Understanding the Post-Understanding the Post-1995 Productivity 1995 Productivity
Turnaround Turnaround between Europe and the between Europe and the
USUSRobert J. GordonRobert J. Gordon
Northwestern University, NBER, CEPRNorthwestern University, NBER, CEPR1414thth Dubrovnik Economic Conference Dubrovnik Economic ConferenceSponsored by Croatian National BankSponsored by Croatian National Bank
Dubrovnik, Croatia, June 26, 2008Dubrovnik, Croatia, June 26, 2008
What is Europe?What is Europe?
Throughout “Europe” refers to the Throughout “Europe” refers to the EU-15, not the EU-25EU-15, not the EU-25
Initially the presentation compares Initially the presentation compares EU-15 as a whole to the U. S.EU-15 as a whole to the U. S.
The second session divides up the EU-The second session divides up the EU-15 into country groups divided by 15 into country groups divided by geographygeography
Time periods: Initial reference to Time periods: Initial reference to post-1970, most of presentation post-1970, most of presentation compares 1980-95 with 1995-2005compares 1980-95 with 1995-2005
Outline of the TalkOutline of the Talk Focus on post-1995 EU Turnaround vs. the USFocus on post-1995 EU Turnaround vs. the US
Productivity growth has slowed downProductivity growth has slowed down Employment per capita growth has speeded upEmployment per capita growth has speeded up
In which Industries has EU Productivity In which Industries has EU Productivity Faltered, comparing country groups and EU Faltered, comparing country groups and EU vs. US?vs. US?
Is there a Tradeoff between Employment and Is there a Tradeoff between Employment and Productivity?Productivity? Channels from policy and institutions to E/NChannels from policy and institutions to E/N Cultural changes in female LFPRCultural changes in female LFPR Contribution of employment turnaround to Contribution of employment turnaround to
productivity turnaroundproductivity turnaround Good news vs. bad news conclusionGood news vs. bad news conclusion
Session #2:Session #2:Is There an Employment-Is There an Employment-
Productivity Tradeoff?Productivity Tradeoff? Two marked events in Europe after 1995Two marked events in Europe after 1995
Slowdown in productivity growth to well below the Slowdown in productivity growth to well below the U. S. rateU. S. rate
Increase in growth of employment per capita at Increase in growth of employment per capita at well above the U. S. ratewell above the U. S. rate
Are these connected causally or just a Are these connected causally or just a coincidence?coincidence? If connected, which way does the causation go?If connected, which way does the causation go?
Co-authored with Ian Dew-BeckerCo-authored with Ian Dew-Becker Look him up on googleLook him up on google
Ian in SF, you can’t see Ian in SF, you can’t see “MV=PY”“MV=PY”
The US Accelerates,The US Accelerates,Europe DeceleratesEurope Decelerates
From 1950 to 1995 EU productivity growth was From 1950 to 1995 EU productivity growth was faster than in the USfaster than in the US
But in the past decade since 1995 we have But in the past decade since 1995 we have witnessedwitnessed An explosion in US productivity growthAn explosion in US productivity growth A slowdown in EU productivity growth roughly equal A slowdown in EU productivity growth roughly equal
in sizein size An explosion in research on the US takeoff and but An explosion in research on the US takeoff and but
much less research on Europe’s slowdownmuch less research on Europe’s slowdown The magnitude of the shift (average EKS&GK The magnitude of the shift (average EKS&GK
Groningen)Groningen) EU/US level of labor productivity (ALP)EU/US level of labor productivity (ALP) 1979 1979 1995 1995 20042004
80%80% 97%97% 89%89%
Point of Departure: Post-95 Point of Departure: Post-95
Turnaround Plus New Turnaround Plus New HeterogeneityHeterogeneity Notational identity: Y/N ≡ Y/H * H/NNotational identity: Y/N ≡ Y/H * H/N
This paper begins with two simple observations:This paper begins with two simple observations:1. While European productivity (Y/H) has fallen back 1. While European productivity (Y/H) has fallen back
since 1995 relative to the US, output per capita (Y/N) since 1995 relative to the US, output per capita (Y/N) has not fared nearly as badlyhas not fared nearly as badly
►►Y/H growth rate US - EU: 0.9%Y/H growth rate US - EU: 0.9%►►Y/N growth rate US - EU: 0.2%Y/N growth rate US - EU: 0.2%
2. A second theme: after 1995, we see divergence across 2. A second theme: after 1995, we see divergence across the EU-15 in Y/H growththe EU-15 in Y/H growth
