Heterogeneous firms or heterogeneous workers? Implications for the exporter premium and the impact of labor reallocation on productivity

We expect trade liberalization to give rise to aggregate productivity gains, as the least efficient firms are forced out, and labor is reallocated towards the best performing firms. But the positive intra-industry reallocation effects rely on the stark assumption that exporters’ superior performance is due to intrinsic firm efficiency. We investigate the importance of intrinsic firm efficiency relative to input quality as sources of exporters’ productivity premium, employing a matched employer-employee data set for Norwegian manufacturing. Augmented measures of total factor productivity which take worker characteristics into account, indicate that up to 67 percent of the exporter premium reflects differences in workforce rather than true efficiency. Simulating the labor dynamics proceeding firm exits, we illustrate that the benign impact on aggregate productivity from firm exits may be reduced because of worker reallocation.