IWH-CompNet Discussion Papers
This section is dedicated to CompNet-related paper series which feature research on competitiveness related fields with and without CompNet data. Although our discussion paper series is relatively new (from 2017), it has already become a recognized publications platform for researchers who are keen on producing economic and policy research based on the CompNet latest vintages and related data sets. The Competitiveness Research Network utilizes this platform in order to encourage more discussions on relevant research questions with a clear policy focus from a variety of fields.
2023
Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology Matthias Mertens, Filippo Biondi, Sergio Inferrera and Javier Miranda (No. 2/2023). –
Show/Hide Abstract We study the changing patterns of business dynamism in Europe after 2000 using novel micro-aggregated data that we collect for 19 European countries. In all of them, we document a decline in job reallocation rates that concerns most economic sectors. This is mainly driven by dynamics within sectors, size classes, and age classes rather than by compositional changes. Large and mature firms show the strongest decline in job reallocation rates. Simultaneously, the shares of employment and sales of young firms decline. Consistent with US evidence, firms’ employment changes have become less responsive to productivity. However, the dispersion of firms’ productivity shocks has decreased too. To enhance our understanding of these patterns, we derive a firm-level framework that relates changes in firms’ productivity, market power, and technology to job reallocation and firms’ responsiveness.
Do Larger Firms Have Higher Markups? Matthias Mertens and Bernardo Mottironi (No. 1/2023). –
Show/Hide Abstract Several models posit a positive cross-sectional correlation between markups and firm size, which, among others, characterizes misallocation, factor shares, and gains from trade. Yet, taking labor market power into account in markup estimation, we show that larger firms have lower markups. This correlation turns positive only after conditioning on wage markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias) and hold across 19 European countries. We discuss the resulting implications and highlight studying input and output market power within an integrated framework as an important next step for future research.
2021
Trade Shocks, Labour Markets and Elections in the
First Globalisation Richard Bräuer, Wolf-Fabian Hungerland, Felix Kersting(No. 4/2021). –
Show/Hide Abstract This paper studies the economic and political effects of a large trade shock in agriculture – the grain invasion from the Americas – in Prussia during the first globalisation (1871-1913). We show that this shock accelerated the structural change in the Prussian economy through migration of workers to booming cities. In contrast to studies using today’s data, we do not observe declining per capita income and political polarisation in counties affected by foreign competition. Our results suggest that the negative and persistent effects of trade shocks we see today are not a universal feature of globalisation, but depend on labour mobility. For our analysis, we digitise data from Prussian industrial and agricultural censuses on the county level and combine it with national trade data at the product level. We exploit the cross-regional variation in cultivated crops within Prussia and instrument with Italian trade data to isolate exogenous variation.
European Firm Concentration and Aggregate Productivity Tommaso Bighelli, Filippo di Mauro, Marc Melitz, Matthias Mertens (No. 3/2021). –
Show/Hide Abstract This article derives a European Herfindahl-Hirschman concentration index from 15 micro-aggregated country datasets. In the last decade, European concentration rose due to a reallocation of economic activity towards large and concentrated industries. Over the same period, productivity gains from reallocation accounted for 50% of European productivity growth and markups stayed constant. Using country-industry variation, we show that changes in concentration are positively associated with changes in productivity and allocative efficiency. This holds across most sectors and countries and supports the notion that rising concentration in Europe reflects a more efficient market environment rather than weak competition and rising market power.
Globalisation in Europe: Consequences for the Business Environment and Future Patterns in Light of Covid-19 Sergio Inferrera (No. 2/2021). –
Show/Hide Abstract In this paper, I study the consequences of globalisation, as measured by the involvement of firms in GVC, on the business environment. In particular, I focus on concentration and productivity, firstly by estimating robust elasticities and then isolating the exogenous component of the variation in the participation in GVC. To this aim, I exploit the distance between industries in terms of upstreamness and downstreamness along the supply chain. The evidences suggest that involvement in international supply chains is positively related to concentration at the sector level and positively associated with aggregate productivity, an effect that is driven by the firms at the top of the productivity distribution. Finally, I relate these findings to the current pandemic, going beyond the lack of official statistics and estimating GVC participation for 2020 at the country-level through real time world-seaborne trade data, providing evidences on the re-absorption of the Covid shock in several European economies.