► ► St. Dev. 1970-1995: 0.62St. Dev. 1970-1995: 0.62► ► St. Dev. 1995-2005: 1.01St. Dev. 1995-2005: 1.01
3. Even greater increase in standard deviation of H/N 3. Even greater increase in standard deviation of H/N and Y/N growthand Y/N growth
The Key Identity SuggestsThe Key Identity Suggeststhe Tradeoffthe Tradeoff
Returning to our identity:Returning to our identity:Y/N = Y/H * H/NY/N = Y/H * H/N
The The level level of EU relative to US Y/H was much higher of EU relative to US Y/H was much higher than Y/N in both 1995 and 2004.than Y/N in both 1995 and 2004.Thus the paradox of high European Y/H and low Y/N Thus the paradox of high European Y/H and low Y/N must be resolved by lower H/Nmust be resolved by lower H/N
Also, Y/H and H/N are jointly determinedAlso, Y/H and H/N are jointly determined The task of this paper is going to be figure out The task of this paper is going to be figure out
which direction the causation runswhich direction the causation runs We will argue that a good deal of the decline in We will argue that a good deal of the decline in
ALP growth is due to exogenous employment ALP growth is due to exogenous employment shocksshocks
Also we will highlight the reversal of almost Also we will highlight the reversal of almost everything at 1995, comparing 1970-95 vs. 1995-everything at 1995, comparing 1970-95 vs. 1995-20052005
Bringing Together the Bringing Together the Disparate LiteraturesDisparate Literatures
Literature #1, why did Europe’s hours per capita Literature #1, why did Europe’s hours per capita (hereafter H/N) decline before 1995? Prescott, (hereafter H/N) decline before 1995? Prescott, Rogerson, Sargent-Lundqvist, Alesina, BlanchardRogerson, Sargent-Lundqvist, Alesina, Blanchard High taxes, regulations, unions, high minimum wagesHigh taxes, regulations, unions, high minimum wages Europe made labor expensiveEurope made labor expensive Movement up Labor Demand curve => low Movement up Labor Demand curve => low
employment + high ALPemployment + high ALP Literature #1 has missed the turnaroundLiterature #1 has missed the turnaround
Since 1995 there has been a decline in tax rates and Since 1995 there has been a decline in tax rates and employment protection measures; unionization earlieremployment protection measures; unionization earlier
Big increase in hours per capita, turnaround in both Big increase in hours per capita, turnaround in both absolute terms and relative to the US Move back absolute terms and relative to the US Move back down Ldown LDD curve curve
The Employment-Productivity The Employment-Productivity TradeoffTradeoff
Take any CRS production Y = F(K,H)Take any CRS production Y = F(K,H) Intensive form Y/H=f(K/H)Intensive form Y/H=f(K/H)
As long as capital is fixed, an increase As long as capital is fixed, an increase in employment lowers labor in employment lowers labor productivityproductivity
We don’t know how fast capital We don’t know how fast capital adjusts; the tradeoff may be adjusts; the tradeoff may be quantitatively small quantitatively small
A major goal of this paper is to A major goal of this paper is to quantify the tradeoffquantify the tradeoff
Textbook Labor Textbook Labor EconomicsEconomics
-2
-1
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8 9 10 11
Labor Input
Re
al W
ag
e
Labor Demand Curve
High-Cost LaborSupply Curve
Low-Cost LaborSupply Curve
(W/P)0
(W/P)1
N0 N1
Downward shift in labor supply curve reduces real wage and productivity
A
B
Pre-1995: Moving Pre-1995: Moving NorthwestNorthwest
1970-95 EU climbs to the northwest1970-95 EU climbs to the northwest Hours per capita decline, average labor Hours per capita decline, average labor
productivity increasesproductivity increases In this sense much of Europe’s 1970-95 In this sense much of Europe’s 1970-95
productivity catchup was “artificial,” productivity catchup was “artificial,” propelled by policies making labor propelled by policies making labor expensiveexpensive No busboys, grocery baggers, valet parkersNo busboys, grocery baggers, valet parkers Product market regulations kept stores shut Product market regulations kept stores shut
tight many hours of the day/nighttight many hours of the day/night All this reduced Europe’s employment share All this reduced Europe’s employment share
in retail/services in retail/services
Post-1995: Moving Post-1995: Moving SoutheastSoutheast
1995-2004 EU slides southeast1995-2004 EU slides southeast Hours per capita start increasing while they decline in Hours per capita start increasing while they decline in
the USthe US Effects are magnified by slow reaction of capital.Effects are magnified by slow reaction of capital.
