Labor costs, KIBS, and export performance: A comparative analysis of Germany and Mediterranean economies

Abstract

Following the onset of the Eurozone crisis, Mediterranean economies (Greece, Italy, Portugal, Spain) followed the example set by Germany, implementing structural reforms with the aim of restraining labor costs and transitioning to export-led growth. Using input–output tables, this paper analyzes the role of labor costs and non-price factors in the export performance of the manufacturing sectors in these Mediterranean economies and in Germany. We estimate an export model taking subsystems as units of analysis, permitting us to consider how the productive linkages between manufacturing and services affect export growth. Our results show that the effect of labor costs on export performance has been negligible in these five economies, while non-price factors stand out as the main drivers of export growth. In addition, we find that the development of stronger linkages between knowledge-intensive business services (KIBS) and manufacturing provides a substantial stimulus for non-price competitiveness.