Firm Productivity Differences from Factor Markets: New Evidence from China

By Wenya Cheng (University of Glasgow) and John Morrow (Birkbeck, University of London)

Although firms may face radically different production conditions, this dimension of firm heterogeneity is often overlooked. A number of studies document large and persistent differences in productivity across both countries and firms.[1] However, these differences remain largely ‘some sort of measure of our ignorance’. It’s therefore worth inquiring to what extent the supply characteristics of regional input markets help explain such systematic productivity dispersion across firms, differences which remain a ‘black box’.[2] It would be surprising if disparate factor markets result in similar outcomes, when clearly the prices and quality of inputs available vary considerably, as when markets are thin, incomplete, distorted or highly heterogeneous: in short, in most developing country markets. Recent work has indicated imperfect factor mobility has sizable economic effects and that developing country distortions are large.[3] Our recent work models firm adaptation to such variation in a general equilibrium framework which microfounds these distortions and heterogeneity.[4] The structural equations of the model are simple to estimate and the estimation results quantify the importance of local factor markets for firm input use, productivity and welfare.

To better understand the environments that firms operate in, we model regional inputs markets with differing distributions of worker types, wages and regional input quality. Firms can hire different types of labor (e.g. education groups or occupations) and within each type, worker quality varies and incurs search costs. As the ease of finding higher quality workers increases with their regional supply, firm hiring depends on the joint distribution of worker types and wages. Our estimates indeed confirm that contrary to standard models with perfectly competitive labor markets, firm hiring responds to not only wages, but also the availability of worker types. Since each firm’s optimal workforce varies by industry and region, the comparative advantage of regions varies with its labor market characteristics. Since industries also differ in factor intensity, local capital and materials costs also influence the comparative advantage of a region. As the model also explicitly models entry, firms locate in proportion to the cost advantages available.

To quantify real world supply conditions, we use the model to derive estimating equations which fix: 1) hiring by wage and worker type distributions, 2) substitution into non-labor inputs and 3) firm location in response to local factor markets. The estimation strategy combines manufacturing and population census data for China in the mid-2000s, a setting which exhibits substantial local variation (see Figures 1, 2 a,b).

Figure 1 Chinese Prefectures Average Monthly Income of Employees (2005)

Figure 2 (a) % of Labor Force with less than or equal to Junior High School

Figure 2 (b) % of Labor Force with greater than or equal to Junior College

By revealing how firm demand for skills varies with local conditions, the model quantifies the unit costs for labor across China. The estimates based on within-firm hiring patterns imply interquartile differences in effective labor costs across prefectures which range from 30 to 80 percent (see Figure 3). Taking into account industry level production estimates of capital, labor and materials expenditure shares, these labor cost differences imply productivity differences of 3 to 12 percent. This helps explain the productivity difference ‘black box’ by reducing the variance of productivity residuals in every industry compared to a production function using counts of worker types or the wage bill. Extending this approach we also find that capital and materials frictions combined explain a similar range of productivity differences.

Figure 3: Geographic Dispersion of Unit Labor Costs: General Machines

The model has welfare implications for microeconomic changes in labor markets that shift regional comparative advantage and thereby the distribution of industry activity in general equilibrium. For instance, if the highly heterogenous distribution of workers and wages is due to regional frictions (e.g. the hukou system in China) then homogenizing worker distributions and wages across labor markets helps capture what the removal of these frictions might imply. In theory, this homogenization could lead to gains from variety being more evenly sourced across regions but could also lessen regional comparative advantages and gains from specialization. Ultimately these competing forces must be resolved quantitatively. Using Input-Output and population data, the model implies that homogenizing across factor markets would, on net, increase real incomes by 1.33 percent.

The importance of local factor markets for understanding firm behavior suggests new dimensions for policy analysis. For instance, regions with labor markets which generate lower unit labor costs for an industry attract higher levels industry activity. As unit labor costs depend on the distribution of wages and worker types that represent substitution options, this yields a deeper view of how educational policy or flows of different worker types impact firms. For this reason, work evaluating wage determination could be enriched by taking this approach. Taken as a whole, the results show that policy changes which influence the composition of regional labor markets will likely have sizeable effects on firm productivity and location. Finally, the substantial differences within industry suggest that at the regional level, inherent comparative advantages exist which policymakers might leverage.