Depending on the model, expanded employment should Depending on the model, expanded employment should eventually stimulate growth of capital, shifting the labor eventually stimulate growth of capital, shifting the labor demand curve up and eliminating much of the productivity demand curve up and eliminating much of the productivity decline decline
Literature #1 misses the turnaround in hoursLiterature #1 misses the turnaround in hours Since 1995 decline in tax rates and employment Since 1995 decline in tax rates and employment
protection measuresprotection measures We are unaware of much macro-level research on the We are unaware of much macro-level research on the
turnaround in hoursturnaround in hours
Literature #2: The EU-US Literature #2: The EU-US ALP gapALP gap
Central Focus of Lit #2 on post-1995 Central Focus of Lit #2 on post-1995 turnaround in US Productivity Growthturnaround in US Productivity Growth Jorgenson, Ho and Stiroh (2006): ’95-’00 due to Jorgenson, Ho and Stiroh (2006): ’95-’00 due to
ICT, ’00-’05 something elseICT, ’00-’05 something else Retail is often noted: contrast between big boxes Retail is often noted: contrast between big boxes
at highway intersections in US vs. inner city at highway intersections in US vs. inner city pedestrian districts in EUpedestrian districts in EU
Van Ark, Inklaar and McGuckin (2003)Van Ark, Inklaar and McGuckin (2003) Foster, Haltiwanger and Krizan (2002) on new Foster, Haltiwanger and Krizan (2002) on new
establishmentsestablishments Baily and Kirkegaard (2004) on product market Baily and Kirkegaard (2004) on product market
regulationsregulations Need to free land use restrictionsNeed to free land use restrictions Restrictions on shop-closing hoursRestrictions on shop-closing hours
Fully 85% of EU productivity Fully 85% of EU productivity slowdown has its counterpart in a slowdown has its counterpart in a speed-up of EU H/Nspeed-up of EU H/N Europe paid for lower ALP mainly with Europe paid for lower ALP mainly with
higher hours rather than less consumptionhigher hours rather than less consumption
This runs counter to the Blanchard This runs counter to the Blanchard story about preferences for leisurestory about preferences for leisure Now we hear that they’re not lazy, just Now we hear that they’re not lazy, just
unproductiveunproductive Huge literature on different structural Huge literature on different structural
reasons for EU sclerosisreasons for EU sclerosis
Literature #3: relationship Literature #3: relationship between Y/H and H/Nbetween Y/H and H/N
There is a long line of research examining the There is a long line of research examining the relationship between hours and productivityrelationship between hours and productivity
Increases in H/N drive down Y/HIncreases in H/N drive down Y/H This makes sense in a single factor model or with any This makes sense in a single factor model or with any
slow adjustment of capitalslow adjustment of capital Measuring the speed of adjustment of investment is Measuring the speed of adjustment of investment is
difficult difficult This tradeoff idea was first proposed as an explanation This tradeoff idea was first proposed as an explanation
of slow productivity growth in the US during 1973-95of slow productivity growth in the US during 1973-95 View today’s talk as a report on research in View today’s talk as a report on research in
progress, not the final polished wordprogress, not the final polished word You’ll find the complete text as a CEPR DP February You’ll find the complete text as a CEPR DP February
20082008
Our First Look at the Our First Look at the DataData
EU-15 vs. USEU-15 vs. US Hodrick-Prescott filtered, not actual Hodrick-Prescott filtered, not actual
growth ratesgrowth rates Expanding the identityExpanding the identity
Y/N ≡ Y/H * H/NY/N ≡ Y/H * H/N
H/N ≡ H/E * E/NH/N ≡ H/E * E/N
Combine:Combine:
Y/N ≡ Y/H * H/E * E/NY/N ≡ Y/H * H/E * E/N
Trends in Labor Trends in Labor Productivity Growth, 1970-Productivity Growth, 1970-
20062006
0
1
2
3
4
5
6
1970 1975 1980 1985 1990 1995 2000 2005
Per
cent EU-15 Y/H
US Y/H
What to Notice About LPWhat to Notice About LP The EU Slowdown is steady and continuousThe EU Slowdown is steady and continuous The US post-1995 revival is looking The US post-1995 revival is looking
increasingly temporaryincreasingly temporary We created the US trend from quarterly data We created the US trend from quarterly data
through 2007, not just the annual data through through 2007, not just the annual data through 2004 used by EU-KLEMS2004 used by EU-KLEMS
The fact that the US trend is turning around The fact that the US trend is turning around is important for interpretations of what is important for interpretations of what caused the post-1995 US revivalcaused the post-1995 US revival
That’s a separate paper. Today we That’s a separate paper. Today we primarily look inside Europe and exclude primarily look inside Europe and exclude the US from the employment and the US from the employment and productivity regressionsproductivity regressions
U. S. Productivity Growth U. S. Productivity Growth TrendsTrends
Based on Data to 2007:Q4Based on Data to 2007:Q4
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
NFPB LP
TE LP
NFPB minus TE
Growth Trends in Y/N and Growth Trends in Y/N and H/N,H/N,
1970-20061970-2006
-3
-2
-1
0
1
2
3
4
1970 1975 1980 1985 1990 1995 2000 2005
Perc
ent
US Y/NEU-15 Y/N
US H/N
EU-15 H/N
Comments about H/N Comments about H/N and Y/Nand Y/N
Importance of expressing everything per capitaImportance of expressing everything per capita Average EU population growth 0.7 percent per year Average EU population growth 0.7 percent per year
slower than USslower than US EU Growth in H/N strongly negative pre-1995, EU Growth in H/N strongly negative pre-1995,
