Product Market Competition, Wages and Productivity: International Evidence From Establishment-Level Data

That greater product market competition has the potential to affect outcomes in labour and product markets is borne out by one of the key premises of standard economic theory which predicts that, all other things held constant, prices should be lower and efficiency enhanced by more competition. In this paper we test this notion by considering the relationship between product market competition and establishment-level wages and economic performance. We use two microeconomic data sources from Britain and Australia to consider this relationship. Our results find only a limited role for market competition to impact on wages and productivity. In British workplaces, labour productivity is not raised by more competition, whilst in Australia we can only find evidence of the conventionally expected positive impact in manufacturing workplaces. With respect to wages, the results are more consistent with the competition hypothesis, though effects are not that strong, with significant effects only being found for some of the skill groups within our samples of establishments. Hence, there is only limited support for the key hypothesis of interest that we consider. Acknowledgements We would like to thank the John Abowd, Francis Kramarz and participants in the December 1994 Paris Conference "The Microeconometrics of Human-Resource Management: Multinational Studies of Firm Practices" for a number of helpful comments.