Benchmarking New Zealand's Frontier Firms Guang Zheng, Hoang Minh Duy, Gail Pacheco (No. 1/2021). –
Show/Hide Abstract New Zealand has experienced poor productivity performance over the last two decades. Factors often cited as reasons behind this are the small size of the domestic market and distance to international partners and markets. While the distance reason is one that is fairly insurmountable, there are a number of other small advanced economies that also face similar domestic market constraints. This study compares the relative performance of New Zealand’s firms to those economies using novel cross-country microdata from CompNet. We present stylised facts for New Zealand relative to the economies of Belgium, Denmark, Finland, Netherlands and Sweden based on average productivity levels, as well as benchmarking laggard, median and frontier firms. This research also employs an analytical framework of technology diffusion to evaluate the extent of productivity convergence, and the impact of the productivity frontier on non-frontier firm performance. Additionally, both labour and capital resource allocation are compared between New Zealand and the other small advanced economies.
2020
Decentralisation of Collective Bargaining: A Path to Productivity di Mauro, F, Aglio, D, (No. 3/2020). –
Show/Hide Abstract Productivity developments have been rather divergent across EU countries and particularly between Central Eastern Europe (CEE) and elsewhere in the continent (non-CEE). How is such phenomenon related to wage bargaining institutions? Starting from the Great Financial Crisis (GFC) shock, we analyse whether the specific set-up of wage bargaining prevailing in non-CEE may have helped their respective firms to sustain productivity in the aftermath of the crisis. To tackle the issue, we merge the CompNet dataset – of firm-level based productivity indicators – with the Wage Dynamics Network (WDN) survey on wage bargaining institutions. We show that there is a substantial difference in the institutional set-up between the two above groups of countries. First, in CEE countries the bulk of the wage bargaining (some 60%) takes place outside collective bargaining schemes. Second, when a collective bargaining system is adopted in CEE countries, it is prevalently in the form of firm-level bargaining (i. e. the strongest form of decentralisation), while in non-CEE countries is mostly subject to multi-level bargaining (i. e. an intermediate regime, only moderately decentralised). On productivity impacts, we show that firms’ TFP in the non-CEE region appears to have benefitted from the chosen form of decentralisation, while no such effects are detectable in CEE countries. On the channels of transmission, we show that decentralisation in non-CEE countries is also negatively correlated with dismissals and with unit labour costs, suggesting that such collective bargaining structure may have helped to better match workers with firms’ needs.
The East-West German Gap in Revenue Productivity: Just a Tale of Output Prices? Mertens, M., Müller, S. (No.2/2020). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract East German manufacturers’ revenue productivity (value-added per worker) is some 8 (25) percent below West German levels, even three decades after German unification. Using firm-product-level data containing information on product quan-tities and prices, we analyse the role of product specialisation and reject the pro-minent ‚extended work bench hypothesis‘, stating a specialisation of Eastern firms in the intermediate input production as explanation for these sustained producti-vity differences. We decompose the East’s revenue productivity disadvantage into Eastern firms selling at lower prices and producing more physical output for given amounts of inputs within ten-digit product industries. This suggests that Eastern firms specialise vertically in simpler product varieties generating less consumer value but being manufactured with less or cheaper inputs. Vertical specialisation, however, does not explain the productivity gap as Eastern firms are physically less productive for given product prices, implying a genuine physical productivity disadvantage of Eastern compared to Western firms.
Labour Market Power and Between-Firm Wage (In)Equality Mertens, M. (No.1/2020). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract This study investigates how labour market power shapes between-firm wage differences using German manufacturing sector data from 1995 to 2016. Over time, firm- and employee-side labour market power, defined as the difference between wages and marginal revenue products of labour (MRPL), increasingly moderated rising between-firm wage inequality. This is because small, low-wage, low-MRPL firms possess no labour market power and pay wages equal to or even above their MRPL, whereas large, high-wage, high-MRPL firms possess high labour market power and pay wages below their MRPL. These wage-MRPL differences grow over time and compress the firm wage distribution compared to the counterfactual competitive labour market scenario. Particularly for the largest, highest-paying, and highest-MRPL firms, wage-MRPL differences strongly increase over time. This allows these firms to generate increasingly large labour market rents while being active on competitive product markets, providing novel insights on why such “superstar firms” are profitable and successful.