US strongly positiveUS strongly positive Falling level of H/N in Europe is what Prescott Falling level of H/N in Europe is what Prescott
and others have been trying to explainand others have been trying to explain Productivity and employment turnarounds cancel Productivity and employment turnarounds cancel
out. Growth in Y/N almost equal 1980-2005out. Growth in Y/N almost equal 1980-2005 EU 1.92 percent per year, US 1.97 percent per yearEU 1.92 percent per year, US 1.97 percent per year
But EU is at only 70-75 percent of US level and is But EU is at only 70-75 percent of US level and is not catching upnot catching up
Growth Trends in E/N,Growth Trends in E/N,1970-20061970-2006
-1
-0.5
0
0.5
1
1.5
2
1970 1975 1980 1985 1990 1995 2000 2005
Per
cent
EU-15 E/N
US E/N
Growth Trend Turnaround Growth Trend Turnaround in in
H/E is less Dramatic, 1970-H/E is less Dramatic, 1970-20062006
-2
-1.5
-1
-0.5
0
0.5
1
1970 1975 1980 1985 1990 1995 2000 2005
Per
cent
US H/E
EU-15 H/E
We Need to Look at We Need to Look at EverythingEverythingPer CapitaPer Capita
Population growth in EU 0.7 percent per Population growth in EU 0.7 percent per year slower than US over the past year slower than US over the past decadedecade
Output per capita in the EU doesn’t look Output per capita in the EU doesn’t look bad at allbad at all
Post-1995 hours turnaround is a Post-1995 hours turnaround is a counterpart to the Y/H turnaroundcounterpart to the Y/H turnaround
We will see that there is a similar pattern We will see that there is a similar pattern withinwithin the EU – a strong negative the EU – a strong negative correlation between the hours and ALP correlation between the hours and ALP turnaroundsturnarounds
Turnarounds in Hours and Turnarounds in Hours and OutputOutput
Turnarounds are 1995-2006 minus Turnarounds are 1995-2006 minus 1980-1995 growth1980-1995 growth
The relative turnarounds (EU minus The relative turnarounds (EU minus US) almost cancel each other out for US) almost cancel each other out for Y/NY/N
Y/H + H/N = Y/NY/H + H/N = Y/N -2.20 1.99 -0.21-2.20 1.99 -0.21 1980-2005 Y/N growth is identical1980-2005 Y/N growth is identical But the EU is not catching up from its But the EU is not catching up from its
levellevel ratio of 70 percent ratio of 70 percent
US vs EU E/NUS vs EU E/N
0.30
0.35
0.40
0.45
0.50
0.55
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Em
plo
ymen
t-P
op
ula
tio
n R
atio
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
EU
-US
rat
io
US
EU-15
Ratio(Right hand axis)
Defining the Four Country Defining the Four Country Groups, Groups,
Pop Share and ALP Growth Pop Share and ALP Growth 1995-20061995-2006
Nordic: Denmark, Finland, SwedenNordic: Denmark, Finland, Sweden Pop Share: 5Pop Share: 5 ALP: 2.09ALP: 2.09
Anglo-Saxon: UK and IrelandAnglo-Saxon: UK and Ireland Pop Share: 17Pop Share: 17 ALP: 2.18ALP: 2.18
Continental: Benelux, Austria, France, Continental: Benelux, Austria, France, Germany, PortugalGermany, Portugal Pop Share: 49Pop Share: 49 ALP: 1.75 ALP: 1.75
Mediterranean: Greece, Italy, SpainMediterranean: Greece, Italy, Spain Pop Share: 29Pop Share: 29 ALP: 0.24ALP: 0.24
A closer look at the A closer look at the Mediterranean CountriesMediterranean Countries
Mainly driven by Spain and ItalyMainly driven by Spain and Italy
Spain:Spain:
►►-4.43 turnaround in Y/H-4.43 turnaround in Y/H
►►+5.04+5.04 turnaround in H/N turnaround in H/N
Italy:Italy:
►►-2.28-2.28 turnaround in Y/Hturnaround in Y/H
►►+1.16 turnaround in H/N+1.16 turnaround in H/N Had we ranked the countries according to Had we ranked the countries according to
their post-1995 annual growth rates of their post-1995 annual growth rates of output per capita, Spain would be a Tiger, output per capita, Spain would be a Tiger, behind only Greece and Ireland behind only Greece and Ireland
Making Sense of Cross-EUMaking Sense of Cross-EUHeterogeneity in Table 1Heterogeneity in Table 1
Notice the homogeneity pre-1995 and Notice the homogeneity pre-1995 and heterogeneity post-’95. Stdev LP 0.63 to 1.0. heterogeneity post-’95. Stdev LP 0.63 to 1.0. Stdev H/N 0.46 to 1.02 Stdev H/N 0.46 to 1.02
The only two countries with a noticeable The only two countries with a noticeable acceleration in LP are Sweden, Greece and acceleration in LP are Sweden, Greece and IrelandIreland
Declines < 1% for Finland, UK, Austria, Lux, Declines < 1% for Finland, UK, Austria, Lux, NLNL
Sharp declines for Belgium, Denmark, France, Sharp declines for Belgium, Denmark, France, Germany, Portugal, and especially Italy and Germany, Portugal, and especially Italy and SpainSpain
We emphasize the experience of the We emphasize the experience of the Mediterranean countries and their contrast Mediterranean countries and their contrast with Nordic & Anglo-Saxonwith Nordic & Anglo-Saxon
Research StrategyResearch Strategy Divergence across the EU has increasedDivergence across the EU has increased The Y/H slowdown in the Med countries is The Y/H slowdown in the Med countries is
balanced by healthy H/N growth, which balanced by healthy H/N growth, which mainly consists of E/N growthmainly consists of E/N growth
We will estimate regressions that allow us to We will estimate regressions that allow us to determine how much of the turnaround in determine how much of the turnaround in E/N growth can be attributed to E/N growth can be attributed to policy/institutional variablespolicy/institutional variables
Then how much of the productivity slowdown Then how much of the productivity slowdown can be explained by the E/N growth and by can be explained by the E/N growth and by policy variables, separately and together?policy variables, separately and together?
