MOVING EUROPE’S MOVING EUROPE’S

PRODUCTIVITY FRONTIER:PRODUCTIVITY FRONTIER:

The Role of Human CapitalThe Role of Human Capital

Karl PICHELMANN

“Quality of Tertiary Education and the Economic Policy

Agenda”

Ljubljana, Slovenia, April 2, 2008

Starting with a short

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Moving Europe‘s Moving Europe‘s productivity frontierproductivity frontier

THE BACKGROUNDTHE BACKGROUND

Slowdown in productivity growth since mid-90s Slowdown in productivity growth since mid-90s Pick-up since 2005 indicating a trend reversal?Pick-up since 2005 indicating a trend reversal?

THE ANALYSIS IN THE REPORTTHE ANALYSIS IN THE REPORT

Reflection of employment-productivity trade-off?Reflection of employment-productivity trade-off? Impact of productivity-enhancing policies?Impact of productivity-enhancing policies?

THE ROLE OF HUMAN CAPITAL FORMATIONTHE ROLE OF HUMAN CAPITAL FORMATION

Private and social returns to education and trainingPrivate and social returns to education and training The importance of „frontier effects“The importance of „frontier effects“

Implementation of the renewed Lisbon strategyImplementation of the renewed Lisbon strategy

Growth accountingGrowth accountingEU vs. USEU vs. US

Graph 2.2.1: Potential GDP per capita levels accounting

50

70

90

110

1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

GDP per Capita Labour Productivity per Hour

Labour Input per Capita

Growth accountingGrowth accountingEU vs. USEU vs. US

           

Gross value added growth and contributions (annual average volume growth rates in %)

EU15ex5 US

1981-

1995

1996-

2000

2001-

2004

1981-

1995

1996-

2000

2001-

2004

Total Industries

Labour Services 0.2 0.8 0.5   0.9 1.3 -0.5

- Hours -0.1 0.7 0.3 0.7 1.1 -0.8

- Composition 0.4 0.1 0.2   0.2 0.2 0.3

Capital Services 1.1 1.4 1.0 1.7 2.0 0.9

- ICT 0.4 0.6 0.4   0.7 1.4 0.6

- Non-ICT 0.8 0.8 0.6 1.0 0.6 0.3

TFP 0.7 0.3 -0.1   0.3 0.8 1.7

Total Industries 2.0 2.6 1.4 2.8 4.1 2.1

Trend growth in Trend growth in output per employeeoutput per employee

Graph 1.5.1: Euro area private business sector

0,0

1,0

2,0

3,0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

HP filter Kalman f ilter

yoy % ch.

Employment & ProductivityEmployment & Productivity An eventual trade-off?An eventual trade-off?

Graph 3.4.15: Employment productivity trade-off: all sectors – change in HLP growth (avg 96-04 minus avg 85-95)

IT

DE

FREU10AT

BE

DK

FI

NL

ES

SE

UK

USA(NAICS)

y = -0,3686x - 0,2713

R2 = 0,1143

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

-0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5

change in hours worked

chan

ge in

HLP

gro

wth

(avg

96-

04

min

us a

vg 8

5-95

)

Source: DG ECFIN calculation on KLEMS datbase.

Employment & ProductivityEmployment & Productivity An eventual trade-off?An eventual trade-off?

THE IMPACT OF LABOUR MARKET REFORMSTHE IMPACT OF LABOUR MARKET REFORMS

Macro-simulation analysis – aggregate levelMacro-simulation analysis – aggregate level

Significant reduction of the NAIRUSignificant reduction of the NAIRUElasticity of productivity ~ -1/3Elasticity of productivity ~ -1/3

Difference-analysis: lower attachment groupsDifference-analysis: lower attachment groups

Robust positive impact on employment ratesRobust positive impact on employment ratesNegative effect on productivity growthNegative effect on productivity growth

Favourable employment effect at little cost Favourable employment effect at little cost

Trend growth in Trend growth in total factor productivitytotal factor productivity

Graph 1.6.1: Trend TFP growth-Euro area

0,0

0,5

1,0

1,5

2,0

2,5

86 88 90 92 94 96 98 00 02 04 06

Kalman filter HP filter

yoy % ch.

