competition policy should reduce the power of Monopolies. Also, the govt can reduce regulation and red tape on firms.
The EU has had relatively high unemployment and low growth in the 1990s compared to the US, many argue this has been caused by inflexible labour markets. Reducing benefits can increase the incentive to work and help reduce voluntary unemployment. However, this may have the disadvantage of increasing inequality, lower benefits will cause an increase in relative poverty. Lower taxes may increase incentives to work and may encourage more inward investment, but will mean less spending on public services. However, this is not certain, lower taxes will not increase the incentive to work, if the income effect dominates; this is because people may work harder to maintain income levels.
It is very important to increase flexible labour markets in the EU so that members of the EURO can deal with asymmetric shocks. Also markets have become more competitive with the growth of globalisation. If labour markets are more competitive then EU firms will be able to compete with other countries more effectively.
There are substantial benefits from increasing competition in product markets through privatisation and deregulation; with increased productivity and efficiency there is an increase in productive capacity and higher economic growth; this should create jobs in growing industries. However, to increase productivity may lead to job losses in some industries and regional areas. For example, if there is increased flexibility then labour may leave depressed areas in the EU to go to more prosperous areas; this could cause a negative multiplier effect in many poor areas.
Weak labour laws (e.g. easier to hire and fire) will benefit companies more than workers, multinationals will find it easier to get rid of workers. However, this will lead to greater job insecurity and may also lead to lower labour productivity. If labour is cheaper firms may not invest in capital to increase productivity. The efficiency wage theory suggests that if wages are lower then workers have less incentive to work. Therefore, this is a potential costs of labour market reforms which increase flexibility
If product markets are deregulated and firms have less regulation it may be easier to cause pollution and create negative externalities.
To conclude reforms to labour and product markets can have benefits such as increased efficiency and lower unemployment, however the govt will have to be careful to avoid other problems of flexible labour markets such as increased inequality.