Employment RegressionsEmployment Regressions Cover 1980-2003 EU-15, N=320, population Cover 1980-2003 EU-15, N=320, population
weightedweighted All variables are rates of changes, not levelsAll variables are rates of changes, not levels Explanatory Variables:Explanatory Variables:
Output GapOutput Gap Product Market Regulation (PMR)Product Market Regulation (PMR) Union Density Union Density Employment Protection Legislation (EPL)Employment Protection Legislation (EPL) Average Replacement Rate (ARR)Average Replacement Rate (ARR) Corporatism DummyCorporatism Dummy Tax wedgeTax wedge Dummies for time shift and for each countryDummies for time shift and for each country
Previous literature – a subset of these variables, Previous literature – a subset of these variables, levels vs. growth rateslevels vs. growth rates
OECD Product Market OECD Product Market Regulation IndexRegulation Index
0
1
2
3
4
5
6
7
1980 1985 1990 1995 2000
Anglo-Saxon
Continental
Nordic
Mediterranean
Employment Protection Employment Protection LegislationLegislation
0
0.5
1
1.5
2
2.5
3
3.5
4
1980 1985 1990 1995 2000
Anglo-Saxon
Continental
Nordic
Mediterranean
Unemployment BenefitsUnemployment Benefits
0
5
10
15
20
25
30
35
40
45
50
1980 1985 1990 1995 2000
Anglo-Saxon
Continental
Nordic
Mediterranean
Taxes in EuropeTaxes in Europe
25
27
29
31
33
35
37
39
41
1980 1985 1990 1995 2000
10
15
20
25
30
35
40
45
Anglo-Saxon
(right hand axis)
Continental
Nordic
Mediterranean
Employment Regression Employment Regression ResultsResultsOutput Gap 0.52 ***
(0.05)
Product Market -0.44Regulation (0.55)
Union Density -0.46 ***(0.10)
Employment 0.86Protection Legislation (0.79)
Unemployment -0.18***Benefits (ARR) (0.05)
High Corpratism Dummy -2.04**(0.98)
Tax Wedge -0.28***(0.07)
Post-1995 Dummy 0.94 ***(0.15)
R2 0.52RMSE 1.18N 320
Our tax wedge coefficient is Our tax wedge coefficient is consistent with what others consistent with what others have found, -0.3 to -0.45have found, -0.3 to -0.45
EPL and PMR seem to have EPL and PMR seem to have no significant effectsno significant effects
Everything else has the Everything else has the correct sign – regulations correct sign – regulations and taxes reduce and taxes reduce employmentemployment
The post-1995 dummy is The post-1995 dummy is substantialsubstantial Growth in the Growth in the
employment employment raterate rose by rose by 1% after ’95 for 1% after ’95 for unexplained reasonsunexplained reasons
Employment Regression Employment Regression ResultsResults
RobustnessRobustness
Results are the same if population Results are the same if population weights are dropped or year dummies weights are dropped or year dummies are addedare added
Dropping the Mediterranean Dropping the Mediterranean countries or Spain does not affect the countries or Spain does not affect the size of the post-1995 dummysize of the post-1995 dummy
Interpretation of Time Shift Interpretation of Time Shift DummyDummy
In mid-1980s there was an enormous In mid-1980s there was an enormous disparity in E/N for females across European disparity in E/N for females across European countries, ranging from 30 percent in Spain countries, ranging from 30 percent in Spain to 70 percent in Scandinaviato 70 percent in Scandinavia
Gradually, but especially after 1995, there Gradually, but especially after 1995, there has been entry of females into the labor has been entry of females into the labor force, esp. in Southern Europeforce, esp. in Southern Europe
A separate literature documents these facts A separate literature documents these facts and links them to changes in cultural and links them to changes in cultural attitudes and social norms.attitudes and social norms.
