Quantifying a Dangerous Obsession? Competitiveness and export performance in an OECD Panel of Industries

This paper analyses the impact of cost competitiveness and technology on export performance using a very rich panel dataset of 12 manufacturing industries in 14 OECD countries for the period between 1970 and 1992. Consistent with standard models, we find that changes in relative unit labour costs are a robust determinant of changes in export market shares. In the long run a 10% increase in relative unit labour costs leads to a fall of between 2% and 3% of export market share. Despite this, the trends in national export performance cannot be fully explained by relative costs. This points to the importance of non-price factors, and extending the model to allow for technology effects (including R&D and patents) on quality provides some evidence for the importance of higher relative investment rates. Allowing for heterogeneity in the effect of relative costs in different industries, different countries and different time periods suggests that labour cost changes are less important in high technology industries, in periods of high demand and in countries within the European Monetary System.