Market imperfections, skills and total factor productivity: Firm-level evidence on Belgium and the Netherlands

Abstract

This paper revisits the relationship between competition and total factor productivity by analyzing how the type and the degree of product and labor market imperfections affect different moments of total factor productivity distributions. Following the methodology developed in Dobbelaere and Mairesse (2013), we use an unbalanced panel of 5,285 firms over the period 2003-2011 in Belgium and 9,653 firms over the period 1999-2008 in the Netherlands to first classify 30 comparable manufacturing and service industries in 6 distinct regimes that differ in the type of competition prevailing in product and labor markets. In both countries, the dominant regime is one of imperfect competition in the product market and efficient bargaining in the labor market. We Önd important cross-country differences in the composition of industries making up the regimes and cross-country variation in the levels of product and labor market imperfection parameters within the dominant regime. We then provide clear descriptive evidence of total factor productivity distributional characteristics varying by the type of competition predominating in product and labor markets and to some extent by the degree of product and labor market imperfections. In both countries, average total factor productivity growth rates are found to be higher in high-skilled enterprises in all regimes, except for the regime characterized by perfect competition in both markets.