The pursuit of The pursuit of higher productivityhigher productivity

ANOTHER LOOK AT POLICIESANOTHER LOOK AT POLICIES Investing in knowledge and innovation Investing in knowledge and innovation

The determinants ofThe determinants ofTFP growthTFP growth

AN ANALYSIS OF „FRONTIER“ EFFECTSAN ANALYSIS OF „FRONTIER“ EFFECTS A „Schumpeterian“ approach A „Schumpeterian“ approach

Graph 4.1.1: Technology frontier and sources of growth

Productivity of factor 1

Pro

duct

ivity

of f

acto

r 2

Growth driven by expansion of technology frontier, mainly innovation

Growth driven by move towards technology frontier, mainly accumulation

The determinants ofThe determinants ofTFP growthTFP growth

AN ANALYSIS OF „FRONTIER“ EFFECTSAN ANALYSIS OF „FRONTIER“ EFFECTS Regression analysis using EU KLEMS databaseRegression analysis using EU KLEMS database

TFP growth at the frontierTFP growth at the frontier Technological gapTechnological gap R & DR & D Human capitalHuman capital Regulation indicatorsRegulation indicators

„„Frontier“ effects increasingly importantFrontier“ effects increasingly important Interaction with R&D and human capitalInteraction with R&D and human capital Industry-specific regulatory reform approachIndustry-specific regulatory reform approach

The pursuit of The pursuit of higher productivityhigher productivity

ANOTHER LOOK AT POLICIESANOTHER LOOK AT POLICIES Investing in knowledge and innovation Investing in knowledge and innovation Efficiency of public spendingEfficiency of public spending Link between competition and innovationLink between competition and innovation Barriers to the reallocation of resourcesBarriers to the reallocation of resources

„ „Flexicurity“ in labour marketsFlexicurity“ in labour markets Entry and exit regulations, SME‘s policiesEntry and exit regulations, SME‘s policies Reduction of administrative burdensReduction of administrative burdens A fully functioning single marketA fully functioning single market

Analysis reconfirms Lisbon strategy priorities Analysis reconfirms Lisbon strategy priorities

The Macroeconomics The Macroeconomics of Higher Educationof Higher Education

The private internal rates of The private internal rates of return to tertiary educationreturn to tertiary education

Men

0

3

6

9

12

15

Per cent

These rates of return include wage, employability, unemployment benefit and pension premia associated with tertiary education and are adjusted for taxation. They also include the opportunity and direct costs of education. They are calculated assuming that labour productivity grows at 1.75% per year in all countries. Source: OECD

The private internal rates of The private internal rates of return to tertiary educationreturn to tertiary education

Women

0

3

6

9

12

15

Per cent

These rates of return include wage, employability, unemployment benefit and pension premia associated with tertiary education and are adjusted for taxation. They also include the opportunity and direct costs of education. They are calculated assuming that labour productivity grows at 1.75% per year in all countries. Source: OECD

Signalling or „true“Signalling or „true“ productivity effects productivity effects

The Macroeconomics The Macroeconomics of „Schooling“of „Schooling“

THE SOCIAL RETURNS TO EDUCATIONTHE SOCIAL RETURNS TO EDUCATION

Impact of human capital in growth regressionsImpact of human capital in growth regressions

Coefficient of average years of schoolingCoefficient of average years of schooling Elasticity almost certainly above 0.6Elasticity almost certainly above 0.6 Current best estimate around 0.9, i.e.Current best estimate around 0.9, i.e. somewhat higher than private returnssomewhat higher than private returns

Some important caveatsSome important caveats

Relative or absolute change in human capital?Relative or absolute change in human capital? Quantity vs quality of education?Quantity vs quality of education? Diminishing returns?Diminishing returns?

Human capital formation:Human capital formation:A glimpse of the futureA glimpse of the future

Source: The EU Economy 2003 Review, Chapter 3.

Moving Europe‘s Moving Europe‘s productivity frontierproductivity frontier

THE CONCLUSIONSTHE CONCLUSIONS

Trend productivity slowdown has come to a halt, Trend productivity slowdown has come to a halt, but scant evidence for a structural turn-around.but scant evidence for a structural turn-around.

Job-friendly reforms can and did have an impact,Job-friendly reforms can and did have an impact, yet productivity is not the enemy of employment.yet productivity is not the enemy of employment.

Considerable scope to boost productivity growth Considerable scope to boost productivity growth Promoting innovation and knowledge buildingPromoting innovation and knowledge building Fostering human capital formation at all levelsFostering human capital formation at all levels The 5The 5thth freedom: free movement of knowledge freedom: free movement of knowledge Remove barriers to high-skilled migrationRemove barriers to high-skilled migration

Thank you very much for your

attention

“Quality of Tertiary Education and the Economic Policy

Agenda”

Ljubljana, Slovenia, April 2, 2008