[ 1 ]

Productivity in Europe. From the expansion to the crisis

Matilde Mas

University of Valencia and Ivie

 World KLEMS Conference. Break Out Session: Europe

Harvard, August 20, 2010

[ 2 ]

Industrial Productivity in Europe: Growth and CrisisEditors: Matilde Mas & Robert Stehrer

Edward Elgar Editors 

PART I. INTRODUCTION

Mas, M.: “Productivity in the advanced countries. From the expansion to the crisis”

Jorgenson, D.W., Ho Mun S. Samuels, J.D. and K. Stiroh: “Industry Origins of the American Productivity Resurgence”

PART II. COUNTRY CHAPTERS

Hans-Olof Hagén: “Growth in the Nordic business sector”

O´Mahony, M, Nayman, L. Gorning, M. and B. Gorzig: “Productivity transitions in large mature economies: France, Germany and the UK”

Kegels, Ch., Peneder, M. and H. van der Wiel: “Productivity performance in Three Small European countries: Austria, Belgium and the Netherlands”

Havlik, P., Leitner, S. and R. Stehrer: “Growth Resurgence, Productivity Catching-up and Labour Demand in CEECs”.

Mas, M., Milana, C. and L. Serrano: “Spain and Italy: catching up and falling behind. Two different tales of productivity slowdown”

Fukao, K., Miyagawa, T., Hak K. Pyo and K. Hee Rhee: “Estimates of Multifactor productivity, ICT Contributions and Resource reallocation effects in Japan and Korea”

[ 3 ]

Industrial Productivity in Europe: Growth and CrisisEditors: Matilde Mas & Robert Stehrer

Edward Elgar Editors 

PART III. SPECIFIC TOPICS

Landesmann, M. Leitner, S. Stehrer, R. and T. Ward: “Skills and industrial competitiveness”

Esposito, P. and R. Stehrer: “Effects of High-Tech Capital, FDI, and Outsourcing on Demand for Skills in West and East”

Kangasniemi, M., Mas, M., Robinson, K. and L. Serrano: “The economic impact of Migration. Productivity Analysis for Spain and the UK”

Van der Wiel, H. Creusen, H. van Leeuwen and E. van der Pijll: “Cross your border and look around”

Hyun Jeong Kim and Hak K. Pyo: “International comparison of Productivity in Market Services: Korea with EU KLEMS Member countries”

Oulton, N. and A. Rincón-Aznar: “Rates of return and alternative measures of capital input: 14 countries and 10 branches, 1971-2005”

Inklaar, R. and M.P. Timmer: “Productivity Convergence Across Industries and Countries: The Importance of Theory-based Measurement”.

[ 4 ]

Productivity in Europe. From the expansion to the crisis

Topics that we deal with in this presentation:

1. Labor productivity from a long run perspective

2. The impact of the economic crisis started in 2007

3. Productivity from an industry's perspective

4. Sources of productivity growth: the relevance of the new information and communication technologies (ICT)

We will compare the EU results with that of the USA and Japan

[ 5 ]

1. Labour productivity from

a long run perspective

[ 6 ]

Labor productivity from a long run perspective

Labour productivity can grow following different patterns:

• The USA followed a virtuous path: strong GVA growth together with employment creation and productivity growth.

• The EU-25 has also followed a positive path, less brilliant however, in terms of GVA and productivity growth.

• The New Member States had a strong GVA and productivity performance but hardly any employment creation.

• Japan also showed a positive rate of productivity growth but originated in employment destruction.

GVA, hours worked and labour productivity. Annual rate of growth. 1995-2009 (percentage)

-2

-1

0

1

2

3

4

1,85 1,71

3,15

2,44

0,700,48 0,57

0,050,51

-1,09

1,371,14

3,10

1,93 1,80

EU-10 USA Japan

GVA Produc-tivity

Hours worked

EU-25

GVA Produc-tivity

Hours worked

GVA Produc-tivity

Hours worked

GVA Produc-tivity

Hours worked

GVA Produc-tivity

Hours worked

EU-15

Source: TCB (2010) and EU KLEMS (2009).

[ 7 ]

Labor productivity from a long run perspective

• The EU-25 is made up of a heterogeneous array of countries

• The New Member States (EU-10) are the ones that have experienced the highest rate of productivity growth.

• In the EU-15 Ireland had the highest rate and Italy the lowest.

