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How do exporters react to changes in cost competitiveness?

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  • Fuss, Catherine
  • Decramer, Stefaan
  • Konings, Jozef

Abstract

Policy-making institutions such as the European Commission, the ECB and the OECD often use unit labor costs as a measure of international competitiveness. The goal of this paper is to examine how well this measure is related to international export performance at the firm level. To this end, we use Belgian firm-level data for the period 1999-2010 to analyze the impact of unit labor costs on exports. We use exports adjusted for their import content. We find a statistically significant negative effect of unit labor costs on export performance of firms with an estimated elasticity of the intensive margin of exports ranging between -0.2 and -0.4. This result is robust to various specifications, including firm, time and sector fixed effects and estimation approaches. We find that this elasticity varies between sectors and between firms, with firms that are more labor-intensive having a higher elasticity of exports with respect to unit labor costs. The micro data also enable us to analyze the impact of unit labor costs on the extensive margin. Our results show that higher unit labor costs reduce the probability of starting to export for non-exporters and increase the probability of exporters stopping. While our results show that unit labor costs have an impact on the intensive margin and extensive margin of firm-level exports, the effect is rather low, suggesting that passthrough of costs into prices is limited or that demand for exported products is not elastic. The latter is consistent with recent trade models emphasizing that not only relative costs, but also demand factors such as quality and taste matter for explaining firm-level exports. JEL Classification: F1, F4, F16

Suggested Citation

  • Fuss, Catherine & Decramer, Stefaan & Konings, Jozef, 2014. "How do exporters react to changes in cost competitiveness?," Working Paper Series 1752, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20141752
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    References listed on IDEAS

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    1. Comment les exportations réagissent-elles à la compétitivité-coût ?
      by Martin Anota in D'un champ l'autre on 2015-03-11 02:16:11

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    Cited by:

    1. E. Dhyne & C. Duprez & C. Fuss, 2015. "Main CompNet research results," Economic Review, National Bank of Belgium, issue iii, pages 103-116, December.
    2. Horen Voskeritsian & Michail Veliziotis & Panos Kapotas & Andreas Kornelakis, 2017. "Between a Rock and a Hard Place: Social Partners and Reforms in the Wage- Setting System in Greece under Austerity'," GreeSE – Hellenic Observatory Papers on Greece and Southeast Europe 114, Hellenic Observatory, LSE.

    More about this item

    Keywords

    competitiveness; exports; heterogeneity; unit labor costs;

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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