Explaining National Differences

What factors determine national differences in the size and industry distribution of employment? We stress the role of the economic policy environment as determined by business taxes, employment security laws, credit market regulations, the national pension system, wage-setting institutions and the size of the public sector. We characterize these aspects of the policy environment in Sweden prior to 1990–91 and compare them to the situation in other European countries and the United States. Our characterization and international comparisons show that Swedish policies strongly disfavored less capitalintensive firms, smaller firms, entry by new firms, and individual and family ownership of business. We also compile evidence that these policies affect outcomes. Taking the U.S. industry distribution as a benchmark that reflects a comparatively neutral set of policies and institutions, Sweden‘s employment distribution in the mid-1980s is sharply tilted away from low-wage industries and industries with greater employment shares for smaller firms and establishments. Compared to other European countries, Sweden has an unusually high share of employment in large firms. Furthermore, the Swedish rate of self-employment in the 1970s and 1980s is the lowest among all OECD countries. The institutional and policy factors emphasized by our study differ greatly across countries. This fact suggests that our approach can be fruitfully applied to other studies of national differences in industry and size structures and their evolution over time. As an example, the tax reform wave of the 1980s – which largely evened out cross-country differences in corporate taxation among OECD countries – offers some basis for projecting a movement towards greater similarity among wealthy countries in the size and industry distribution of employment. The industry distribution of employment differs sharply across countries, even countries with similar levels of economic development. What factors determine these differences? Theories of international trade stress relative factor endowments and scale economies as major forces behind observed national differences in the industry distribution of employment. But, since these differences extend to sectors of the economy that do not produce traded goods and services (or intermediate inputs into the traded sector), other forces must also be at work. Differences in the organization of business activity among countries with similar factor endowments also present a puzzle. Presumably, these countries have access to the same technologies for producing goods and services. Why then does the distribution of business activity by firm and establishment size differ markedly across countries?