Labour productivity. Annual rate of growth. EU-25. 1995-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-15

Irel

and

Gre

ece

Swed

en

Finl

and

Uni

ted

Kin

gdom

Fran

ce

Port

ugal

Ger

man

y

Aus

tria

Net

herlan

ds

Spai

n

Bel

gium

Den

mar

k

Luxe

mbu

rgo

Ital

y

Esto

nia

Latv

ia

Lith

uani

a

Slov

akia

Pola

nd

Eslo

veni

a

Hun

gary

Cze

ch R

epub

lic

Cyp

rus

Mal

ta 0

1

2

3

4

5

6

7

3,03

2,101,80 1,74

1,54 1,43 1,37 1,30 1,281,09

0,84 0,750,30 0,24 0,10

6,34

4,944,64

3,85 3,783,43

3,01

2,46

1,70 1,62

EU-10

[ 8 ]

Labor productivity from a long run perspective

• In the Eurozone-12 unit labor cost had a positive sign which originated in wages growing at higher rates than productivity.

• In the USA unit labor cost growth rates were even higher despite its strong productivity growth, while Japan experienced an improvement in its competitiveness thanks to the slow rate of wages growth.

Unit labour cost. Annual rate of growth, 1995-2009 (percentage)

¹ 1995-2008 for this country.Source: ECB (2010), EU KLEMS (2009) and Fundación BBVA-Ivie.

Eurozone-12 USA Japan¹-2

-1

0

1

2

3

4

5

0,69

1,74

-1,44

1,73

3,67

0,47

1,04

1,93 1,91

Unit labour cost Wages Productivity

[ 9 ]

2. The impact of the crisis

[ 10 ]

The impact of the crisis

• The first 3 years of the crisis hit Japan harder than the EU or the USA

• The contraction in terms of GVA was more intense in the EU-15 than in the USA, while the New Member states maintained a positive growth rate

GVA. Annual rate of growth. 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-25 EU-15 EU-10 USA J apan-4

-3

-2

-1

0

1

2

3

4

5

2,44 2,31

3,623,02

1,34

-1,65 -1,87

0,34

-1,05

-3,13

1995-2007 2007-2009

[ 11 ]

The impact of the crisis

• Employment destruction has been very severe in Japan and the USA

• The EU was more in favor of labor hoarding (not in Spain!) with only minor adjustments in the new member states aggregate.

Labour (hours worked). Annual rate of growth. 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-25 EU-15 EU-10 USA J apan-4

-3

-2

-1

0

1

2

3

4

5

0,76 0,90

0,10

1,10

-0,72-1,21 -1,41

-0,22

-3,00-3,35

1995-2007 2007-2009

[ 12 ]

The impact of the crisis

• The USA maintained its rate of productivity growth thanks to the intense reaction of its labor market, while in the EU-15 it had a negative growth rate as a consequence of labor maintenance.

• In Japan productivity slowed down in spite of its strong labor contraction

Labour productivity. Annual rate of growth, 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

EU-25 EU-15 EU-10 USA Japan-1

0

1

2

3

4

5

1,671,41

3,52

1,93 2,06

-0,43 -0,46

0,57

1,95

0,23

1995-2007 2007-2009

[ 13 ]

Irel

and

Swed

en

Gre

ece

Finl

and

Uni

ted

Kin

gdom

Port

ugal

Ger

man

y

Aus

tria

Fran

ce

Net

herlan

ds

Bel

gium

Luxe

mbo

urg

Den

mar

k

Spai

n

Ital

y

-5

-4

-3

-2

-1

0

1

2

3

4

5

3,56

2,35 2,30 2,281,87 1,75 1,72 1,62 1,62 1,51

1,11 0,990,63 0,54 0,42

-0,15

-1,48

0,92

-1,53

-0,45-0,92

-1,25-0,74

0,34

-1,47 -1,43

-4,29

-1,67

2,63

-1,85

1995-2007 2007-2009

The impact of the crisis

• All the EU-15 countries, with the only exception of Spain, have experienced a slowdown in labor productivity. In Spain its acceleration is due to strong employment destruction.

Labour productivity. Annual rate of growth. EU-15. 1995-2007 and 2007-2009 (percentage)

Source: TCB (2010) and EU KLEMS (2009).

[ 14 ]

The impact of the crisis

• During the first 3 years of the crisis, unit labor cost decelerated in the USA (improving its competitiveness), while it accelerated sharply in Japan and even more in the Eurozone.

Unit labour cost. Annual rate of growth. 1995-2007 and 2007-2009 (percentage)

¹ 2007-2008 for this countrySource: ECB (2010), EU KLEMS (2009) and Eurostat (2010)

Eurozone-12 USA J apan¹-3

-2

-1

0

1

2

3

4

5

0,22

2,10

-1,78

3,50

-0,40

2,60

1995-2007 2007-2009

[ 15 ]

The impact of the crisis

• During the crisis the wages of employed workers rose in all countries.

• In the Eurozone wages increased while productivity decreased, pushing up unit labor cost and thus reducing competitiveness.

• In the USA productivity growth was higher than wages growth, thus unit labor cost decreased.