Post-1995 immigration has also contributed Post-1995 immigration has also contributed to the post-1995 time-shift dummyto the post-1995 time-shift dummy
Employment vs. productivity effectsEmployment vs. productivity effects
Employment Regression Employment Regression ResultsResults
With all of our dummies, we need to With all of our dummies, we need to determine the effects of the determine the effects of the policy/institutional variables holding policy/institutional variables holding constant the country and time dummies. constant the country and time dummies.
To calculate effects of the policy/institutional To calculate effects of the policy/institutional variables, we run counter-factual variables, we run counter-factual simulations. We plot predicted values with simulations. We plot predicted values with policy fixed at its 1995 levelpolicy fixed at its 1995 level
The output gap and dummies are still The output gap and dummies are still allowed to varyallowed to vary
Note: These plots convert growth rates to Note: These plots convert growth rates to levelslevels
35
37
39
41
43
45
47
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Fixed Policy
Predicted
No Post-1995 Dummy
Female EmploymentFemale Employment
Effect of the post-95 dummy (2.38%)
Effect of the Policy variables (1.75%)
50
55
60
65
70
75
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Fixed Policy
Predicted
No Post-1995 Dummy
Male EmploymentMale Employment
Effect of the post-95 dummy (6.32%)
Effect of the Policy variables (1.47%)
Productivity RegressionsProductivity Regressions Suppose we are in a Cobb-Douglas world. What Suppose we are in a Cobb-Douglas world. What
coefficient would we expect on employment? coefficient would we expect on employment? (Here we neglect the distinction between H and E (Here we neglect the distinction between H and E and use lower case letters for logs) and use lower case letters for logs)
y = 0.33*k + 0.67*hy = 0.33*k + 0.67*h
(y-h) = 0.33*(k/h)(y-h) = 0.33*(k/h) If capital is fixed, the coefficient will be -0.33 and If capital is fixed, the coefficient will be -0.33 and
if capital adjusts, it would be smallerIf labor is not if capital adjusts, it would be smallerIf labor is not homogenous it could be largerhomogenous it could be larger The last people to enter the labor force are likely the The last people to enter the labor force are likely the
least skilled and experienced. This is especially true least skilled and experienced. This is especially true when unskilled immigration occurswhen unskilled immigration occurs
Productivity RegressionsProductivity Regressions Our aim is to regress changes in productivity Our aim is to regress changes in productivity
on changes in employment per capita and on on changes in employment per capita and on our policy/institutional variables.our policy/institutional variables.
This allows us to determine which variables This allows us to determine which variables affect productivity directly, and which others affect productivity directly, and which others only indirectly through their effects on only indirectly through their effects on employmentemployment
We can’t simply regress productivity on We can’t simply regress productivity on employmentemployment
A shock to productivity affects wages and A shock to productivity affects wages and hence employment. Alternatively, a hence employment. Alternatively, a technology shock that raises productivity may technology shock that raises productivity may lead to layoffs of workers who are no longer lead to layoffs of workers who are no longer neededneeded
Instrumental Variables in Instrumental Variables in the Productivity the Productivity
RegressionsRegressionsIdentification using Instrumental Identification using Instrumental
VariablesVariables We want variables that affect employment We want variables that affect employment
but not productivitybut not productivity The tax wedge is our best candidateThe tax wedge is our best candidate We also consider using the post-1995 We also consider using the post-1995
dummy and union densitydummy and union density PragmatismPragmatism This gives more power and passes identification This gives more power and passes identification
tests, but raises the question as to what caused tests, but raises the question as to what caused the post-1995 change as quantified by the dummythe post-1995 change as quantified by the dummy
Productivity RegressionsProductivity Regressions Coefficients on policy/inst Coefficients on policy/inst
variables on productivity are variables on productivity are expected to be positive, the expected to be positive, the opposite of the negative opposite of the negative coefficients in the coefficients in the employment regressionsemployment regressions
Tax wedge is the only Tax wedge is the only instrument in this versioninstrument in this version
Coefficient on employment is Coefficient on employment is twice what we would expecttwice what we would expect
EPL and ARR have EPL and ARR have independent positive effects independent positive effects on productivityon productivity