In fact, relatively little is known about the dynamic relationships between labor markets and firm behavior, and this paper provides both a general equilibrium theory and structural estimation strategy to evaluate these linkages.[5] Having seen that cost and productivity differences inherent in local factor markets are potentially large, our approach could be of use in evaluating trade offs between regional policies or ongoing trends across regions. Further work could leverage or extend the approach of combining firm, census and geographic data to better understand the role of local factor markets on firm behavior.


Cheng, W. and J. Morrow, (2018); “Firm Productivity Differences from Factor Markets.” Journal of Industrial Economics, 66(1): 126–171.

Hsieh, C. T. and P. J. Klenow, (2009); “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics, 124(4): 1403–1448.

Melitz, M.J. and S.J. Redding, (2014); “Heterogeneous Firms and Trade.” Handbook of International Economics, Vol. 4: 1–54.

Ottaviano, G., and G. Peri, (2013) “New Frontiers of Immigration Research: Cities and Firms.” Journal of Regional Science, 53(1): 1–7.

Syverson, C., (2011); “What Determines Productivity?Journal of Economic Literature, 49(2): 326–365.

Topalova, P., (2010); “Factor Immobility and Regional Impacts of Trade Liberalization: Evidence on Poverty from India.” American Economic Journal: Applied Economics, 2(4): 1–41.


[1] See Syverson (2011).

[2] See Melitz and Redding (2014).

[3] See Topalova (2010) and Hsieh and Klenow (2009).

[4] See Cheng and Morrow (2018).

[5] See Ottaviano and Peri (2013).

Research Officer on a development project (full-time position)

The Centre for Economic Policy Research (CEPR) is looking to recruit a dynamic, dedicated individual with an interest in cutting-edge, policy-relevant research in development economics for a full-time Research Officer position within its Private Enterprise Development in Low-Income Countries (PEDL) programme, which has recently been extended. PEDL is a joint research initiative of CEPR and the Department for International Development (DFID). It offers competitive research grants for projects related to the behaviour of firms and the structure of markets in developing countries, with the aim to better understand what drives private sector growth in these countries. More information can be found at

This position includes the following tasks:

  • Assessing scientific progress and reviewing outputs and results of active research projects from an academic standpoint – involves assessing ~10 progress reports per month.
  • Disseminating the results from awarded projects by editing researchers’ policy briefs, writing project summaries, and managing website content.
  • Drafting PEDL Policy Insights, an 8-10 page summary of a longer and more comprehensive literature review on novel or understudied topics in development economics, so that the underlying research can be shared with a wider policy audience.
  • Writing executive summaries for PEDL Policy Insight and PEDL Synthesis pieces.
  • Producing reports for DFID outlining the Initiative’s progress and achievements against its original timeline and objectives and identifying key policy-relevant projects to highlight.
  • Sending DFID PEDL’s best publications monthly for internal circulation and updating the R4D.
  • Working with a web developer to rebuild the PEDL website in order to better highlight results from funded projects as new types of outputs become available.
  • Supporting overall programme management by helping to organise conferences, assisting the Scientific Coordinator of the PEDL initiative by evaluating research grant proposals for policy relevance and scientific merit, smoothing the grant application progress and tracking the progress of PEDL.
  • Liaising between researchers, the PEDL Scientific Coordinator and the CEPR Grants Coordination team.

The candidate should have the following qualifications/skills:


  • Postgraduate degree in economics, public policy or a related discipline with a significant focus on econometric techniques and experimental design.
  • High critical abilities for identifying scientific value in research projects and a solid understanding of the issues related to rigorous identification in economic research.
  • Strong writing skills, with the ability to translate research results into non-specialist terms.
  • Excellent organisational and project management skills and ability to prioritise among competing tasks.
  • Ability to take initiative and work autonomously.
  • Strong interest in development and growth economics, firms and markets.
  • The candidate should have the right to work in the UK.


  • Research experience (e.g. Research Assistance experience).
  • Experience managing websites and social media.
  • Experience working in developing countries.

Salary: £30k – £33k, full time

To Apply

Candidates can apply by submitting a CV and short cover letter outlining their skills and motivation by email to . Candidates should also mention their availability and preferred start date in the cover letter.

The deadline is Thursday 24th May

9th Bari Conference “Economics of Global Interactions: New Perspectives on Trade, Factor Mobility and Development”

The University of Bari “Aldo Moro” is hosting the 9th edition of the conference on the  “Economics of Global Interactions” that will take place in Bari (Italy) 10-11 September 2018.