Unit labour cost. Annual rate of growth. 2007-2009 (percentage)

¹ 2007-2008 for this countrySource: ECB (2010), EU KLEMS (2009) and Eurostat (2010)

Eurozone-12 USA J apan¹-1

0

1

2

3

43,50

-0,40

2,60

3,09

1,55

2,73

-0,41

1,95

0,13

unit labour cost wages productivity

[ 16 ]

3. Aggregate productivity from

the industries perspective

[ 17 ]

Aggregate productivity from the industries perspective

• Manufacturing has contributed positively to labor productivity growth, especially in the EU-10.

• The main difference between EU-15 and USA labor productivity growth is not to be found in Manufacturing but in the Services industries.

• The contribution of the Construction industry was either nil or negative in all groups of countries.

Industries contribution to labour productivity growth. Market Economy. 1995-2007 (percentage)

¹ 1995-2006 for these areas or countriesSource: EU KLEMS (2009).

Agriculture and fishing

Energy

Manufacturing

Construction

Transport and storage and communication

Financial intermediation and business activities

Social and personal services

[ 18 ]

Aggregate productivity from the industries perspective

• The slowdown of productivity in the EU-15 in the 1995-2007 period affected all sectors, being Construction the only one with a negative sign.

• The growth rate of Manufacturing was higher than in Market Services.

• The highest growth rate was shown by the Energy sector, followed by Manufacturing and Agriculture and Fishing.

Labour productivity. Annual rate of growth. EU-15. Market Economy. 1970-1995 and 1995-2007 (percentage)

Source: EU KLEMS (2009) .

Market Economy Agriculture and fishing

Energy Manufacturing Construction Market Services-4

-3

-2

-1

0

1

2

3

4

5

6

2,84

5,294,80

3,48

1,431,911,76

2,71 2,96 2,81

-0,07

1,57

1970-1995 1995-2007

[ 19 ]

4. Sources of productivity growth:

the relevance of new technologies (ICT)

[ 20 ]

Sources of productivity growth…

The higher labor productivity growth in the USA as compared with EU-15ex had a double origin:

•a higher rate of ICT capital deepening and

•a higher rate of growth of technical progress (MFP).

Growth accounting.Labour productivity. Market Economy. 1995-2007(percentage)

¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom.² 1995-2006 for this country.Source: EU KLEMS (2009) .

Labour composition

ICT capital deepening per hour worked

Non ICT capital deepening per hour worked

TFP

[ 21 ]

Sources of productivity growth…

The countries belonging to the EU-15 that have experienced higher rates of productivity growth are also the ones showing:

•a higher rate of ICT capital deepening and/or

•a higher rate of growth of technical progress (MFP).

Growth accounting.Labour productivity. Market Economy. 1995-2007(percentage)

¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom.² 1995-2006 for this country.Source: EU KLEMS (2009) .

Labour composition

ICT capital deepening per hour worked

Non ICT capital deepening per hour worked

TFP

Irela

nd

Fin

an

d

Sw

ed

en

US

A

Au

stri

a

Fran

ce

Belg

ium

Germ

an

y

Den

mark

Sp

ain

Italy

0

1

2

3

4

5

-1

Neth

erl

an

ds

Un

ited

Kin

gd

om

[ 22 ]

Sources of productivity growth…

• In the EU-15ex, Agriculture, Transport and Storage and Communication, and Manufacturing where the industries showing the highest contribution of MFP.

• On the contrary, the contribution of MFP was negative in Construction, Financial Intermediation and Business Activities, and Social and Personal Services.

Growth accounting.Labour productivity. EU-15ex. Market Economy. 1995-2007(percentage)

¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom.Source: EU KLEMS (2009) .

Labour composition

ICT capital deepening per hour worked

Non ICT capital deepening per hour worked

TFP

0

1

2

3

4

-1Market

EconomyAgriculture and fishing

Energy Manufacturing Construction Transport and storage and

communication

Financial intermediation and business

activities

Social and personal services

[ 23 ]

Sources of productivity growth…

• This is an important difference with respect to the USA where all the Services Sectors, including Financial Intermediation and Business Activities as well as Social and Personal Services experienced positive MFP contributions.

Growth accounting. Labour productivity. USA. Market Economy. 1995-2007(percentage)

Source: EU KLEMS (2009) .

