How Do Exporters React to Changes in Cost Competitiveness?

Abstract

Various international institutions such as the European Commission, the ECB and the OECD often use unit labour costs as a measure of international competitiveness. The goal of this paper was 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 to 2010 to analyse the impact of unit labour costs on exports. We find an estimated elasticity of the intensive margin of exports with respect to unit labour costs between −0.2 and −0.4. This elasticity varies between sectors and between firms, with more labour‐intensive firms having a higher elasticity. The microdata also enable us to analyse the impact of unit labour costs on the extensive margin. Our results show that higher unit labour costs reduce the probability of starting to export for non‐exporters and increase the probability of exporters stopping. While our results show that unit labour costs have an impact on the intensive margin and extensive margin of firm‐level exports, the effect is rather low, suggesting that pass‐through of costs into prices is limited. The latter is consistent with recent trade models emphasising that not only relative costs, but also demand factors such as quality and taste matter for explaining firm‐level exports.

Heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries

“…Finally, while this paper focuses on the short-to medium-run relationships between competitiveness and the macroeconomy, future research can shed light on the long-run effects of competitiveness shocks and investigate whether these long-run effects are heterogeneous across countries. 9 Using microeconomic data, Decramer, Fuss, and Konings (2016) find that exporters across sectors react very differently to reductions in unit labour costs, suggesting that national industry structures may help explain the heterogeneity found in this paper.…”

One-size-fits-some! Capitalist diversity, sectoral interests and monetary policy in the euro area

“…The importance of non-price competitiveness is not restricted to Germany, however. Decramer, Fuss, and Konings (2014) found only a small negative effect of ULC on the export performance of Belgian firms with an estimated elasticity of the intensive margin of exports ranging between 595 -0.2 and -0.4, suggesting that pass-through of costs onto prices is limited and/or that demand for exported products is almost price-inelastic. Table 9 shows the European Commission's (2014)…”

Rising Powers and Economic Crisis in the Euro Area

“…The importance of non-price competitiveness is not restricted to Germany, however. Decramer et al ( 2014 ) found only a small negative effect of ULC on the export performance of Belgian fi rms with an estimated elasticity of the intensive margin of exports ranging between −0.2 and −0.4, suggesting that pass-through of costs onto prices is limited and/or that demand for exported products is relatively inelastic. Table 4.3 shows the EC's recent estimations of the elasticity of export demand of several CMEs to the REER and foreign demand: exports of CMEs tend to have signifi cantly lower elasticity to REER changes and higher elasticity to foreign demand than exports of MMEs (whose elasticities are shown in Table 5.3 ).…”