2019
Trade, Misallocation, and Capital Market Integration Tetenyi, L. (No.8/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract I study how cross-country capital market integration affects the gains from trade in a model with financial frictions and heterogeneous, forward-looking firms. The model predicts that misallocation among exporters increases as trade barriers fall, even as misallocation decreases in the aggregate. The reason is that financially constrained productive exporters increase their production only marginally, while unproductive exporters survive for longer and increase their size. Allowing capital inflows magnifies misallocation, because unproductive firms expand even more, leading to a decline in aggregate productivity. Nevertheless, under integrated capital markets, access to cheaper capital dominates the adverse effect on productivity, leading to higher output, consumption and welfare than under closed capital markets. Applied to the period of European integration between 1992 and 2008, I find that underdeveloped sectors experiencing higher export exposure had more misallocation of capital and a higher share of unproductive firms, thus the data is consistent with the model’s predictions. A key implication of the model is that TFP is a poor proxy for consumption growth after trade liberalization.
Private Debt, Public Debt, and Capital Misallocation Alimov, B. (No.7/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract Does finance facilitate efficient allocation of resources? Our aim in this paper is to find out whether increases in private and public indebtedness affect capital misallocation, which is measured as the dispersion in the return to capital across firms in different industries. For this, we use a novel dataset containing industrylevel data for 18 European countries and control for different macroeconomic indicators as potential determinants of capital misallocation. We exploit the within-country variation across industries in such indicators as external finance dependence, technological intensity, credit constraints and competitive structure, and find that private debt accumulation disproportionately increases capital misallocation in industries with higher financial dependence, higher R&D intensity, a larger share of credit-constrained firms and a lower level of competition. On the other hand, we fail to find any significant and robust effect of public debt on capital misallocation within our country-sector pairs. We believe the distortionary effects of private debt found in our analysis needs a deeper theoretical investigation.
Total Factor Productivity and the Terms of Trade Teresinski, J. (No.6/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract In this paper we analyse how the terms of trade (TOT) – the ratio of export prices to import prices – affect total factor productivity (TFP). We provide empirical macroeconomic evidence for the European Union countries based on the times series SVAR analysis and microeconomic evidence based on industry level data from the Competitiveness Research Network (CompNet) database which shows that the terms of trade improvements are associated with a slowdown in the total factor productivity growth. Next, we build a theoretical model which combines open economy framework with the endogenous growth theory. In the model the terms of trade improvements increase demand for labour employed in exportable goods production at the expense of technology production (research and development) which leads to a shift of resources from knowledge development towards physical exportable goods. This reallocation has a negative impact on the TFP growth. Under a plausible calibration the model is able to replicate the observed empirical pattern.
Employment Protection and Firm-level Job Reallocation: Adjusting for Coverage Marzinotto B., Wintr L. (No.5/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract This paper finds that employment protection legislation (EPL) had a significant impact on employment adjustment in Europe over 2001-2013, once we account for firm-size related exemptions to EPL. We construct a novel coverage-adjusted EPL indicator and find that EPL hinders employment growth at the firm level and increases the share of firms that remain in the same size class. This suggests that stricter EPL restrains job creation because firms fear the costs of shedding jobs during downturns. We do not find evidence that EPL has positive effects on employment by limiting job losses after adverse shocks. In addition to standard controls for the share of credit-constrained firms and the position in the business cycle, we also control for sizerelated corporate tax exemptions and find that these also significantly constrain job creation among incumbent firms.
Price-cost Margin and Bargaining Power in the European Union Soares, A.C. (No.4/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract Using firm-level data between 2004 and 2012 for eleven countries of the European Union (EU), we document the size of product and labour market imperfections within narrowly defined sectors including services which are virtually undocumented. Our findings suggest that perfect competition in both product and labour markets is widely rejected. Levels of the price-cost margin and union bargaining power tend to be higher in some service sectors depicting however substantial heterogeneity. Dispersion within sector and across countries tends to be higher in some services sectors assuming a less tradable nature which suggests that the Single Market integration is partial particularly relaxing the assumption of perfect competition in the labour market. We report also figures for the aggregate economy and show that Eastern countries tend to depict lower product and labour market imperfections compared to other countries in the EU. Also, we provide evidence in favour of a very limited adjustment of both product and labour market imperfections following the international and financial crisis.