Labour composition

ICT capital deepening per hour worked

Non ICT capital deepening per hour worked

TFP 0

2

4

6

-2

-4Market

EconomyAgriculture and fishing

Energy Manufacturing Construction Transport and storage and

communication

Financial intermediation and business

activities

Social and personal services

[ 24 ]

Sources of productivity growth…

Industry classification according to ICT assets

ICT producers ICT non intensive users

Electrical and optical equipment Agriculture, hunting, forestry and fishing

Post and telecommunications Food products, beverages and tobacco

ICT intensive users Textiles, textile products, leather and footwear

Mining and quarrying Wood and products of wood and cork

Pulp, paper, paper products, printing and publishing Rubber and plastics products

Coke, refined petroleum products and nuclear fuel Other non-metallic mineral products

Chemicals and chemical products Basic metals and fabricated metal products

Machinery, nec Construction

Transport equipment Sale, maintenance and repair of motor veh.

Manufacturing nec; recycling Retail trade

Electricity, gas and water supply Hotels and restaurants

Wholesale trade Private households with employed persons

Transport and storage

Financial intermediation

Business activities

Other community, social and personal services

[ 25 ]

Sources of productivity growth…

• The share of ICT producers industries is very small

• In the USA the share of the ICT related sectors (producers and intensive users) have a higher weight than in the other grouping of countries.

Share of each grouping in GVA. Market Economy. 1995 and 2007(percentage)

Source: EU KLEMS (2009) .

0

20

40

60

80

100

ICT producers ICT Intensive users ICT non intensive users

EU-25 EU-15 EU-10 USA Japan1995 2007 1995 2007 1995 2006 1995 2007 1995 2006

[ 26 ]

Sources of productivity growth…

• However, its contribution to productivity growth is much higher than its share in the aggregate.

• Especially in developed economies such as Japan and the USA

Contribution of each sectoral grouping to labour productivity growth. Market Economy, 1995-2007 (percentage)

¹ 1995-2006 for these areas or countries.Source: EU KLEMS (2009) .

ICT producers ICT Intensive users ICT non intensive users

EU-25 EU-15 EU-10¹ USA Japan¹

0

20

40

60

80

100

120

[ 27 ]

Sources of productivity growth…

• The higher productivity growth rate in the ICT producing industries has its origin in its strong MFP growth.

• In the USA, the efficiency improvements have spilled over the ICT intensive sectors, while in the EU-15ex and in Japan the sectors other than ICT producers have benefited only slightly.

Growth accounting. Labour productivity. Market Economy, 1995-2007 (percentage)

A: ICT producers; B: ICT intensive users; C: ICT non intensive users.¹ The EU-15ex consist of Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Spain and the United Kingdom² 1995-2006 for this country.Source: EU KLEMS (2009) .

Labour composition

ICT capital deepening per hour worked

Non ICT capital deepening per hour worked

TFP A B C A B C A B C

0

2

4

6

8

10

-2

UE-15ex

USA Japan¹

[ 28 ]

Conclusions

The set of 25 countries analyzed show very different patterns, as well as strength, of growth.

During the expansion years the USA showed a “virtuous” profile, combining GVA and productivity growth together with employment creation.

The EU-15 had a much modest profile, while the EU-10 benefited from both its initial laggard position and its integration in the EU.

The consequences of the economic crisis

The recent crisis starting in 2007 hit the geographical areas with different intensity. Japan was the country experiencing the highest GVA contraction, followed by the EU-15.

Labor markets also responded different. The USA adjusted sharply to the change of the cycle, while the EU opted for hoarding labor.

As a consequence, the USA maintained its previous productivity growth rate, while in the EU-15 it became negative.

[ 29 ]

Conclusions

Spain was the only EU-15 country that experienced a positive labor productivity acceleration in 2007-2009 originating in its strong employment destruction.

Wages of employed people kept growing during the crisis, pushing up the unit labor cost in the Eurozone and Japan but not in the USA. As a consequence, the USA has gained competitiveness during those years.

The importance of the industry's disaggregation

Manufacturing has been an important source of productivity growth in all countries, especially in the New Member States

However, what makes the difference between the USA and EU are not the Manufacturing industries but the Services Sectors.

Growth in all countries has been driven by ICT capital deepening and MFP growth.

[ 30 ]

Conclusions

In the EU-15 and the USA the MFP growth was especially intense in Agriculture, Manufacturing and Transport and Communication.

However, while in the USA all the Services Sectors showed a positive contribution of MFP in the EU it was strongly negative.

ICT and productivity growth

ICT producing industries have a small share in the aggregate but its contribution to productivity growth is very relevant, especially in the most developed countries.

ICT producing industries have experienced a strong MFP growth in the EU-15ex, USA and Japan.

However, there is an important difference. While in the USA its positive effects spilled over the other sectors of the economy (especially the intensive users), in the UE-15 its positive effects restricted to only the ICT producers.

[ 31 ]

Productivity in Europe. From the expansion to the crisis

Matilde Mas

University of Valencia and Ivie

 World KLEMS Conference. Break Out Session: Europe

Harvard, August 20, 2010