Does the extent of competitive pressure industries face influence their productivity? We study a natural experiment conducted in the iron ore industry as a result of the collapse in world steel production in the early 1980s. For iron ore producers, whose only market is the steel industry, this collapse was an exogenous shock. The drop in steel production differed dramatically by region: it fell by about a third in the Atlantic Basin but only very little in the Pacific Basin. Given that the cost of transporting iron ore is very high relative to its mine value, Atlantic iron ore producers faced a much greater increase in competitive pressure than did Pacific iron ore producers. In response to the crisis, most Atlantic iron ore producers doubled their labor productivity; Pacific iron ore producers experienced few productivity gains.
This article is reprinted, with permission, from the _American Economic Review_ (September 2002, vol. 92, no. 4, pp. 1222-1235). Copyright 2002 by the American Economic Association. The article was edited for publication in the _Federal Reserve Bank of Minneapolis Quarterly Review_. https://doi.org/10.1257/00028280260344759