Market Power, Input Costs, and Technology

The research group deals with the empirical analysis of the dynamics and determinants of economic development. Thereby, we recognize that these are individual heterogeneous firms with their specific capabilities to innovate and to efficiently allocate scarce resources that shape patterns at higher level of aggregation (e.g. cause structural change). While following a micro-level approach we aim at adding to the understanding of the actual mechanisms and dynamics in the development of economies as well as for the development of policy instruments. For instance, one of the current research projects deals with the effect of import competition on the productivity and innovating behaviour of firms as well as on the dynamic in and of industries

The research group works closely together with CompNet.

Research Cluster
Productivity and Institutions

Your contact

Dr Matthias Mertens
Dr Matthias Mertens
Mitglied - Department Structural Change and Productivity
Send Message +49 345 7753-707 Personal page

EXTERNAL FUNDING

10.2022 ‐ 09.2024

MULTIMSPROD/MULTIMSPROD AUT

European Commission

Enhancing the Micro Foundation of the Research Output of National Productivity Board (NPBs). Using CompNet and expanding its Micro Data Infrastructure (MDI).

See project page

Professor Javier Miranda, PhD

09.2016 ‐

The Competitiveness Research Network (CompNet)

Funding institutions: European Central Bank (ECB), European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), Tinbergen Institute, European Commission.

The Competitiveness Research Network (CompNet) provides a forum for high level research and policy analysis in the areas of competitiveness and productivity. Its main activities include the regular updating of its micro-based competitiveness database for European countries, unprecedented in terms of coverage and cross-country comparability.

Professor Reint E. Gropp, PhD

Refereed Publications

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European Firm Concentration and Aggregate Productivity

Tommaso Bighelli Filippo di Mauro Marc Melitz Matthias Mertens

in: Journal of the European Economic Association, No. 2, 2023

Abstract

This paper derives a European Herfindahl–Hirschman concentration index from 15 micro-aggregated country datasets. In the last decade, European concentration rose due to a reallocation of economic activity toward large and concentrated industries. Over the same period, productivity gains from an increasing allocative efficiency of the European market accounted for 50% of European productivity growth while markups stayed constant. Using country-industry variation, we show that changes in concentration are positively associated with changes in productivity and allocative efficiency. This holds across most sectors and countries and supports the notion that rising concentration in Europe reflects a more efficient market environment rather than weak competition and rising market power.

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Paying Outsourced Labor: Direct Evidence from Linked Temp Agency-Worker-Client Data

Andres Drenik Simon Jäger Pascuel Plotkin Benjamin Schoefer

in: Review of Economics and Statistics, No. 1, 2023

Abstract

We estimate how much firms differentiate pay premia between regular and outsourced workers in temp agency work arrangements. We leverage unique Argentinian administrative data that feature links between user firms (the workplaces where temp workers perform their labor) and temp agencies (their formal employers). We estimate that a high-wage user firm that pays a regular worker a 10% premium pays a temp worker on average only a 4.9% premium, compared to what these workers would earn in a low-wage user firm in their respective work arrangements—the midpoint between the benchmarks for insiders (one) and the competitive spot-labor market (zero).

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The East-West German Gap in Revenue Productivity: Just a Tale of Output Prices?

Matthias Mertens Steffen Müller

in: Journal of Comparative Economics, No. 3, 2022

Abstract

East German manufacturers’ revenue productivity is substantially below West German levels, even three decades after German unification. Using firm-product-level data with product quantities and prices, we analyze the role of product specialization and show that the prominent “extended work bench hypothesis” cannot explain these sustained productivity differences. Eastern firms specialize in simpler product varieties generating less consumer value and being manufactured with less or cheaper inputs. Yet, such specialization cannot explain the productivity gap because Eastern firms are physically less productive for given product prices. Hence, there is a genuine price-adjusted physical productivity disadvantage of Eastern compared to Western firms.

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What Does Codetermination Do?

Simon Jäger Shakked Noy Benjamin Schoefer

in: ILR Review, No. 4, 2022

Abstract

The authors provide a comprehensive overview of codetermination, that is, worker representation in firms’ governance and management. The available micro evidence points to zero or small positive effects of codetermination on worker and firm outcomes and leaves room for moderate positive effects on productivity, wages, and job stability. The authors also present new country-level, general-equilibrium event studies of codetermination reforms between the 1960s and 2010s, finding no effects on aggregate economic outcomes or the quality of industrial relations. They offer three explanations for the institution’s limited impact. First, existing codetermination laws convey little authority to workers. Second, countries with codetermination laws have high baseline levels of informal worker voice. Third, codetermination laws may interact with other labor market institutions, such as union representation and collective bargaining. The article closes with a discussion of the implications for recent codetermination proposals in the United States.