The conference is co-organized with the Centre for Experimental Research on Fairness, Inequality, and Rationality (FAIR) at NHH Norwegian School of Economics (Bergen, Norway) and Master E.G.E.I. (

The event will provide scholars with the opportunity to discuss their recent contributions in the following areas:

  • Theoretical and empirical aspects of International Trade;
  • Determinants and effects of International Migration and FDI;
  • Institutions and Economic Development;
  • Globalization, sustainability and the environment;
  • Experimental methods and development;
  • Industrial Policy in Developing Countries;

Both theoretical and empirical papers are welcome. A discussant will be assigned to each paper presented at the conference.

Keynote Speakers:
Prof. Uri Gneezy (University of California San Diego, USA)
Prof. Ian Wooton (Strathclyde University, United Kingdom),
Prof. Joseph Francois (World Trade Institute, Switzerland; TBC).

Submission guidelines and timetable
Submissions of papers or extended abstracts are expected by May 30th, 2018, to the following address: 
Decisions will be communicated by June 15th, 2018The full paper is expected by the end of July.

Nicola Coniglio (University of Bari ‘Aldo Moro’, Italy),
Kjetil Bjorvatn (NHH Norwegian School of Economics, Norway)

Web page   /
Info or 

We will be grateful if you can forward the information to collegues / graduate students who might be interested.

Nicola D. Coniglio
Associate professor in economics
University of Bari Aldo Moro (Italy)
Tel. +39 0805049041 Fax: +39 0805049149
Email: or

PhD position on economic modeling of climate change mitigation, and analysing climate change impacts on economic growth

Application Deadline: 06 May 2018

The climate needs bright minds. The Potsdam Institute for Climate Impact Research (PIK) addresses crucial scientific questions in the fields of global change, climate impacts and sustainable development. It is one of the world’s leading research institutions in its field and offers natural and social scientists from around the world an inspiring environment for excellent interdisciplinary research. PIK’s historic science campus on Telegrafenberg Potsdam is within 30 minutes commuting distance of Berlin.

For our Growth & Development flagship project PIK is offering

1 PhD position on economic modeling of climate change mitigation, and analysing climate change impacts on economic growth

starting in fall 2018.

Reference: RD3-Macro-15-2018

The position is funded for 3 years and are part of the BMBF project “ROCHADE”. Remuneration is in accordance with German public tariff scheme (TV-L Brandenburg), salary group E 13 (65 %). The position is a full-time position with a weekly working time of 40 hours. Appointment is conditional on approval by the funding agency.

Key responsibilities:

  • The successful candidate will be working in a project on the interaction of structural change and climate change mitigation, on economic impacts of climate change and distributional consequences.
  • Investigation of novel concepts for estimating climate change impacts on economic growth, and accounting for climate damages in household models as well as integrated energy-economy-landuse-climate models;
  • Development of a multi-sectoral growth model to study conceptually as well as numerically the interaction of structural change and economic growth with climate change and climate change mitigation policies.


  • Master’s Degree in Economics, Physics, Environmental Sciences, Mathematics, System Sciences or a related field,
  • expertise in economic growth theory or economic analysis of inequality or empirical work on economic impacts of climate change, respectively,
  • training in formal, quantitative methods, excellent analytical skills and interest in theoretical and applied modeling (programming skills in R or GAMS are an advantage).

We expect:

  • strong motivation and good organizational skills,
  • team orientation,
  • strong communication skills in English; the working language at PIK is English.

The successful candidate will be working in the integrate assessment and macroeconomic modeling group of PIK’s Research Domain 3 “Sustainable Solutions”. PhD students will be supervised by Prof. Dr. Ottmar Edenhofer (Chair of Research Domain III and Professor of Economics of Climate Change at the Technische Universität Berlin).

We offer

  • an inspiring, international and interdisciplinary work environment in one of the world’s leading research institutes on climate change mitigation and impact research
  • high-impact research: PIK researchers publish in renowned international journals
  • participation in solution-oriented research in projects with several German and international partners and with immediate policy relevance and impact on international assessments such as IPCC reports
  • opportunities for cooperation with PIK’s national and international network of leading climate & economic research institutes and think tanks
  • a structured PhD programme with supervision agreements, a supervision team, reporting obligations, a career development plan, a mediator team and an interdisciplinary education programme.

