Globalization and Productivity in the United States and Germany

Abstract

This paper investigates the impact of globalization on productivity in manufacturing industries in the United States and Germany. Using disaggregated data from the manufacturing sectors in Germany and the United States, I investigate two hypotheses of how globalization and productivity might be related. The first hypothesis investigates the relationship between globalization and changes in the productivity growth rate. The second hypothesis investigates the importance of globalization for the procyclical characteristics of productivity. Globalization is proxied by real exports and imports, both real volumes and as a share of output and apparent domestic consumption, respectively. Productivity is measured three ways: (1) labor productivity; (2) a Solow residual from a calculation including labor and utilization-adjusted capital; and (3) a Solow residual from a calculation including labor, materials, and utilization-adjusted capital. The time period analyzed is 1979 to 1995 for the United States and 1981 to 1994 for Germany. For U.S. industries, the analysis suggests that international demand growth affects trend productivity growth differently from the effect of greater international exposure. Increased export demand is associated with an increase in trend productivity growth; but this increase is less than that associated with an increase in domestic shipments. Thus, the positive correlation between productivity growth and the share of exports in output found by some other researchers is not corroborated by this study. ¹ On the other hand, while increased import growth is associated with lower trend productivity growth, an increase in import competition (measured by the share of imports in domestic demand) increases trend productivity growth. Thus, whereas increased imports apparently do not induce productivity enhancements, loss of market share to imports does. Comparing across the measures of productivity growth, labor markets do not bear the brunt of the reallocation of inputs necessary to achieve productivity gains; reallocation in the use of materials is particularly important for raising productivity growth rates. Capital utilization is more affected by the overall level of output, regardless of source or destination.

Catherine Mann was Assistant Director in the International Finance Division of the Federal Reserve Board when this paper was written. She is currently a Senior Fellow at the Institute for International Economics. This paper was prepared for the conference “Globalization, Technological Change, and the Welfare State” held at the American Institute for Contemporary German Studies of the Johns Hopkins University, June 8–10, 1997. The views in this paper are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.