We can drive the SE on We can drive the SE on employment down to 0.10, but employment down to 0.10, but the result remains the samethe result remains the same
Not dependent on the Med Not dependent on the Med group of countriesgroup of countries
Employment Rate -0.64***(0.20)
Output Gap 0.68***(0.11)
Product Market 0.56Regulation (0.45)
Union Density 0.03(0.12)
Employment 1.66***Protection Legislation (0.65)
Unemployment 0.14***Benefits (ARR) (0.05)
High Corpratism Dummy -0.49(0.94)
Post-1995 Dummy -0.14(0.24)
R2 0.63RMSE 0.95N 320
88
90
92
94
96
98
100
102
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Predicted
Fixed Policy
Level of Labor Level of Labor ProductivityProductivity
Policy Effect– Lowered growth by .25% per year
– cumulates to 2.5% decline in the level
– 1/3 of the total shortfall
Effects of the Policy and Effects of the Policy and Institutional VariablesInstitutional Variables
Assuming hours per employee is Assuming hours per employee is stable, E/N + Y/H = Y/Nstable, E/N + Y/H = Y/N
Policy has effects on both Policy has effects on both employment and productivityemployment and productivity
We just add these effects upWe just add these effects up
Effects of Policy & Effects of Policy & InstitutionsInstitutions
Tax wedge and union density lower Y/NTax wedge and union density lower Y/N ARR and EPL have ARR and EPL have positivepositive effects effects
Driven by their direct effects on productivityDriven by their direct effects on productivity
Shock Size Employment Productivity Output Per CapitaProduct Market 0.9 -0.14 0.35 0.21Regulation (0.24) (0.25) (0.22)
Union Density 23.32 -7.93 5.07 -2.85(1.17) (1.23) (1.07)
Unemployment 11.31 -0.90 1.37 0.47Benefits (ARR) (0.34) (0.31) (0.25)
Employment 0.87 0.74 0.23 0.97Protection Legislation (0.36) (0.37) (0.31)
High Corpratism Dummy 1 -1.02 0.65 -0.37(0.48) (0.33) (0.21)
Tax Wedge 9.21 -2.67 1.71 -0.96(0.64) (0.53) (0.4)
Effects of Government Effects of Government PolicyPolicy
Why would ARR and EPL Why would ARR and EPL raiseraise productivity and output?productivity and output? Acemoglu and Shimer on reservation Acemoglu and Shimer on reservation
wages and matchingwages and matching Match quality may improveMatch quality may improve More incentive to create job-specific More incentive to create job-specific
human capitalhuman capital
The New Results in thisThe New Results in thisPaper at the Industry LevelPaper at the Industry Level
We aggregate productivity growth by We aggregate productivity growth by industry in a way that allows us to determine industry in a way that allows us to determine the relative role of productivity and sharesthe relative role of productivity and shares
The “productivity” effect is just the difference The “productivity” effect is just the difference in productivity growth in a given industryin productivity growth in a given industry
The “share” effect is the addition or The “share” effect is the addition or subtraction from growth as shares shift subtraction from growth as shares shift within industries.within industries. Example: Ireland shifts to high tech Example: Ireland shifts to high tech
manufacturing, this comes out as a “share” effect manufacturing, this comes out as a “share” effect within manufacturingwithin manufacturing
The industry analysis examines both EU vs. The industry analysis examines both EU vs. US and as well contrasts among the four EU US and as well contrasts among the four EU country groupscountry groups
Contributions, Productivity vs. Contributions, Productivity vs. Share Effects, in EU-US, 1995-Share Effects, in EU-US, 1995-
20032003
-0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2
Farms/mining
Const./utilities
Manufacturing
Retail/wholesale
Trans.
Finance
Serv.
Comm.
Real estate
ProdShare
Non-ICT share
Non-durables share
Non-ICT prodICT prod
Non-durables prod
ICT share
Manufacturing is nearly as importantas retail
But ICT is tinyOnly ~2% hours share
ALP growth multiplied by nominal sharesALP growth multiplied by nominal shares
-0.2 -0.1 0 0.1 0.2 0.3 0.4 0.5
Real Estate
Communications
Services
Finance
Transportation
Retail/Wholesale
Manufacturing
Construction Utilities
Farms/Mining
U.S.
E.U.
US acceleration is widespread, not just in retailand manufacturing.
EU weakness is also widespread
Cross-Industry Correlation Cross-Industry Correlation ofof
Y/H and E/N TurnaroundsY/H and E/N Turnarounds
-10
-5
0
5
10
15
-15 -10 -5 0 5 10 15
Y/H Turnaround (Percent)
E/N
Turn
arou
nd (P
erce
nt)
▲ = ICT or Communications
■ = Med. (non-ICT or Comm)
Table 12: Table 12: Regressions of LP Turnaround* on E/N Turnaround*
Countries
Exclude ICT and Comm.
Coefficient
T-Statistic N R2 RMSE
All No -0.45 -4.35 179 0.10 3.000
All Yes -0.54 -5.94 149 0.19 2.495
Mediterranean Only No -0.82 -4.19 36 0.34 2.920
Mediterranean Only Yes -0.83 -5.60 30 0.53 2.140
* Turnaround equals 1995-2004 average growth minus 1980-1995 average growth
Comparing Nordic with Comparing Nordic with EU-15EU-15
Nordic
Business Services
Retail/
Wholesale
ICT
Mfg.