PIK seeks to increase the share of women in scientific positions and therefore explicitly encourage women to apply. In cases of equal qualification and within the given legal scope, women will be given preference. Applications by persons with a migration background, provided they fulfill the conditions for appointment, are expressly encouraged. Applications of disabled persons with equal qualifications will be regarded favourably. PIK is also encouraging applications by parents returning from parental leave within the availability of financial resources.

Application documents should comprise a letter of motivation including research interests, a CV with the contact details of two referees, certificates, detailed transcripts of university grades, a sample of your work (e.g., term paper, thesis or journal publication) and a publication list (for Postdoc applications). Please send your full application as a single PDF document by email to

quoting the reference RD3-Macro-15-2018 and mentioning where you read about the position. Applications will be accepted until position is filled, but need to be submitted by May 6th to be considered in the initial selection process. The size of the file should not exceed 15 MB.

For further informationen or to discuss the position please contact Dr. Elmar Kriegler () and Dr. Marian Leimbach ().

Job Opportunity: PFM specialist, Building Public Finance Management (PFM) Capabilities

Location: Centurion (Pretoria), South Africa
Contract: 3 years (renewable)

1. Background

The Collaborative Africa Budget Reform Initiative (CABRI) is an intergovernmental organisation of Ministries of Finance and Budget from across Africa, which provides a unique platform for peer exchange and learning amongst senior public finance managers. CABRI vision is that public financial resources in Africa are managed with integrity, transparency and accountability for efficient and effective service delivery, sustainable economic growth and development. CABRI supports its vision by strengthening the capabilities of senior government officials for the implementation of reforms that achieve functional PFM systems.
CABRI would like to recruit a PFM specialist to support its work under the Building PFM Capabilities programme. The programme is underpinned by the Problem Driven Iterative Adaption (PDIA) approach and aims to build the capability of a set of finance officials as they learn how to address and solve locally-nominated problems, in teams through action-oriented work. The PFM specialist will lead the research efforts related to the understanding the process of the building of PFM capabilities in Africa while engaging in the action-learning part of the programme.

2. Duties of the PFM specialist

The PFM specialist will coordinate the research outputs for the Building PFM Capabilities programme and work closely with the Manager for the Building PFM Capabilities Programme. The PFM specialist will be expected to undertake the following activities:

Strategic support

  • Support the implementation of CABRI’s strategic plan pertaining to building the capabilities of senior finance and budget officials in Africa. The workplan includes country work, research, case studies, media production, workshops, capability building and other peer learning activities.
  • Conduct outreach and network-building as well as engagement with external partners.

Research on assessing PFM capabilities in Africa

  • Lead innovative research in designing an assessment method for PFM capabilities in Africa. Research outputs will support CABRI member countries in understanding the constraints on the improvement of their PFM capabilities.
  • Develop concepts and terms of reference for specific components of the research and manage a dedicated budget.
  • Organize workshops and exchanges on the method developed. Pilot the assessment in a country and roll out to further African countries.

Studies, writing, and Communication

  • Conduct and/or coordinate analysis and policy-orientated research. The research will focus on producing knowledge on specific aspects of institutions and capabilities related to public financial management in Africa.
  • Contribute to and write reports, blog pieces and other documents disseminating
    CABRI’s work and communicating on our activities and results.
  • Contribute to discussions at seminars and conferences linked to the programme

3. Qualifications, Experience and Competencies

The PFM specialist is expected to have the following qualifications and experience:

  • A graduate degree in economics, public policy, public finance or a related field.
  • Relevant professional experience of at least 4 years, ideally in a developing world
    context. Experience in public financial management is a strong asset.
  • Experience in conducting research and an interest in public sector institutions, public financial management and Africa.
  • Analytical and Technical Skills – demonstrated use of statistical and research methods; ability to perform quantitative analysis using Excel and/or other databases.
  • Record of problem solving and innovation to bring new and different insights.
  • Fluency in English. Knowledge of French is a strong plus.
  • Ability to integrate ideas from diverse views, create partnerships, and collaborate with others.
  • Oral and written communication skills with the ability to translate technical content
    into plain language.
  • Interpersonal skills and demonstrated ability to work as part of a team.
  • Willingness to travel, mostly in Africa

Please submit your resume in English to Adil Ababou, Manager for the Building PFM Capabilities programme, Awa Touray, Officer for the Building PFM Capabilities programme at the following addresses: and
Applications for the position close on 4 May 2018 and interviews will be conducted on a rolling basis. Should you not hear from us within two weeks of the closing date, please consider your application unsuccessful.