This paper studies how product market regulation (PMR) affects firm-level labour productivity growth and within-sector labour reallocation across EU countries and service sectors from 2000 to 2021. Using productivity shocks to U.S. parent firms as instrument for productivity spillovers, it finds that stricter PMR weakens the positive impact of US shocks on EU subsidiary productivity growth and hampers within-sector labour reallocation. In highly regulated countries and sectors, productivity spillovers are diminished, and employment growth in more productive firms slows. The findings suggest that pro-competition reforms and greater market integration could strengthen productivity and reallocation in the EU service sector.