Micro-mechanisms Behind Declining Labour Shares: Market Power, Production Processes, and Global Competition Mertens, M. (No.3/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract This article investigates how changing production processes and increasing market power at the firm level relate to a fall in Germany’s manufacturing sector labour share. Coinciding with the fall of the labour share, I document a rise in firms’ product and labour market power. Notably, labour market power is a more relevant source of firms’ market power than product market power. Increasing product and labour market power, however, only account for 30% of the fall in the labour share. The remaining 70% are explained by a transition of firms towards less labour-intensive production activities. I study the role of final product trade in causing those secular movements. I find that rising foreign export demand contributes to a decline in the labour share by increasing labour market power within firms and by inducing a reallocation of economic activity from nonexporting- high-labour-share to exporting-low-labour-share firms.
Labour Market Power and the distorting effects of international trade Mertens, M. (No.2/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract This article examines how trade shocks shape labour market imperfections that create market power in labour markets and prevent an efficient allocation of labour. I develop a framework for measuring such labor market distortions in monetary terms and document large degrees of those distortions in Germany's manufacturing sector. Import competition can only exert labor market disciplining effects when firms rather than workers have labour market power. Otherwise, export demand and import competition shocks tend to fortify existing distortions by amplifying labour market power structures. This diminishes the gains from trade compared to a model with perfectly competitive labour markets.
The effect of the single currency on exports: Comparative firm-level evidence Lalinsky, T., Meriküll, J. (No.1/2019). IWH-CompNet Discussion Paper Series. –
Show/Hide Abstract We investigate how adopting the euro affects exports using firm-level data from Slovakia and Estonia. In contrast to previous studies, we focus on countries that adopted the euro individually and had different exchange rate regimes prior to doing so. Following the New Trade Theory we consider three types of adjustment: firm selection, changes in product varieties and changes in the average value of the exports that compose the exports of individual firms. The euro effect is identified by a difference in differences analysis comparing exports by firms to the euro area countries with exports to the EU countries that are not members of the euro area. The results highlight the importance of the transaction costs channel related to exchange rate volatility. We find the euro has a strong pro-trade effect in Slovakia, which switched to the euro from a floating exchange rate, while it has almost no effect in Estonia, which had a fixed exchange rate to the euro prior to the euro changeover. Our findings indicate that the euro effect manifested itself mainly through the intensive margin and that the gains from trade were heterogeneous across firm characteristics.
2018
Living with lower productivity growth: Impact on exports Di Mauro, F., Mottironi, B., Ottaviano, G., Zona-Mattioli, A. (No.1/2018) IWH-CompNet Discussion Paper Series –
Show/Hide Abstract This paper investigates the impact of sustained lower productivity growth on exports, by looking at the role of the productivity distribution and allocative efficiency as drivers of export performance. It follows and goes beyond the work of Barba Navaretti et al. (2017), analysing the effects of productivity on exports depending on the dynamics of allocative efficiency. Low productivity growth is a well-documented stylised fact in Western countries - and possibly a reality likely to persist for some time. What could be the impact of persistent sluggish growth of productivity on exports? To shed light on this question, this paper examines the relationship between the productivity distribution of firms and sectoral export performance. The structure of firms within countries or even sectors matters tremendously for the nexus between productivity and exports at the macroeconomic level, as the theoretical and empirical literature documents. For instance, whether too few firms at the top (lack of innovation) or too many firms at the bottom (weak market selection) drives slow average productivity at the macro level has very different implications and therefore demands different policy responses.
2017
Wage Bargaining Regimes and Firms' Adjustments to the Great Recession Ronchi, M., Di Mauro, F. (No.1/2017) IWH-CompNet Discussion Paper Series –
Show/Hide Abstract The paper aims at investigating to what extent wage negotiation set-ups have shaped up firms’ response to the Great Recession, taking a firm-level cross-country perspective. We contribute to the literature by building a new micro-distributed database which merges data related to wage bargaining institutions (Wage Dynamic Network, WDN) with data on firm productivity and other relevant firm characteristics (CompNet). We use the database to study how firms reacted to the Great Recession in terms of variation in profits, wages, and employment. The paper shows that, in line with the theoretical predictions, centralized bargaining systems – as opposed to decentralized/firm level based ones – were accompanied by stronger downward wage rigidity, as well as cuts in employment and profits.
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