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Heterogeneous firms or heterogeneous workers? Implications for the exporter premium and the impact of labor reallocation on productivity

  • Irarrazabal, Alfonso
  • Moxnes, Andreas
  • Ulltveit-Moe, Karen-Helene

We expect trade liberalization to give rise to aggregate productivity gains, as the least efficient firms are forced out, and labor is reallocated towards the best performing firms. But the positive intra-industry reallocation effects rely on the stark assumption that exporters’ superior performance is due to intrinsic firm efficiency. We investigate the importance of intrinsic firm efficiency relative to input quality as sources of exporters’ productivity premium, employing a matched employer-employee data set for Norwegian manufacturing. Augmented measures of total factor productivity which take worker characteristics into account, indicate that up to 67 percent of the exporter premium reflects differences in workforce rather than true efficiency. Simulating the labor dynamics proceeding firm exits, we illustrate that the benign impact on aggregate productivity from firm exits may be reduced because of worker reallocation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7577.

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Date of creation: Nov 2009
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Handle: RePEc:cpr:ceprdp:7577
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  1. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  2. Eric Verhoogen, 2007. "Trade, quality upgrading and wage inequality in the Mexican manufacturing sector," Discussion Papers 0607-08, Columbia University, Department of Economics.
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