Understanding competitiveness

Abstract

Using firm level data, we analyze the factors that drive the evolution of the aggregate Unit Labor Costs – the main European competitiveness indicator – in France, Germany, Italy and Spain. The evolution of the aggregate Unit Labor Cost is not driven by the evolution of the firm level Unit Labor Costs, but rather by an important factor for the competitiveness of a country: the reallocation of resources among the firms of the economy. Using the methodology of Hsieh and Klenow (2009), we show the importance of an efficient allocation of resources for productivity gains.