Finance
Real Estate
Nondurable
Mfg
Non-ICT Durable
Mfg.Construction/
Utilities
Trans
Ag./Mining
Communication
GHI-0.05
-0.15
0.1
0.2
0.05 0.10
Comparing Anglo-Saxon Comparing Anglo-Saxon with EU-15with EU-15
Anglo-Saxon
-0.10
0.05
0.15
0.25
0.05
Business
Services
Retail/
Wholesale
ICT Mfg.
Finance
Real Estate
Nondurable Mfg.
Non-ICT Durable Mfg.
Construction/Utilities
Trans Ag./Mining
Communication
GHI
Comparing Continental Comparing Continental with EU-15with EU-15
Continental
Retail/
Wholesale
ICT Mfg.
Finance
Real Estate
Nondurable Mfg.
Non-ICT Durable
Mfg.
Construction/
Utilities
Trans
Ag./Mining
Communication
GHI
Business
Services
0.10
0.05
-0.05
-0.15
Comparing Med with EU-Comparing Med with EU-1515
Mediterranean
Business
Services
Retail/
Wholesale
ICT
Mfg.
Finance
Real Estate
Nondurable Mfg
Non-ICT Durable
Mfg.
Construction/
UtilitiesTrans.
Ag./Mining
Communication
GHI
-0.10 0.05
0.05
-0.15
0.15
-0.25
0.10
Comparing US with EU-Comparing US with EU-1515
EU TFP
US T
FP Business
Services
Retail/
Wholesale
ICT
Mfg.
Finance
45º line
Real Estate
Nondurable
Mfg
Non-ICT Durable
Mfg.
GHI
Construction/
Utilities
Trans.
Ag./Mining
Communication
0.05
0.35
0.25
0.05
-0.05
-0.05 0.10
Conclusions from Conclusions from Employment Employment
and Productivity Growth and Productivity Growth RegressionsRegressions Growing heterogeneity with EU-15 in employment and Growing heterogeneity with EU-15 in employment and
productivity growth after 1995.productivity growth after 1995. There is a strong negative correlation between growth in Y/H There is a strong negative correlation between growth in Y/H
and E/N evident in the data, emerging from our regressions, and E/N evident in the data, emerging from our regressions, and also in the cross-industry data displayed at the endand also in the cross-industry data displayed at the end
At least in short run, lower taxes and looser regulations raise At least in short run, lower taxes and looser regulations raise employment growth and reduce productivity growthemployment growth and reduce productivity growth
The novelty in our framework is to show that policy changes The novelty in our framework is to show that policy changes widely endorsed in Europe as desirable (Lisbon agenda) may widely endorsed in Europe as desirable (Lisbon agenda) may boost E/N at the cost of reducing Y/H, thus leaving boost E/N at the cost of reducing Y/H, thus leaving ambiguous effects on growth in output per capita (Y/N)ambiguous effects on growth in output per capita (Y/N)
A 1% increase in employment only raises output by 0.36% in A 1% increase in employment only raises output by 0.36% in the short-runthe short-run
Summary of effectsSummary of effects Unions reduce output per capitaUnions reduce output per capita EPL and unemployment benefits raise output per capitaEPL and unemployment benefits raise output per capita PMR and the tax wedge have roughly no effectsPMR and the tax wedge have roughly no effects
Further Conclusions from Further Conclusions from Cross-Industry ResultsCross-Industry Results
Differences across Europe are in part Differences across Europe are in part reflected in industries that are “national reflected in industries that are “national champions”. Compared to EU average, LP champions”. Compared to EU average, LP turnaround revealsturnaround reveals Nordic strong in ICT manufacturingNordic strong in ICT manufacturing Anglo-Saxon strong in finance and business Anglo-Saxon strong in finance and business
servicesservices Continental average as would be expectedContinental average as would be expected Mediterranean weak across the board, Mediterranean weak across the board,
consistent with a broad-based macro consistent with a broad-based macro explanation rather than an industry-specific explanation rather than an industry-specific explanationexplanation
Final QualificationFinal Qualification The E/N and Y/H regression analysis is static and The E/N and Y/H regression analysis is static and
does not trace further dynamic adjustmentdoes not trace further dynamic adjustment Negative effect of policy reforms on K/H should in many Negative effect of policy reforms on K/H should in many
models be followed by faster growth in Kmodels be followed by faster growth in K This has not happened (yet) in much of EuropeThis has not happened (yet) in much of Europe
There are fundamental differences in industry There are fundamental differences in industry performance between the US and EU that have performance between the US and EU that have widely accepted structural explanationswidely accepted structural explanations Wholesale and retail trade, big boxes vs. inner-city Wholesale and retail trade, big boxes vs. inner-city
pedestrian walking districts (role of land-use planning pedestrian walking districts (role of land-use planning as another policy reform)as another policy reform)
Other industries, such as finance and business services, Other industries, such as finance and business services, require further study and may involve data require further study and may involve data comparability issues.comparability issues.