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Micro-mechanisms behind Declining Labor Shares: Rising Market Power and Changing Modes of Production

Matthias Mertens

in: International Journal of Industrial Organization, March 2022

Abstract

I derive a micro-founded framework showing how rising firm market power on product and labor markets and falling aggregate labor output elasticities provide three competing explanations for falling labor shares. I apply my framework to 20 years of German manufacturing sector micro data containing firm-specific price information to study these three distinct drivers of declining labor shares. I document a severe increase in firms’ labor market power, whereas firms’ product market power stayed comparably low. Changes in firm market power and a falling aggregate labor output elasticity each account for one half of the decline in labor's share.

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Working Papers

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The Aggregate Effects of the Decline of Disruptive Innovation

Richard Bräuer

in: IWH Discussion Papers, No. 22, 2023

Abstract

This paper proposes a model that explains both recently documented facts about the decline of disruptive innovation and the decline in productivity growth as the result of large firms trying to monopolize technologies by poaching inventors from disruptive activities. To come to this conclusion, the paper builds an endogenous growth model with inventor labor markets on which firms can interact strategically. To inform this model, I perform an event study of the effect of disruptive inventions on their technology fields using PATSTAT (1980-2010). I document that technology classes without disruption slowly trend towards incrementalism and that after a disruption, more patents get registered and research becomes less incremental.

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Declining Business Dynamism in Europe: The Role of Shocks, Market Power, and Technology

Filippo Biondi Sergio Inferrera Matthias Mertens Javier Miranda

in: IWH Discussion Papers, No. 19, 2023

Abstract

We study the changing patterns of business dynamism in Europe after 2000 using novel micro-aggregated data that we collect for 19 European countries. In all of them, we document a decline in job reallocation rates that concerns most economic sectors. This is mainly driven by dynamics within sectors, size classes, and age classes rather than by compositional changes. Large and mature firms show the strongest decline in job reallocation rates. Simultaneously, the shares of employment and sales of young firms decline. Consistent with US evidence, firms’ employment changes have become less responsive to productivity. However, the dispersion of firms’ productivity shocks has decreased too. To enhance our understanding of these patterns, we derive a firm-level framework that relates changes in firms’ productivity, market power, and technology to job reallocation and firms’ responsiveness.

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Minimum Wages, Productivity, and Reallocation

Mirja Hälbig Matthias Mertens Steffen Müller

in: IZA Discussion Paper, No. 16160, 2023

Abstract

We study the productivity effect of the German national minimum wage by applying administrative firm data. At the firm level, we confirm positive effects on wages and negative employment effects and document higher productivity even net of output price increases. We find higher wages but no employment effects at the level of aggregate industry × region cells. The minimum wage increased aggregate productivity in manufacturing. We do not find that employment reallocation across firms contributed to these aggregate productivity gains, nor do we find improvements in allocative efficiency. Instead, the productivity gains from the minimum wage result from within-firm productivity improvements only.

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Minimum Wages, Productivity, and Reallocation

Mirja Hälbig Matthias Mertens Steffen Müller

in: IWH Discussion Papers, No. 8, 2023

Abstract

We study the productivity effect of the German national minimum wage by applying administrative firm data. At the firm level, we confirm positive effects on wages and negative employment effects and document higher productivity even net of output price increases. We find higher wages but no employment effects at the level of aggregate industry × region cells. The minimum wage increased aggregate productivity in manufacturing. We do not find that employment reallocation across firms contributed to these aggregate productivity gains, nor do we find improvements in allocative efficiency. Instead, the productivity gains from the minimum wage result from within-firm productivity improvements only.

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Do Larger Firms Exert More Market Power? Markups and Markdowns along the Size Distribution

Matthias Mertens Bernardo Mottironi

in: IWH Discussion Papers, No. 1, 2023

Abstract

Several models posit a positive cross-sectional correlation between markups and firm size, which characterizes misallocation, factor shares, and gains from trade. Accounting for labor market power in markup estimation, we find instead that larger firms have lower product markups but higher wage markdowns. The negative markup-size correlation turns positive when conditioning on markdowns, suggesting interactions between product and labor market power. Our findings are robust to common criticism (e.g., price bias, non-neutral technology) and hold across 19 European countries. We discuss possible mechanisms and resulting implications, highlighting the importance of studying input and output market power in a unified framework.

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