Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

Competitive Pressure and Labor Productivity: World Iron Ore Markets in the 1980s *

Academic journal article Federal Reserve Bank of Minneapolis Quarterly Review

Competitive Pressure and Labor Productivity: World Iron Ore Markets in the 1980s *

Article excerpt

Does the extent of competitive pressure industries face influence their productivity? While a widespread view says that competitive pressure does influence productivity, and some theoretical reasons to expect gains exist, the amount of evidence to support this view is not overwhelming. (1) Evidence has been sought, for example, in the impact of economic liberalization policies, such as deregulation, privatization, and tariff reductions, on productivity. These policies are thought to increase competitive pressure on industries and, hence, to lead to productivity gains. (2) But the evidence that they increase productivity is not overpowering. This lack of evidence may well stem from issues such as policy endogeneity. Here we study a situation akin to a natural experiment in which competitive pressure was brought upon producers by a shrinking market for their product. In particular, we examine the increased competitive pressure iron ore producers faced in the early 1980s following the collapse of world steel pro duction.

We show that a striking relationship exists between the increase in competitive pressure iron ore mines faced in the early 1980s and their subsequent labor productivity gains in the 1980s. In countries where mines faced little increase in competitive pressure, productivity changed little over the 1980s; in countries where mines faced dramatic increases, productivity gains ranged from 50 to 100 percent, rates that were unprecedented.

We say that the collapse of world steel production led to an increase in competitive pressure at a mine if because of the collapse the likelihood that the mine would close over, say, the next decade, increased. The increase in competitive pressure a mine faced depended on a number of factors, but two were paramount: the mine's location and the mine's production costs.

Location was paramount because the costs of shipping iron ore are high relative to the ore's value at the mine. (Transport costs often amount to 50 percent and more of delivered prices.) The steel production collapse in the early 1980s was almost entirely concentrated in the Atlantic Basin. Because iron ore mines in Atlantic Basin countries (Brazil, Canada, France, South Africa, Sweden, and the United States) were located in the region of the steel collapse, they faced, everything else equal, a greater increase in competitive pressure than mines in Pacific Basin countries (Australia and India). (3)

Production costs were, obviously, also paramount in determining the increase in competitive pressure a mine faced. The production costs of mines in Atlantic Basin countries (with one exception) greatly exceeded the production costs of mines in Pacific Basin countries. Hence, on both counts, the Atlantic Basin mines faced a greater increase in competitive pressure than the Pacific Basin mines.

Regarding production costs, the exception was Brazil: its mines had the lowest production costs in the world. As we demonstrate below, the Brazilian mines were like those in the Pacific Basin countries in that they faced little increase in competitive pressure.

Among those mines that faced little or no increase in competitive pressure, Australian and Brazilian mines had no productivity gains in the 1980s (and few in the preceding decade either); Indian mines had modest productivity gains, about 29 percent in the 1980s (55 percent in the preceding decade). Among mines that faced a dramatic increase in competitive pressure, Canadian, Swedish, and U.S. mines had productivity gains approaching 100 percent in the 1980s (whereas each had no productivity gain in the preceding decade); South African mines had substantial gains, about 50 percent in the 1980s; and French mines had no productivity gains and by the end of the 1980s were (essentially) out of the business. France demonstrates that not all industries that face a dramatic increase in competitive pressure will increase productivity. …

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