How Do Exporters React to Changes in Cost Competitiveness?

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.